Prospectus Supplement dated June 11, 2001
(to Prospectus dated May 4, 2001)
[C-BASS LOGO]
$181,455,000 (Approximate)
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C-BASS Mortgage Loan
Asset-Backed Certificates, Series 2001-CB2
ACE Securities Corp.
Depositor
------------------------------------------
Credit-Based Asset Servicing and Securitization LLC
Seller
------------------------------------------
Litton Loan Servicing LP
Servicer
------------------------------------------
- --------------------------------------------------------------------------------
Carefully consider the "Risk Factors" beginning on page S-12 of this prospectus
supplement.
The offered certificates are not insured or guaranteed by any governmental
agency or instrumentality.
The offered certificates represent interests in the trust only and will not be
obligations of or represent interests in any other entity. This prospectus
supplement may be used to offer and sell the offered certificates only if it is
accompanied by the prospectus.
- --------------------------------------------------------------------------------
Offered Certificates
The trust created for the Series 2001-CB2 certificates will hold a pool of
first, second and third lien residential mortgage loans. The mortgage loans will
be segregated into two loan groups. Loan group 1 will consist of fixed-rate FHA
insured mortgage loans, VA guaranteed mortgage loans and conventional fixed-rate
mortgage loans. Loan group 2 will consist of adjustable-rate mortgage loans. The
trust will issue eight classes of Offered Certificates. You can find a list of
these classes, together with their initial certificate principal balances (or
notional amounts) and pass-through rates, in the table below. Credit enhancement
for all of the Offered Certificates will be provided in the form of
subordination and overcollateralization. Certain of the mortgage loans will be
covered, to a limited extent, by either insurance from the Federal Housing
Administration or a guaranty from the United States Department of Veterans
Affairs.
Initial Certificate Pass-Through
Class Balance(1) Rate
A-IO................... $50,000,000(2) 2.000%(3)
A-1F................... $41,348,000 5.102%(4)
A-2F................... $16,768,000 5.974%(4)
A-3F................... $24,794,000 7.122%(4)
A-1A................... $83,330,000 (5)
M-1.................... $ 6,574,000 7.479%(6)
M-2.................... $ 4,884,000 7.897%(6)
B-1.................... $ 3,757,000 8.509%(6)
- -----------------
(1) Plus or minus 5%.
(2) Notional amount.
(3) The Class A-IO Certificates will receive interest only until the
distribution date in January 2003.
(4) The Class A-1F, Class A-2F and Class A-3F Certificates will be subject to an
interest rate cap, plus, in the case of the Class A-2F and Class A-3F
Certificates, a 0.50% per annum increase following the optional termination
date, as described in this prospectus supplement.
(5) The Class A-1A Certificates will bear interest at a variable rate that is
subject to an interest rate cap and a margin increase following the optional
termination date, as described in this prospectus supplement.
(6) The Class M-1, Class M-2 and Class B-1 Certificates will be subject to an
interest rate cap.
The certificates offered by this prospectus supplement will be purchased by
Deutsche Banc Alex. Brown Inc. and First Union Securities, Inc. from the
Depositor, and are being offered by Deutsche Banc Alex. Brown Inc. and First
Union Securities, Inc. from time to time for sale to the public in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. Proceeds to the Depositor from the sale of these certificates will be
approximately 100.47% of their initial Certificate Principal Balance, plus
accrued interest before deducting expenses.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the Offered Certificates or determined
that this prospectus supplement or the prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
The Attorney General of the State of New York has not passed on or endorsed the
merits of this offering. Any representation to the contrary is unlawful.
Deutsche Banc Alex. Brown First Union Securities, Inc.
Important notice about information presented in this prospectus supplement
and the accompanying prospectus
You should rely only on the information contained in this document. We have not
authorized anyone to provide you with different information.
We provide information to you about the Offered Certificates in two separate
documents that progressively provide more detail:
o the accompanying prospectus, which provides general
information, some of which may not apply to this series of
certificates; and
o this prospectus supplement, which describes the specific terms
of this series of certificates.
ACE Securities Corp.'s principal offices are located at 6525 Morrison Boulevard,
Suite 318, Charlotte, North Carolina 28211 and its phone number is 704-365-0569.
Table of Contents
Prospectus Supplement
SUMMARY OF PROSPECTUS SUPPLEMENT.............................................S-2
RISK FACTORS................................................................S-12
USE OF PROCEEDS.............................................................S-19
THE MORTGAGE POOL...........................................................S-19
YIELD ON THE CERTIFICATES...................................................S-47
DESCRIPTION OF THE CERTIFICATES.............................................S-60
THE SELLER..................................................................S-76
POOLING AND SERVICING AGREEMENT.............................................S-76
METHOD OF DISTRIBUTION......................................................S-84
SECONDARY MARKET............................................................S-85
LEGAL OPINIONS..............................................................S-86
RATINGS.....................................................................S-86
LEGAL INVESTMENT............................................................S-86
CONSIDERATIONS FOR BENEFIT PLAN INVESTORS...................................S-87
ANNEX I......................................................................I-1
SUMMARY OF PROSPECTUS SUPPLEMENT
The following summary is a very broad overview of the certificates
offered by this prospectus supplement and the accompanying prospectus and does
not contain all of the information that you should consider in making your
investment decision. To understand the terms of the offered certificates,
carefully read this entire prospectus supplement and the entire accompanying
prospectus.
Title of Series............ C-BASS Mortgage Loan Asset-Backed Certificates,
Series 2001-CB2.
Cut-off Date............... May 1, 2001.
Closing Date............... On or about June 14, 2001.
Depositor.................. ACE Securities Corp., a Delaware corporation.
See "The Depositor" in the prospectus.
Seller..................... Credit-Based Asset Servicing and Securitization
LLC ("C-BASS"), a Delaware limited liability
company. The mortgage loans were acquired
generally in accordance with the underwriting
standards described in "Underwriting Standards"
in this prospectus supplement. See "The Seller"
in this prospectus supplement.
Servicer................... Litton Loan Servicing LP will service the
mortgage loans. Subject to certain limitations,
the servicer must advance delinquent payments of
principal and interest on the mortgage loans,
other than with respect to simple interest
mortgage loans and REO Properties. The servicer
is a wholly-owned subsidiary of the seller of
the mortgage loans. See "Pooling and Servicing
Agreement--The Servicer" in this prospectus
supplement.
Trustee.................... U.S. Bank National Association, a national
banking association, will be the trustee of the
trust. See "Pooling and Servicing Agreement--The
Trustee" in this prospectus supplement.
Distribution Dates......... Distributions on the offered certificates will
be made on the 25th day of each month, or, if
that day is not a business day, on the next
succeeding business day, beginning in June 2001.
Offered Certificates....... Only the certificates listed on the cover of
this prospectus supplement are being offered by
this prospectus supplement. Each class of
offered certificates will have the initial
certificate principal balance (or notional
amount) and pass-through rate set forth or
described in the table appearing on the cover of
this prospectus supplement.
S-2
The Trust
The depositor will establish a trust with respect to the certificates under the
pooling and servicing agreement dated as of the cut-off date among the
depositor, the seller, the servicer and the trustee. The Class A-IO, Class A-1F,
Class A-2F, Class A-3F, Class A-1A, Class M-1, Class M-2, Class B-1, Class B-2,
Class N, Class X and Class R Certificates represent in the aggregate the entire
beneficial ownership interest in the trust. Distributions of interest and
principal on the offered certificates will be made only from payments received
in connection with the mortgage loans. See "Description of the Certificates" in
this prospectus supplement.
The Offered Certificates
The underwriters are offering to sell the Class A-IO, Class A-1F, Class A-2F,
Class A-3F, Class A-1A, Class M-1, Class M-2 and Class B-1 Certificates.
The Non-Offered Certificates
The Class B-2, Class X, Class N Certificates (the Class X and Class N
Certificates collectively, the "Class X/N Certificates") and the Class R
Certificates are not offered by this prospectus supplement. The Class X/N
Certificates will represent the right to receive principal and interest on the
mortgage loans remaining after payment of all amounts due on the offered
certificates and the Class B-2 Certificates on each distribution date. The Class
B-2 Certificates initially evidence an interest of approximately 2.40% in the
trust. The Class X/N Certificates initially evidence an interest of
approximately 1.00% in the trust. The Class X/N Certificates will also be
entitled to all prepayment charges received on the mortgage loans.
The Class R Certificates are not offered by this prospectus supplement and are
the classes of certificates representing the residual interests in the trust.
Final Scheduled Distribution Dates
The final scheduled distribution date for each class of offered certificates
(other than the Class A-IO Certificates) is set forth below:
Final Scheduled
Class Distribution Date
- ----- -----------------
Class A-1F August 25, 2014
Class A-2F March 25, 2019
Class A-3F August 25, 2033
Class A-1A August 25, 2033
Class M-1 August 25, 2033
Class M-2 August 25, 2033
Class B-1 August 25, 2033
Each such final scheduled distribution date has been calculated as described
under "Yield on the Certificates--Final Scheduled Distribution Dates" in this
prospectus supplement.
The Mortgage Loans
On the closing date, the trust will acquire a pool of mortgage loans that will
be divided into two loan groups. Loan group 1 will be divided into sub-groups 1A
and 1B.
The total mortgage pool has the following aggregate characteristics (percentages
are based on the aggregate principal balance as of May 1, 2001):
Aggregate Current Principal Balance $187,840,911.05
Average Current Principal Balance $77,684.41
Range of Current Principal Balances $891.02 - $989,727.99
Average Original Principal Balance $80,344.28
Range of Original Principal Balances $1,430.45 - $1,000,000.00
Loan Type:
Fixed rate 55.64%
Adjustable rate 44.36%
Weighted Average Mortgage Interest Rate 10.369%
Weighted Average Net Mortgage Interest Rate 9.571%
Range of Mortgage Interest Rates 4.875% - 19.000%
Weighted Average CLTV Ratio 81.59%
S-3
Weighted Average Original Term to Maturity (months) 332
Weighted Average Remaining Term to Stated Maturity (months) 303
Percentage of Balloon Loans 5.43%
Percentage of Simple Interest Mortgage Loans 4.54%
Percentage of Mortgage Loans with Primary Mortgage Insurance 34.09%
Percentage of Second and Third Liens 2.25%
Percentage of FHA/FHAUN Mortgage Loans 9.29%
Percentage of VA/VANG Mortgage Loans 2.54%
Percentage of Sub-Prime Loans 75.34%
Percentage of Performing Loans 78.02%
Percentage of Sub-Performing Loans: 5.59%
Sub-Performing Loans that are also
Forbearance Plan Loans 0.20%
Sub-Performing Loans that are also
Bankruptcy Plan Loans 0.25%
Percentage of Re-Performing Loans: 16.39%
Re-Performing Loans that are also
Forbearance Plan Loans 2.41%
Re-Performing Loans that are also
Bankruptcy Plan Loans 13.25%
Percentage of Owner-Financed Mortgage Loans 6.66%
Percentage of Delinquent Mortgage Loans 21.98%
30-59 Days Delinquent 5.59%
60-89 Days Delinquent 0.00%
Percentage of Re-Performing Loans: 16.39%
Percentage of Loans with Prepayment Penalties 46.66%
Max ZIP Code Concentration (%) 0.6%
Max ZIP Code Concentration (ZIP) 10128
Geographic Concentrations in Excess of 5%:
California 20.3%
Florida 10.1%
Texas 6.2%
New York 5.8%
Loan group 1 will consist of two sub-groups of FHA insured mortgage loans, FHAUN
Mortgage Loans, VA guaranteed mortgage loans, VANG Mortgage Loans and
conventional fixed-rate mortgage loans with the following characteristics
(percentages are based on the aggregate principal balance of loan group 1 as of
May 1, 2001):
Aggregate Current Principal Balance $104,510,103.46
Average Current Principal Balance $62,655.94
Range of Current Principal Balances $891.02 - $698,677.67
Average Original Principal Balance $66,026.93
Range of Original Principal Balances $1,430.45 - $700,000.00
Weighted Average Mortgage Interest Rate 9.94%
Weighted Average Net Mortgage Interest Rate 9.175
Range of Mortgage Interest Rates 4.875% - 19.000%
Weighted Average CLTV Ratio 84.81%
Weighted Average Original Term to Maturity (months) 309
S-4
Weighted Average Remaining Term to Stated Maturity (months) 269
Percentage of Balloon Loans 9.76%
Percentage of Simple Interest Mortgage Loans 8.16%
Percentage of Mortgage Loans with Primary Mortgage Insurance 31.53%
Percentage of Second and Third Liens 4.04%
Percentage of FHA/FHAUN Mortgage Loans 14.36%
Percentage of VA/VANG Mortgage Loans 4.34%
Percentage of Sub-Prime Loans 58.54%
Percentage of Performing Loans 71.25%
Percentage of Sub-Performing Loans: 5.61%
Sub-Performing Loans that are also
Forbearance Plan Loans 0.18%
Sub-Performing Loans that are also
Bankruptcy Plan Loans 0.41%
Percentage of Re-Performing Loans: 23.14%
Re-Performing Loans that are also
Forbearance Plan Loans 3.32%
Re-Performing Loans that are also
Bankruptcy Plan Loans 19.05%
Percentage of Owner-Financed Mortgage Loans 11.98%
Percentage of Delinquent Mortgage Loans 28.75%
30-59 Days Delinquent 5.61%
60-89 Days Delinquent 0.00%
Percentage of Re-Performing Loans: 23.14%
Loans with Prepayment Penalties 27.16%
Max ZIP Code Concentration (%) 0.7%
Max ZIP Code Concentration (ZIP) 92067
Geographic Concentrations in Excess of 5%:
Florida 16.0%
California 13.0%
Texas 8.2%
New York 6.4%
Sub-group 1A will consist of FHA insured mortgage loans, FHAUN Mortgage Loans,
VA guaranteed mortgage loans and VANG Mortgage Loans with the following
characteristics (percentages are based on the aggregate principal balance of
loan sub-group 1A as of May 1, 2001):
Aggregate Current Principal Balance $19,542,465.93
Average Current Principal Balance $71,063.51
Range of Current Principal Balances $891.02 - $205,557.34
Average Original Principal Balance $77,178.85
Range of Original Principal Balances $17,000.00 - $206,116.34
Weighted Average Mortgage Interest Rate 8.370%
Weighted Average Net Mortgage Interest Rate 7.870%
Range of Mortgage Interest Rates 5.500% - 15.500%
Weighted Average CLTV Ratio 100.40%
Weighted Average Original Term to Maturity (months) 354
Weighted Average Remaining Term to Stated Maturity (months) 284
Percentage of Balloon Loans 0.70%
S-5
Percentage of Simple Interest Mortgage Loans 0.00%
Percentage of Mortgage Loans with Primary Mortgage Insurance 0.00%
Percentage of FHA/FHAUN Mortgage Loans 76.78%
Percentage of VA/VANG Mortgage Loans 23.22%
Percentage of Sub-Prime Loans 0.00%
Percentage of Performing Loans 23.50%
Percentage of Sub-Performing Loans: 3.89%
Sub-Performing Loans that are also
Forbearance Plan Loans 0.65%
Sub-Performing Loans that are also
Bankruptcy Plan Loans 1.28%
Percentage of Re-Performing Loans: 72.61%
Re-Performing Loans that are also
Forbearance Plan Loans 11.30%
Re-Performing Loans that are also
Bankruptcy Plan Loans 58.30%
Percentage of Owner-Financed Mortgage Loans 0.00%
Percentage of Delinquent Mortgage Loans 76.50%
30-59 Days Delinquent 3.89%
60-89 Days Delinquent 0.00%
Percentage of Re-Performing Loans: 72.61%
Loans with Prepayment Penalties 0.30%
Max ZIP Code Concentration (%) 1.4%
Max ZIP Code Concentration (ZIP) 11412
Geographic Concentrations in Excess of 5%:
California 11.5%
Florida 10.4%
Maryland 9.9%
New York 9.4%
Texas 7.3%
Pennsylvania 5.6%
New Jersey 5.3%
Sub-group 1B will consist of fixed rate mortgage loans with the following
characteristics (percentages are based on the aggregate principal balance of
loan sub-group 1B as of May 1, 2001):
Aggregate Current Principal Balance $84,967,637.53
Average Current Principal Balance $60,996.15
Range of Current Principal Balances $1,054.83 - $698,677.67
Average Original Principal Balance $63,825.37
Range of Original Principal Balances $1,430.45 - $700,000.00
Weighted Average Mortgage Interest Rate 10.301%
Weighted Average Net Mortgage Interest Rate 9.475%
Range of Mortgage Interest Rates 4.875% - 19.000%
Weighted Average CLTV Ratio 81.22%
Weighted Average Original Term to Maturity 298
Weighted Average Remaining Term to Stated Maturity 265
Percentage of Balloon Loans 11.84%
Percentage of Simple Interest Mortgage Loans 10.04%
Percentage of Mortgage Loans with Primary Mortgage Insurance 38.78%
Percentage of Second and Third Liens 4.97%
S-6
Percentage of Sub-Prime Loans 72.00%
Percentage of Performing Loans 82.23%
Percentage of Sub-Performing Loans: 6.01%
Sub-Performing Loans that are also Forbearance Plan Loans 0.07%
Sub-Performing Loans that are also Bankruptcy Plan Loans 0.21%
Percentage of Re-Performing Loans: 11.76%
Re-Performing Loans that are also Forbearance
Plan Loans 1.49%
Re-Performing Loans that are also Bankruptcy
Plan Loans 10.02%
Percentage of Owner-Financed Mortgage Loans 14.73%
Percentage of Delinquent Mortgage Loans 17.77%
30-59 Days Delinquent 6.01%
60-89 Days Delinquent 0.00%
Percentage of Re-Performing Loans: 11.76%
Loans with Prepayment Penalties 33.33%
Max ZIP Code Concentration (%) 0.8%
Max ZIP Code Concentration (ZIP) 92067
Geographic Concentrations in Excess of 5%:
Florida 17.3%
California 13.4%
Texas 8.4%
New York 5.7%
Loan group 2 will consist of adjustable-rate mortgage loans with the following
characteristics (percentages are based on the aggregate principal balance of
loan group 2 as of May 1, 2001):
Aggregate Current Principal Balance $83,330,807.59
Average Current Principal Balance $111,107.74
Range of Current Principal Balances $18,126.22 - $989,727.99
Average Original Principal Balance $112,186.06
Range of Original Principal Balances $18,200.00 - $1,000,000.00
Index:
Six-Month LIBOR 91.72%
1 YR CMT 7.51%
Other 0.77%
Weighted Average Mortgage Interest Rates by Index:
Six-Month LIBOR 11.043%
1 YR CMT 9.495%
Other 8.605%
Weighted Average Gross Margin by Index:
Six-Month LIBOR 6.469%
1 YR CMT 4.132%
Other 3.616%
Weighted Average Maximum Mortgage Interest Rate 17.117%
Range of Maximum Mortgage Interest Rates 10.375% - 99.999%
Weighted Average Minimum Mortgage Interest Rate 9.534%
Range of Minimum Mortgage Interest Rates 0.000% - 15.500%
Weighted Average Initial Rate Adjustment Cap 2.024%
Range of Initial Rate Adjustment Cap 1.000% - 6.000%
Weighted Average Periodic Rate Adjustment Cap 1.119%
Range of Periodic Rate Adjustment Caps 1.000% - 3.000%
Weighted Average Months to Next Adjustment Date 18 months
Range of Months to Next Adjustment Date 1 - 46 months
Weighted Average Interest Adjustment Frequency 7 months
Weighted Average Mortgage Interest Rate 10.908%
Weighted Average Net Mortgage Interest Rate 10.067%
Range of Mortgage Interest Rates 6.375% - 15.500%
S-7
Weighted Average CLTV Ratio 77.54%
Weighted Average Original Term to Maturity 360
Weighted Average Remaining Term to Stated Maturity 345
Percentage of Simple Interest Mortgage Loans 0.00%
Percentage of Balloon Loans 0.00%
Percentage of Mortgage Loans with Primary Mortgage Insurance 37.29%
Percentage of Sub-Prime Loans 96.40%
Percentage of Performing Loans 86.52%
Percentage of Sub-Performing Loans: 5.56%
Sub-Performing Loans that are also
Forbearance Plan Loans 0.23%
Sub-Performing Loans that are also
Bankruptcy Plan Loans 0.06%
Percentage of Re-Performing Loans: 7.92%
Re-Performing Loans that are also
Forbearance Plan Loans 1.27%
Re-Performing Loans that are also
Bankruptcy Plan Loans 5.97%
Percentage of Delinquent Mortgage Loans 13.48%
30-59 Days Delinquent 5.56%
60-89 Days Delinquent 0.00%
Percentage of Re-Performing Loans: 7.92%
Loans with Prepayment Penalties 71.12%
Max ZIP Code Concentration (%) 1.2%
Max ZIP Code Concentration (ZIP) 10128
Geographic Concentrations in Excess of 5%:
California 29.4%
Illinois 5.8%
Michigan 5.5%
New York 5.1%
See "The Mortgage Pool" in this prospectus supplement for more information about
the mortgage loans.
Distributions
Interest Distributions. Interest will accrue on the Class A-1F, Class A-2F and
Class A-3F Certificates during each accrual period at a rate equal to the lesser
of (i) the applicable per annum rate for such class as set forth on the cover
page, plus, on each distribution date following the optional termination date in
the case of the Class A-2F and Class A-3F Certificates, 0.50% per annum, and
(ii) the Pool Cap as described under "Description of the Certificates--Pass
Through Rates" in this prospectus supplement.
Interest will accrue on the Class A-IO Certificates for twenty months at a per
annum rate equal to 2.000%; thereafter no distributions will be made on the
Class A-IO Certificates.
Interest will accrue on the Class A-1A Certificates during each accrual period
at a rate equal to the lesser of (i) the sum of one-month LIBOR plus (a) a
margin of 0.290% on or prior to the optional termination date as described below
under "Optional Termination" and (b) a margin of 0.580% following the optional
termination date, and (ii) the Class A-1A Cap as described under "Description of
the Certificates--Pass-Through Rates" in this prospectus supplement.
Interest will accrue on the Class M-1, Class M-2 and Class B-1 Certificates
during each accrual period at a rate equal to the lesser of (i) the applicable
per annum rate for such class as set forth on the cover page, and (ii) the Pool
Cap as described under "Description of the Certificates--Pass-Through Rates" in
this prospectus supplement.
The accrual period for all offered certificates, except for the Class A-1A
Certificates, is the month immediately preceding the month in which such
distribution date occurs. Except for the first accrual period, the accrual
period for the Class A-1A Certificates is the period from the distribution date
in the prior month to the day prior to the current distribution date. The first
accrual period for the Class A-1A Certificates will begin on the closing date
and end on June 24, 2001. Interest will be calculated for all offered
certificates, except for the Class A-1A Certificates, on the basis of a 360-day
year consisting of twelve 30-day months. Interest will be calculated for the
Class A-1A Certificates on the basis of the actual number of days in the accrual
period, based on a 360-day year. See "Description of the
Certificates--Pass-Through Rates" in this prospectus supplement.
S-8
Principal Distributions. On each distribution date, you will receive a
distribution of principal if there are funds available on that date for your
class of certificates. You should review the priority of payments described
under "Description of the Certificates--Principal Distributions" in this
prospectus supplement.
The offered certificates will be sold by the depositor to Deutsche Banc Alex.
Brown Inc. and First Union Securities, Inc. on the closing date.
The offered certificates will initially be represented by one or more global
certificates registered in the name of a nominee of the Depository Trust Company
in the United States, or Clearstream and the Euroclear System (each, as defined
herein) in Europe in minimum denominations of $25,000 and integral multiples of
$1.00 in excess of the minimum denominations. See "Description of the
Certificates--Book-Entry Certificates" in this prospectus supplement.
Credit Enhancement
Credit enhancement reduces the risk of harm caused to holders of certificates by
shortfalls in payments received on the mortgage loans. Credit enhancement can
reduce the effect of shortfalls on all classes, or it can allocate shortfalls so
they affect some classes before others. This transaction employs the following
four forms of credit enhancement. See "Description of the Certificates" in this
prospectus supplement.
Subordination. On each distribution date, classes that are lower in order of
payment priority will not receive payments until the classes that are higher in
order of payment priority have been paid. If there are insufficient funds on a
distribution date to pay all classes, the subordinate classes are the first to
forego payment.
Overcollateralization. If the total assets in the trust exceed the total
principal amount of the offered certificates, there is overcollateralization
available to absorb losses on the mortgage loans before such losses affect the
certificates. On the closing date, the total initial principal balance of the
mortgage loans will equal $187,840,911.05, while the total initial principal
amount of the certificates is only $185,963,000. This results in
overcollateralization equal to approximately 1.00% of the total initial
principal balance of the mortgage loans. If the level of overcollateralization
falls below what is required under the pooling and servicing agreement, the
excess interest described in the next section will be paid to the offered
certificates as principal. This will have the effect of reducing the principal
balance of the certificates faster than the principal balance of the mortgage
loans until the required level of overcollateralization is reached.
Monthly Excess Cashflow. Because more interest is expected to be paid by the
mortgagors than is necessary to pay the interest earned on the offered
certificates, we expect there to be excess interest each month. The excess
interest will be used to maintain overcollateralization, to pay interest that
was previously earned but not paid to the offered certificates, and to reimburse
the offered certificates for losses and certain shortfalls that they experienced
previously.
Application of Realized Losses. If, on any distribution date after the balances
of the offered certificates have been reduced by the amount of cash paid on that
date, the total principal balance of the offered certificates is greater than
the total principal balance of the mortgage loans, the principal balance of the
offered certificates that are lowest in order of payment priority will be
reduced by the amount of such excess.
Advances
The servicer is required to advance delinquent payments of principal and
interest on the mortgage loans, subject to the limitations described under
"Description of the Certificates--Advances" in this prospectus supplement. The
servicer is entitled to be reimbursed for these advances, and therefore these
advances are not a form of credit enhancement. See "Description of the
Certificates--Advances" in this prospectus supplement and "Description of the
Securities--Advances in Respect of Delinquencies" in the prospectus.
Optional Termination
The servicer (or an affiliate of the servicer) has the option, subject to
certain conditions specified in the pooling and servicing agreement, to purchase
all the mortgage loans and any properties that the trust acquired in
satisfaction of any of the mortgage loans. This option can be exercised when the
total principal balance of the mortgage loans, including the mortgage loans
related to the properties which the trust has acquired, is 10% or less of the
total principal balance of the mortgage loans on the cut-off date. If the option
is exercised, your certificate will be retired early and you will be entitled to
the following amounts to the extent available therefor:
S-9
o the outstanding principal balance of your certificate;
o one month's interest on such balance at the related pass-through rate;
o any interest previously earned but not paid; and
o in the case of the Class A-1A Certificates only, any "LIBOR Carryover
Amount," as described in this prospectus supplement, from all previous
distribution dates.
You will receive the last two items only to the extent that there is enough cash
to make such payments. See "Pooling and Servicing Agreement--Termination" in
this prospectus supplement.
Federal Income Tax Consequences
Multiple elections will be made to treat designated portions of the trust as
real estate mortgage investment conduits for federal income tax purposes.
For further information regarding the federal income tax consequences of
investing in the offered certificates, see "Certain Material Federal Income Tax
Consequences" in this prospectus supplement and "Federal Income Tax
Consequences" in the prospectus.
Ratings
The trust will not issue the certificates unless they receive the respective
ratings set forth below from Standard & Poor's Ratings Services, Moody's
Investors Service, Inc. and Fitch, Inc.:
Class S&P Moody's Fitch
----- --- ------- -----
A-IO AAA Aaa AAA
A-1F AAA Aaa AAA
A-2F AAA Aaa AAA
A-3F AAA Aaa AAA
A-1A AAA Aaa AAA
M-1 AA Aa2 AA
M-2 A A2 A
B-1 BBB Baa2 BBB
The ratings on the certificates indicate the likelihood that you will receive
all funds to which you are entitled by the terms of your certificate. The rating
agency that issues the rating reviews the nature and credit quality of the
mortgage loans and the soundness of the structure which the depositor has
created to allow the payments on the mortgage loans to flow to the holders of
the certificates. A rating is not a recommendation to buy, sell or hold
securities and the rating agency can revise or withdraw it at any time. A rating
does not address the likelihood of the payment of any LIBOR Carryover Amount,
the frequency of prepayments on the mortgage loans or the effect of such
prepayments on your yield. See "Yield, Prepayment and Maturity Considerations"
and "Ratings" in this prospectus supplement and "Yield Considerations" in the
prospectus.
Legal Investment
You should consult with counsel to see if you are permitted to buy the offered
certificates, since legal investment rules will vary depending on the type of
entity purchasing the offered certificates, whether that entity is subject to
regulatory authority, and if so, by whom. The Class A-1A 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
statistical rating organization and, as such, are legal investments for certain
entities to the extent provided for in the Secondary Mortgage Market Enhancement
Act of 1984, as amended. The other offered certificates will not be "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984, as amended, because the mortgage loans in loan group 1 contain
second and third lien mortgage loans and owner-financed mortgage loans that were
originated by individuals and not by financial institutions or mortgagees
approved by the Secretary of Housing and Urban Development. See "Legal
Investment" in this prospectus supplement and in the prospectus.
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Considerations for Benefit Plan Investors
It is expected that the Class A Certificates may be purchased by a pension or
other benefit plan subject to the Employee Retirement Income Security Act of
1974 or Section 4975 of the Internal Revenue Code of 1986, as amended (the
"Code") so long as certain conditions are met. A fiduciary of a benefit plan
must determine that the purchase of a certificate is consistent with its
fiduciary duties under applicable law and does not result in a nonexempt
prohibited transaction under applicable law. See "Considerations for Benefit
Plan Investors" in this prospectus supplement and "ERISA Considerations" in the
prospectus.
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RISK FACTORS
The following information, which you should carefully consider,
identifies significant sources of risk associated with an investment in the
certificates. You should also carefully consider the information set forth in
the prospectus.
Nature of sub-prime mortgage loans may increase risk of loss.
Approximately 58.54% of the loan group 1 mortgage loans and
approximately 96.40% of the loan group 2 mortgage loans (in each case, by
aggregate principal balance as of the cut-off date) are of sub-prime credit
quality; i.e., do not meet the customary credit standards of FHLMC and FNMA.
Delinquencies and liquidation proceedings are more likely with these mortgage
loans than with mortgage loans that satisfy such credit standards. In the event
these mortgage loans do become delinquent or subject to liquidation, you may
face delays in receiving payment and losses if the credit enhancements are
insufficient to cover the delays and losses.
Inclusion of delinquent mortgage loans increases risk of loss.
Approximately 5.61% and 5.56% of the loan group 1 mortgage loans and
loan group 2 mortgage loans, respectively (by aggregate principal balance as of
the cut-off date), were 30 to 59 days contractually delinquent. None of the
mortgage loans in either loan group were 60 to 89 days contractually delinquent.
Approximately 23.14% and 7.92% of the loan group 1 mortgage loans and loan group
2 mortgage loans, respectively (in each case, by aggregate principal balance as
of the cut-off date), were re-performing mortgage loans that were 90 days or
more contractually delinquent. As a result, the mortgage pool may bear more risk
than a pool of mortgage loans without any delinquencies but with otherwise
comparable characteristics. It is possible that a delinquent mortgage loan
(including a mortgage loan that is a re-performing mortgage loan) will not ever
become current or, if it does become current, that the mortgagor may become
delinquent again.
These past due payments on mortgage loans which were delinquent on or
prior to the cut-off date are called "arrearages" and, to the extent previously
advanced, are not a part of the trust. The servicer will be required to make
advances of delinquent payments of principal and interest on delinquent mortgage
loans (other than simple interest mortgage loans and REO properties), each to
the extent such advances are deemed recoverable, until such mortgage loans
become current or the related mortgaged property is acquired through
foreclosure. In the event that a mortgage loan is liquidated before the related
arrearage is reduced to zero, the arrearage, together with reimbursements for
advances of principal and interest and servicing advances with respect to such
mortgage loan, will reduce the liquidation proceeds available for distribution
to certificateholders.
There are risks involving unpredictability of prepayments and the effect of
prepayments on yields.
Mortgagors may prepay their mortgage loans in whole or in part at any
time. We cannot predict the rate at which mortgagors will repay their mortgage
loans. A prepayment of a mortgage loan generally will result in a prepayment on
the certificates.
o If you purchase your certificates at a discount and principal is
repaid more slowly than you anticipate, then your yield may be lower
than you anticipate.
o If you purchase your certificates at a premium and principal is
repaid faster than you anticipate, then your yield may be lower than
you anticipate.
o If you purchase the Class A-IO Certificates and principal is repaid
faster than you anticipate, then you may not fully recover your
initial investment.
o The rate of prepayments on the mortgage loans will be sensitive to
prevailing interest rates. Generally, if prevailing interest rates
decline significantly below the interest rates on the fixed-rate
mortgage loans, those mortgage loans are more likely to prepay than
if prevailing rates remain above the interest rates on such mortgage
loans. Conversely, if prevailing interest rates rise significantly,
the prepayments on fixed-rate mortgage loans are likely to decrease.
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o Approximately 46.66% of the mortgage loans, representing
approximately 27.16% of the loan group 1 mortgage loans (by
aggregate principal balance as of the cut-off date) and
approximately 71.12% of the loan group 2 mortgage loans (by
aggregate principal balance as of the cut-off date) require the
mortgagor to pay a penalty if the mortgagor prepays the mortgage
loan during periods ranging from one year to five years after the
mortgage loan was originated. A prepayment penalty may discourage a
mortgagor from prepaying the mortgage loan during the applicable
period. Such prepayment penalties will be distributed to holders of
the Class X/N Certificates and not to holders of the offered
certificates.
o The seller may be required to purchase mortgage loans from the trust
in the event certain breaches of representations and warranties have
not been cured. In addition, the servicer (or an affiliate of the
servicer) has the option, subject to certain conditions specified in
the pooling and servicing agreement, to purchase mortgage loans 120
days or more delinquent. These purchases will have the same effect
on the holders of the offered certificates as a prepayment of the
mortgage loans.
o If the rate of default and the amount of losses on the mortgage
loans is higher than you expect, then your yield may be lower than
you expect.
o The overcollateralization provisions are intended to result in an
accelerated rate of principal distributions to holders of the
offered certificates.
See "Yield, Prepayment and Maturity Considerations" for a description
of factors that may influence the rate and timing of prepayments on the mortgage
loans.
There are risks related to owner-financed mortgage loans.
Reduced underwriting standards. Approximately 11.98% of the loan group
1 mortgage loans (by aggregate principal balance as of the cut-off date) are
owner-financed mortgage loans. None of the loan group 2 mortgage loans are
owner-financed mortgage loans. These mortgage loans were originated by the
individual sellers of the related mortgaged property who generally are
inexperienced in matters pertaining to mortgage banking. These mortgage loans
were originated with less stringent standards than the other mortgage loans. The
mortgagor under an owner-financed mortgage loan generally does not complete a
mortgage loan application and the seller of the related property generally does
not verify the income or employment of the related mortgagor, nor obtain other
information customarily obtained during the mortgage loan origination process.
As a result, certain information concerning the owner-financed mortgage loans
that may be of interest to you is not available. In connection with an
acquisition of an owner-financed mortgage loan, the seller obtained and reviewed
the credit history and payment history of the mortgagor, as well as conducted an
assessment of the value of the property.
Appraisals may be inaccurate. In acquiring owner-financed mortgage
loans, the seller assesses the value of a property, generally using either a
prior appraisal, which must be re-certified if older than six months, or a
drive-by appraisal. A drive-by appraisal is not as accurate as a full real
estate appraisal because the appraiser does not have access to the interior of
the mortgaged property and may not have access to the rear of the mortgaged
property. As a result, the appraisal may reflect assumptions the appraiser made
regarding the interior or the rear of the mortgaged property which may not be
accurate. To the extent the seller has over-appraised the value of a property,
such amount may not be recovered during a liquidation proceeding.
The recovery of defaulted amounts under FHA and VA programs is uncertain.
Approximately 14.05% of the loan group 1 mortgage loans and 2.77% of
the loan group 2 mortgage loans (in each case, by aggregate principal balance as
of the cut-off date) are covered by either insurance from the Federal Housing
Administration or a guaranty from the United States Department of Veterans
Affairs. As described in this prospectus supplement, the amount of coverage may
be limited. In addition, recovery of the insured amounts from these agencies is
dependent upon material compliance by the originator and the servicer with
applicable regulations. These regulations are subject to interpretative
uncertainties. If upon filing a claim for recovery of a defaulted amount, it is
discovered that the mortgage loan did not comply with a regulation, the servicer
may not be able to fully recover the insured amounts. Defaults on mortgage loans
either insured by the Federal Housing Administration or guaranteed by the United
States Department of Veterans Affairs should have the same effect on the related
certificates as a prepayment of such mortgage loans. However, in the event that
such guaranty or insurance is no longer available to provide protection or does
not cover the full amount of the loss, any losses on such mortgage loans will be
borne by the related certificateholders. See "The Mortgage Pool--FHA Mortgage
Loans and VA Mortgage Loans" in this prospectus supplement.
S-13
There are risks relating to alternatives to foreclosure.
Certain of the mortgage loans will be delinquent as of the closing
date. Other mortgage loans may become delinquent after the closing date. The
servicer may either foreclose on any such mortgage loan or work out an agreement
with the mortgagor, which may involve waiving or modifying certain terms of the
mortgage loan. If the servicer extends the payment period or accepts a lesser
amount than stated in the mortgage note in satisfaction of the mortgage note,
your yield may be reduced.
There is a risk that interest payments may be insufficient to maintain
overcollateralization.
Because the weighted average of the interest rates on the mortgage
loans is expected to be higher than the weighted average of the interest rates
on the certificates, the mortgage loans are expected to generate more interest
than is needed to pay interest owed on the certificates as well as certain fees
and expenses of the trust. After these financial obligations of the trust are
covered, the available excess interest will be used to maintain
overcollateralization. Any remaining interest will then be used to compensate
for losses that occur on the mortgage loans. We cannot assure you, however, that
enough excess interest will be generated to maintain the overcollateralization
level required by the rating agencies. The factors described below will affect
the amount of excess interest that the mortgage loans will generate:
o Every time a mortgage loan is prepaid in full, excess interest
will be reduced because the mortgage loan will no longer be
outstanding and generating interest or, in the case of a partial
prepayment, will be generating less interest.
o Every time a mortgage loan is liquidated or written off, excess
interest will be reduced because such mortgage loans will no
longer be outstanding and generating interest.
o If the rates of delinquencies, defaults or losses on the mortgage
loans are higher than expected, excess interest will be reduced by
the amount necessary to compensate for any shortfalls in cash
available on such date to pay certificateholders.
o The pass-through rate of the Class A-1A Certificates is based on
one-month LIBOR while all the loan group 2 mortgage loans have
rates that are adjustable based on an index that in certain cases
is different from the index used to determine the pass-through
rate on the Class A-1A Certificates. As a result, the pass-through
rate on the Class A-1A Certificates may increase relative to
interest rates on the loan group 2 mortgage loans, thus requiring
that more of the interest generated by the loan group 2 mortgage
loans be applied to cover interest on the Class A-1A Certificates.
There is a risk that mortgage interest rates will affect the offered
certificates.
The Class A-1A Certificates will accrue interest at a pass-through rate
based on the one-month LIBOR index plus a specified margin, but are subject to a
cap described in "Description of the Certificates--Pass-Through Rates" in this
prospectus supplement. The other classes of offered certificates (other than the
Class A-IO Certificates) will accrue interest at a fixed pass-through rate,
subject to a cap. The cap on interest paid on the classes of offered
certificates (other than the Class A-1A and Class A-IO Certificates) will be
based on the weighted average of the interest rates on the mortgage loans, net
of any primary mortgage insurance premium, interest paid with respect to the
Class A-IO Certificates and certain expenses of the trust.
The pass-through rate on the Class A-1A Certificates adjusts monthly
while the mortgage interest rates on the loan group 2 mortgage loans may adjust
less frequently. Substantially all of the adjustable-rate mortgage loans have
periodic and maximum limitations on adjustments to the mortgage loan rate.
Consequently, the operation of these interest rate caps may limit increases in
the pass-through rate for extended periods in a rising interest rate
environment.
S-14
Although holders of the Class A-1A Certificates will be entitled to
receive any LIBOR carry-over amount from and to the limited extent of funds
available for such payments, there is no assurance that those funds will be
available or sufficient to pay such LIBOR carry-over amount.
If the operation of an interest rate cap limits the accrual of interest
on the offered certificates (other than the Class A-1A Certificates), holders of
those certificates will not be entitled to receive any carry-over amount and
their yield would be adversely affected.
There are risks relating to subordinate loans.
Approximately 4.04% of the loan group 1 mortgage loans (by aggregate
principal balance as of the cut-off date) and none of the loan group 2 mortgage
loans evidence a second or third lien that is subordinate to the rights of the
mortgagee under the senior mortgage or mortgages. The proceeds from any
liquidation, insurance or condemnation proceedings will be available to satisfy
the outstanding principal balance of such junior mortgage loans only to the
extent that the claims of any senior mortgage loans have been satisfied in full,
including any foreclosure costs. In circumstances where the servicer determines
that it would be uneconomical to foreclose on the related mortgaged property,
the servicer may write-off the entire outstanding principal balance of the
related mortgage loan as bad debt. The foregoing considerations will be
particularly applicable to junior mortgage loans that have high combined
loan-to-value ratios because the servicer is more likely to determine that
foreclosure would be uneconomical. You should consider the risk that to the
extent losses on mortgage loans are not covered by available credit enhancement,
such losses will be borne by the holders of the certificates.
There are risks in holding subordinate certificates.
The protections afforded the senior certificates in this transaction
create risks for the subordinate certificates. Prior to any purchase of any
subordinate certificates, consider the following factors that may adversely
impact your yield:
o Because the subordinate certificates receive interest and
principal distributions after the related senior certificates
receive such distributions, there is a greater likelihood that the
subordinate certificates will not receive the distributions to
which they are entitled on any distribution date.
o If a simple interest mortgage loan becomes delinquent or the
servicer determines not to advance a delinquent payment on an
actuarial mortgage loan because such amount is not recoverable
from a mortgagor, there may be a shortfall in distributions on the
certificates which will impact the subordinate certificates.
o With respect to simple interest mortgage loans, if monthly
payments are made in any month less than 30 days after the
previous payment or shortfalls in interest collections result from
prepayments in full, there may be a shortfall in distributions on
the certificates. This will disproportionately impact the
subordinate certificates. In addition, the portion of the
shortfalls in the amount of interest collections on actuarial
mortgage loans that are attributable to prepayments in full and
are not covered by the servicer and shortfalls in interest
collections on any mortgage loans arising from the timing of
partial principal prepayments may result in a shortfall in
distributions on the certificates, which will disproportionately
impact the subordinate certificates.
o The subordinate certificates are not expected to receive principal
distributions until, at the earliest, June 2004.
o Losses resulting from the liquidation of defaulted mortgage loans
will first reduce the level of overcollateralization, if any, for
the certificates. If there is no overcollateralization, losses
will be allocated to the subordinate certificates. A loss
allocation results in a reduction in a certificate balance without
a corresponding distribution of cash to the holder. A lower
certificate balance will result in less interest accruing on the
certificate.
S-15
o The earlier in the transaction that a loss on a mortgage loan
occurs, the greater the impact on yield.
See "Description of the Certificates" and "Yield on the Certificates"
in this prospectus supplement for more detail.
There is a risk that interest payments on the mortgage loans may be insufficient
to pay interest on your certificates.
When a mortgage loan is prepaid in full, the mortgagor is charged
interest only up to the date on which payment is made, rather than for an entire
month. This may result in a shortfall in interest collections available for
payment on the next distribution date. Similarly, with respect to simple
interest mortgage loans, the mortgagor is only charged interest up to the date
on which payment is made. Therefore, if a mortgagor makes a payment on a simple
interest mortgage loan in any month less than 30 days after the previous payment
date, a shortfall in interest collections available for payment on the next
distribution date may result. The servicer is required to cover a portion of the
shortfall in interest collections that are attributable to prepayments in full
on actuarial mortgage loans, but only up to one-half of the servicing fee for
the related accrual period. The servicer is not required to cover any shortfall
in interest collections that are attributable to prepayments in full or the
timing of monthly payments on simple interest mortgage loans. If the credit
enhancement is insufficient to cover this shortfall in excess of the amount
covered by the servicer, you may incur a loss.
In addition, the servicer will not cover shortfalls in interest
collections arising from the application of the Soldiers' and Sailors' Civil
Relief Act of 1940, as amended.
There is a risk relating to the potential inadequacy of credit enhancement for
the offered certificates.
The credit enhancement features described in the summary are intended
to enhance the likelihood that holders of the offered certificates will receive
regular payments of interest and principal.
If delinquencies or defaults occur on the mortgage loans, neither the
servicer nor any other entity will advance scheduled monthly payments of
interest and principal on delinquent or defaulted actuarial mortgage loans if
such advances are not likely to be recovered. Neither the servicer nor any other
entity will advance scheduled monthly payments of principal and interest on
simple interest mortgage loans. We cannot assure you that the applicable credit
enhancement will adequately cover any shortfalls in cash available to pay your
certificates as a result of such delinquencies or defaults.
If substantial losses occur as a result of defaults and delinquent
payments on the mortgage loans, you may suffer losses.
There is a risk because the certificates are not obligations of any entity.
The offered certificates represent an interest in the trust fund only.
No other person will insure or guarantee the offered certificates or will have
any obligation with respect to the certificates except for the obligations of
the depositor and the seller pursuant to certain limited representations and
warranties made with respect to the mortgage loans and of the servicer with
respect to its servicing obligations under the pooling and servicing agreement
and, with respect to certain of the mortgage loans, of the primary mortgage
insurer under the primary mortgage insurance policy. No government agency or
instrumentality will guarantee or insure the certificates or the underlying
mortgage loans (other than approximately 14.05% of the loan group 1 mortgage
loans and approximately 2.77% of the loan group 2 mortgage loans (in each case,
by aggregate principal balance as of the cut-off date) which are covered by
either insurance from the Federal Housing Administration or a guaranty from the
United States Department of Veterans Affairs). Proceeds of the assets included
in the trust fund (including the mortgage loans) will be the sole source of
payments on the offered certificates. You will not be able to receive money from
any entity in the event that such proceeds are not enough to make all payments
provided for under the offered certificates.
S-16
There is a risk that there may be a delay in receipt of liquidation proceeds,
and that liquidation proceeds may be less than the outstanding balance of the
mortgage loan.
Substantial delays could be encountered in connection with the
liquidation of delinquent mortgage loans. Further, liquidation expenses such as
legal fees, real estate taxes and maintenance and preservation expenses will
reduce the portion of liquidation proceeds payable to you. If a mortgaged
property fails to provide adequate security for the mortgage loan, you will
incur a loss on your investment if the credit enhancements are insufficient to
cover the loss.
There is an increased risk of loss relating to high combined loan-to-value
ratios.
Mortgage loans with combined loan-to-value ratios in excess of 80% may
present a greater risk of loss than mortgage loans with combined loan-to-value
ratios of equal to or below 80%. Approximately 20.15% of the mortgage loans,
representing approximately 25.90% of the loan group 1 mortgage loans and
approximately 12.94% of the loan group 2 mortgage loans (in each case, by
aggregate principal balance as of the cut-off date), are mortgage loans which
had a combined loan-to-value ratio in excess of 80% at origination, and are not
covered by a primary mortgage insurance policy, insurance from the Federal
Housing Administration or a guaranty from the United States Department of
Veterans Affairs.
There are risks relating to geographic concentration of the mortgage loans.
The following chart lists the states with the highest concentrations of
mortgage loans for each loan group, based on the aggregate principal balance of
the mortgage loans as of the cut-off date.
Loan Group 1 Loan Group 2
-------------------------------- ------------------------------
Florida 16.0% California 29.4%
California 13.0% Illinois 5.8%
Texas 8.2% Michigan 5.5%
New York 6.4% New York 5.1%
Property in California may be particularly susceptible to certain types
of uninsurable hazards, such as earthquakes, hurricanes, floods, mudslides and
other natural disasters. Properties in Florida may be particularly susceptible
to certain types of uninsurable hazards such as hurricanes.
In addition, the conditions below will have a disproportionate impact
on the mortgage loans in general:
o Economic conditions in states listed above which may or may not
affect real property values may affect the ability of mortgagors
to repay their loans on time.
o Declines in the residential real estate markets in the states
listed above may reduce the values of properties located in those
states, which would result in an increase in the combined
loan-to-value ratios.
o Any increase in the market value of properties located in the
states listed above would reduce the combined loan-to-value ratios
and could, therefore, make alternative sources of financing
available to the mortgagors at lower interest rates, which could
result in an increased rate of prepayment of the mortgage loans.
There are risks relating to balloon loans.
Balloon loans pose a risk because a mortgagor must make a large lump
sum payment of principal at the end of the loan term. If the mortgagor is unable
to pay the lump sum or refinance such amount, you may suffer a loss.
S-17
Approximately 9.76% of the loan group 1 mortgage loans (by aggregate principal
balance as of the cut-off date), and none of the loan group 2 mortgage loans,
are balloon loans.
The lack of a secondary market may limit your ability to sell your certificates.
The underwriters intend to make a secondary market in the certificates
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 certificates readily or at prices
that will enable you to realize your desired yield. The market values of the
certificates are likely to fluctuate; these fluctuations may be significant and
could result in significant losses to you.
The secondary markets for 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 certificates.
Federal and state laws regulate the 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 servicers and
originators, particularly in the case of mortgage loans with high interest rates
or high origination fees or charges. 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,
and
o subject the trust 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 certificates. In addition,
approximately 3.35% and 1.82% of the loan group 1 mortgage loans and loan group
2 mortgage loans, respectively (by aggregate principal balance as of the cut-off
date), will have been originated with interest rates or fees which make them
subject to the Home Ownership and Equity Protection Act of 1994 and such
mortgage loans and other mortgage loans in both loan groups may be subject to
comparable state laws with lower threshold tests. See "Certain Legal Aspects of
Mortgage Loans--Anti-Deficiency Legislation 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 certificateholders for
any losses arising from the related breach. For example, if a mortgagor brings
legal action against the trust, the trustee will be entitled to indemnification
from trust property for its defense costs. The seller will not indemnify the
trust or have any other responsibility to the trust or certificateholders (other
than to repurchase or replace such loan) for any losses and liabilities the
trust 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 certificates could occur.
In the event the seller is not able to repurchase or replace defective mortgage
loans you may suffer losses on your certificates.
The seller will make various representations and warranties related to
the mortgage loans.
S-18
If the seller fails to cure a material breach of its representations
and warranties with respect to any mortgage loan in a timely manner, the seller
will be required to repurchase or replace the defective loan. See "Pooling and
Servicing Agreement--Assignment of the Mortgage Loans" in this prospectus
supplement. In the event that the seller is not able to repurchase or replace
any defective mortgage loans at the date such action is required, for financial
or other reasons, you may suffer losses on your certificates. The inability of
the seller to repurchase or replace defective mortgage loans would likely cause
the mortgage loans to experience higher rates of delinquencies, defaults and
losses. As a result, shortfalls in the distributions due on your certificates
could occur.
There are risks of non-payment of insured amounts under the primary mortgage
insurance policy.
Pursuant to the pooling and servicing agreement, the servicer is
obligated to pay the premium due under the primary mortgage insurance policy
from amounts collected with respect to certain mortgage loans. The servicer's
failure to pay such premium may result in cancellation of the primary mortgage
insurance policy or failure of the insurer to pay amounts otherwise due with
respect to defaulted mortgage loans covered under such policy. Furthermore,
there can be no assurance that any filed claims will be filed properly, which
may adversely affect the recovery of insurance proceeds on the related mortgage
loan. This may have an adverse affect on your certificates. See "The Mortgage
Pool--Primary Mortgage Insurance" in this prospectus supplement.
USE OF PROCEEDS
The Seller will sell the mortgage loans to the Depositor and the
Depositor will convey the Mortgage Loans to the Trust in exchange for and
concurrently with the delivery of the Certificates. Net proceeds from the sale
of the Offered Certificates will be applied by the Depositor to the purchase of
the Mortgage Loans from the Seller. Such net proceeds, together with the cash
proceeds from the sale of the Class B-2 Certificates, the Class X/N Certificates
and the Residual Certificates, will represent the purchase price to be paid by
the Depositor to the Seller for the Mortgage Loans.
THE MORTGAGE POOL
The Seller provided the information in the following paragraphs. None
of the Depositor, either Underwriter, the Servicer, the Trustee or any of their
respective affiliates have made or will make any representation as to the
accuracy or completeness of such information.
Certain information with respect to the Mortgage Loans to be included
in each Loan Group is set forth herein. Prior to the Closing Date, Mortgage
Loans may be removed from a Loan Group and other Mortgage Loans may be
substituted therefor. The Seller believes that the information set forth herein
with respect to each Loan Group as presently constituted is representative of
the characteristics of each Loan Group as it will be constituted at the Closing
Date, although certain characteristics of the Mortgage Loans in a Loan Group may
vary.
General
The assets included in the Trust (the "Trust Fund") will consist of a
pool of 2,418 closed-end, fixed-rate and adjustable-rate mortgage loans (the
"Mortgage Pool") having original terms to maturity ranging from 12 months to 583
months (the "Mortgage Loans") and an aggregate principal balance as of May 1,
2001 (the "Cut-off Date") of $187,840,911.05. All Mortgage Loan statistics set
forth herein are based on principal balances, interest rates, terms to maturity,
mortgage loan counts and similar statistics as of the Cut-off Date. All weighted
averages specified herein are based on the principal balances of the Mortgage
Loans in the related loan group as of the Cut-off Date, as adjusted for the
principal payments received or advanced on or before such date (each, a "Cut-off
Date Principal Balance"). The "Principal Balance" of a Mortgage Loan, as of any
date, is equal to the principal balance of such Mortgage Loan at its
origination, less the sum of scheduled and unscheduled payments and other
recoveries in respect of principal made or advanced on such Mortgage Loan.
References to percentages of the Mortgage Loans mean percentages based on the
aggregate of the Cut-off Date Principal Balances of the Mortgage Loans in the
related Loan Group, unless otherwise specified. The "Pool Balance" is equal to
the aggregate of the Principal Balances of the Mortgage Loans in both Loan
Groups.
The Depositor will purchase the Mortgage Loans from the Seller pursuant
to the Mortgage Loan Purchase Agreement (the "Mortgage Loan Purchase
Agreement"), dated as of the Cut-off Date, between the Seller and the Depositor.
Pursuant to the Pooling and Servicing Agreement, the Depositor will cause the
Mortgage Loans to be assigned to the Trustee for the benefit of the
Certificateholders. See "Pooling and Servicing Agreement" in this prospectus
supplement.
S-19
Each of the Mortgage Loans in the Mortgage Pool was selected from the
Seller's portfolio of mortgage loans. The Mortgage Loans were acquired by the
Seller in the secondary market in the ordinary course of its business and
re-underwritten by the Seller in accordance with its underwriting standards as
described in "Underwriting Standards." The Mortgage Loans in the Mortgage Pool
were originated or acquired by various mortgage loan originators. Approximately
13.25% and 11.98% of the Group 1 Mortgage Loans were originated or acquired by
Crown Bank and South Plains, respectively. Approximately 27.04% and 19.68% of
the Group 2 Mortgage Loans were originated by BNC Mortgage and Life Bank,
respectively.
Under the Pooling and Servicing Agreement, the Seller will make certain
representations and warranties to the Trustee relating to, among other things,
the due execution and enforceability of the Pooling and Servicing Agreement, its
title to the Mortgage Loans and certain characteristics of the Mortgage Loans
and, subject to certain limitations, will be obligated to repurchase or
substitute a similar mortgage loan for any Mortgage Loan as to which there
exists deficient documentation or an uncured breach of any such representation
or warranty, if such breach of any such representation or warranty materially
and adversely affects the Certificateholders' interests in such Mortgage Loan.
The Depositor will make no representations or warranties with respect to the
Mortgage Loans and will have no obligation to repurchase or substitute for
Mortgage Loans with deficient documentation or that are otherwise defective. The
Seller is selling the Mortgage Loans without recourse and will have no
obligation with respect to the Certificates in its capacity as Seller other than
the repurchase or substitution obligations described above.
The Mortgage Pool will consist of two loan groups ("Loan Group 1" and
"Loan Group 2," respectively, and each, a "Loan Group"). The Mortgage Loans in
Loan Group 1 (the "Group 1 Mortgage Loans") consist of 275 FHA Mortgage Loans,
FHAUN Mortgage Loans, VA Mortgage Loans and VANG Mortgage Loans and 1,393
fixed-rate conventional Mortgage Loans with an aggregate principal balance (the
"Group 1 Loan Balance") of $104,510,103.46 as of the Cut-off Date. The Mortgage
Loans in Loan Group 2 (the "Group 2 Mortgage Loans") consist of 750
adjustable-rate Mortgage Loans with an aggregate principal balance (the "Group 2
Loan Balance") of $83,330,807.59 as of the Cut-off Date.
Each Loan Group consists of Performing Mortgage Loans, Sub-Performing
Mortgage Loans and Re-Performing Mortgage Loans, each as defined below:
o A "Performing Mortgage Loan" is a Mortgage Loan pursuant to which
no payment due under the related mortgage note (or any
modification thereto) prior to the Cut-off Date, is 30 or more
days Delinquent.
o A "Sub-Performing Mortgage Loan" is a Mortgage Loan (that might be
a Forbearance Plan Mortgage Loan or a Bankruptcy Plan Mortgage
Loan) pursuant to which a payment due prior to the Cut-off Date
under the terms of the related mortgage note (or any modification
thereto), is at least 30 but not more than 89 days Delinquent.
Certain Sub-Performing Mortgage Loans have been modified in
writing and are also characterized as follows:
(a) If a Sub-Performing Mortgage Loan is a "Forbearance
Plan Mortgage Loan", the related mortgagor must make
monthly payments ("Modified Scheduled Payments") in
an amount at least equal to the sum of (i) the amount
of the monthly scheduled payment of principal and
interest determined in accordance with such Mortgage
Loan's original amortization schedule ("Regular
Scheduled Payments") plus (ii) an additional amount
to be applied to pay down the total amount of
scheduled monthly payments due thereon on or before
the Cut-off Date but not received prior to the
Cut-off Date plus the aggregate amount of tax and
insurance advances made with respect to such Mortgage
Loan to the extent remaining outstanding as of the
Cut-off Date.
S-20
(b) If a Sub-Performing Mortgage Loan is a "Bankruptcy
Plan Mortgage Loan," the related mortgagor defaulted
and, after default, became the subject of a case
under either Chapter 7 or 13 of the United States
Bankruptcy Code, 11 U.S.C. ss.ss. 101 et seq. (the
"Bankruptcy Code") and, as of the Cut-off Date, had a
confirmed bankruptcy plan. Each such bankruptcy plan
generally requires the related mortgagor to make
Modified Scheduled Payments in an amount at least
equal to (i) the Regular Scheduled Payment plus (ii)
an additional amount sufficient to pay down overdue
amounts resulting from the period of default,
generally over a period of three to five years from
the commencement of such bankruptcy plan.
o A "Re-Performing Mortgage Loan" is a Mortgage Loan (that might be
a Forbearance Plan Mortgage Loan or a Bankruptcy Plan Mortgage
Loan) which had defaulted in the past and which is currently at
least 90 days Delinquent with respect to certain Regular Scheduled
Payments but which satisfies one of the following criteria (the
"Re-Performance Test"):
(a) the mortgagor has made at least three aggregate
Regular Scheduled Payments in the three calendar
months preceding the Cut-off Date (regardless of
either the timing of receipt of such payments or the
payment history of such loans prior to February 1,
2001), or
(b) the mortgagor has made at least four aggregate
Regular Scheduled Payments in the four calendar
months preceding the Cut-off Date (regardless of
either the timing of receipt of such payments or the
payment history of such loans prior to January 1,
2001), or
(c) the mortgagor has made at least five aggregate
Regular Scheduled Payments in the five calendar
months preceding the Cut-off Date (regardless of
either the timing of receipt of such payments or the
payment history of such loans prior to December 1,
2000).
A Mortgage Loan is "Delinquent" if the scheduled monthly payment of
principal and interest on such Mortgage Loan which is payable by the related
mortgagor under the related Mortgage Note (the "Monthly Payment") due on a due
date is not paid by the close of business on the next scheduled due date for
such Mortgage Loan. Thus, a Mortgage Loan for which the mortgagor failed to make
the Monthly Payment due on January 1, 2001 will be reported as Delinquent on
February 2, 2001 if the payment is not made by the close of business on February
1, 2001.
With respect to certain Delinquent Mortgage Loans, the total amount of
scheduled Monthly Payments due thereon on or before the Cut-off Date but not
received prior to the Cut-off Date, together with any outstanding servicing
advances on such Mortgage Loans, is referred to as the "Arrearage." The Servicer
has previously made advances in respect of the Arrearages. Any Arrearage will
not be included as part of the Trust Fund and, accordingly, payments with
respect to Arrearage will not be payable to the Certificateholders as and when
received. However, the Servicer shall be required to make servicing advances on
Delinquent Mortgage Loans and make advances of delinquent payments of principal
and interest on Delinquent Mortgage Loans (other than Simple Interest Mortgage
Loans or REO Properties), each to the extent such advances are deemed
recoverable, until such Mortgage Loans become current or an REO Property.
Group 1 Mortgage Loan Statistics
Loan Group 1 consists of FHA Mortgage Loans, FHAUN Mortgage Loans, VA
Mortgage Loans, VANG Mortgage Loans and fixed-rate conventional Mortgage Loans.
The Group 1 Loan Balance as of the Cut-off Date is equal to $104,510,103.46 and
the Arrearage is equal to $4,945,976.52. The Group 1 Mortgage Loans have
original terms to maturity ranging from 12 to 583 months. The following
statistical information, unless otherwise specified, is based upon the Group 1
Loan Balance as of the Cut-off Date.
The Group 1 Mortgage Loans are secured by mortgages, deeds of trust or
other similar security instruments (each, a "Mortgage") creating first, second
or third liens on one- to four-family residential properties consisting of one-
to four-family dwelling units and individual condominium units (each, a
"Mortgaged Property"). Approximately 4.04% of the Group 1 Mortgage Loans are
secured by a Mortgage that is junior to one or more senior mortgage liens on the
related Mortgaged Property, and approximately 95.96% of the Group 1 Mortgage
Loans are secured by a first mortgage lien on the related Mortgaged Property.
Approximately 25.90% of the Group 1 Mortgage Loans had a Combined Loan-to-Value
Ratio at origination in excess of 80% and do not have primary mortgage
insurance, FHA insurance or a VA guaranty. There can be no assurance that the
Combined Loan-to-Value Ratio of any such Group 1 Mortgage Loan determined at any
time after origination is less than or equal to its original Combined
Loan-to-Value Ratio. Of the Group 1 Mortgage Loans, approximately 66.56% have
scheduled Monthly Payments due on the first day of the month (the day such
Monthly Payments are due with respect to each Mortgage Loan, a "Due Date"). The
"Combined Loan-to-Value Ratio" of a Mortgage Loan shall generally mean the
ratio, expressed as a percentage of (i) the sum of (a) the principal amount of
the Mortgage Loan at origination plus (b) the outstanding balance of all senior
liens, if any, at origination of the Mortgage Loan over (ii) lesser of (A) the
appraised value based on an appraisal made at the time of the origination of the
related Mortgage Loan, and (2) the sales price of the related Mortgaged Property
at such time of origination.
S-21
Approximately 9.80% and approximately 4.55% of the Loan Group 1
Mortgage Loans are FHA and FHAUN Mortgage Loans, respectively. Approximately
4.25% and approximately 0.10% of the Loan Group 1 Mortgage Loans are VA and VANG
Mortgage Loans, respectively. See "--FHA Mortgage Loans and VA Mortgage Loans."
Approximately 71.25% of the Group 1 Mortgage Loans are Performing
Mortgage Loans. Approximately 5.61% of the Group 1 Mortgage Loans are
Sub-Performing Mortgage Loans, including 0.18% that are Forbearance Plan
Mortgage Loans and 0.41% that are Bankruptcy Plan Mortgage Loans. Of the
Mortgage Loans in Loan Group 1, approximately 5.61% are 30-59 days past due and
none are 60-89 days past due. Approximately 23.14% of the Group 1 Mortgage Loans
are Re-Performing Mortgage Loans, including 3.32% that are Forbearance Plan
Mortgage Loans and 19.05% that are Bankruptcy Plan Mortgage Loans.
Approximately 27.16% of the Group 1 Mortgage Loans provide for payment
by the mortgagor of a prepayment charge in limited circumstances on certain
prepayments. No such prepayment charge will be distributed to the holders of the
Offered Certificates.
Approximately 9.76% of the Group 1 Mortgage Loans will not fully
amortize by their respective maturity dates (each, a "Balloon Loan"). The
Monthly Payment for each Balloon Loan is based on an amortization schedule
ranging from 121 months to 360 months, except for the final payment (the
"Balloon Payment") which is due and payable between the 12th month and the 180th
month following origination of such Mortgage Loan, depending on the terms of the
related mortgage note. With respect to the majority of the Balloon Loans, the
Monthly Payments for such Balloon Loans amortize over 360 months, but the
Balloon Payment is due in the 180th month following origination. The amount of
the Balloon Payment on each Balloon Loan is substantially in excess of the
amount of the scheduled Monthly Payment for such Mortgage Loan.
Approximately 11.98% of the Group 1 Mortgage Loans are Owner-Financed
Mortgage Loans.
Each Group 1 Mortgage Loan accrues interest at a per annum rate (the
"Mortgage Interest Rate") of not less than 4.875% per annum and not more than
19.000% per annum and as of the Cut-off Date the weighted average Mortgage
Interest Rate of the Group 1 Mortgage Loans was approximately 9.940% per annum.
The weighted average remaining term to maturity of the Group 1 Mortgage
Loans will be approximately 269 months as of the Cut-off Date. None of the Group
1 Mortgage Loans had a first Due Date prior to August 1, 1972 or after May 3,
2001 or will have a remaining term to maturity of less than 3 months or greater
than 386 months as of the Cut-off Date. The latest maturity date of any Group 1
Mortgage Loan is July 15, 2033.
The average Principal Balance of the Group 1 Mortgage Loans at
origination was $66,026.93. No Group 1 Mortgage Loan had a Cut-off Date
Principal Balance of greater than $698,677.67 or less than $891.02. The average
Cut-off Date Principal Balance of the Group 1 Mortgage Loans was $62,655.94.
Each Group 1 Mortgage Loan had a Net Mortgage Interest Rate of not less
than 4.375% per annum, and not more than 18.500% per annum and as of the Cut-off
Date, the weighted average Net Mortgage Interest Rate of the Group 1 Mortgage
Loans was approximately 9.175%.
S-22
The Group 1 Mortgage Loans are expected to have the following
characteristics as of the Cut-off Date (the sum in any column may not equal the
total indicated due to rounding):
Principal Balances of the Group 1 Mortgage Loans as of the Cut-off Date
Aggregate % of Aggregate Group 1
Number of Principal Balance Principal Balance
Principal Balance as of Mortgage Outstanding as of Outstanding as of
the Cut-off Date ($) Loans the Cut-off Date the Cut-off Date
-------------------------------------------- -------------- ------------------------- ---------------------------
0.01 - 20,000.00 ........ 230 $ 2,937,537.14 2.81%
20,000.01 - 40,000.00 ........ 407 12,464,953.07 11.93
40,000.01 - 60,000.00 ........ 378 18,924,801.05 18.11
60,000.01 - 80,000.00 ........ 265 18,314,195.71 17.52
80,000.01 - 100,000.00 ........ 125 11,191,374.27 10.71
100,000.01 - 120,000.00 ........ 94 10,345,063.61 9.90
120,000.01 - 140,000.00 ........ 67 8,704,717.33 8.33
140,000.01 - 160,000.00 ........ 30 4,497,541.68 4.30
160,000.01 - 180,000.00 ........ 15 2,577,338.66 2.47
180,000.01 - 200,000.00 ........ 18 3,389,179.79 3.24
200,000.01 - 220,000.00 ........ 10 2,110,365.14 2.02
220,000.01 - 240,000.00 ........ 5 1,143,280.21 1.09
240,000.01 - 260,000.00 ........ 5 1,242,799.58 1.19
260,000.01 - 280,000.00 ........ 4 1,072,546.91 1.03
280,000.01 - 300,000.00 ........ 3 876,394.98 0.84
300,000.01 - 320,000.00 ........ 1 314,036.43 0.30
320,000.01 - 340,000.00 ........ 3 988,492.08 0.95
340,000.01 - 360,000.00 ........ 3 1,070,552.00 1.02
360,000.01 - 380,000.00 ........ 1 366,679.60 0.35
380,000.01 - 400,000.00 ........ 1 394,677.36 0.38
420,000.01 - 440,000.00 ........ 1 435,520.89 0.42
440,000.01 - 460,000.00 ........ 1 449,378.30 0.43
680,000.01 - 700,000.00 ........ 1 698,677.67 0.67
-------- --------------- -------
Total.............................. 1,668 $104,510,103.46 100.00%
======== =============== =======
S-23
Mortgage Rates of the Group 1 Mortgage Loans as of the Cut-off Date
Aggregate % of Aggregate Group 1
Number of Principal Balance Principal Balance
Mortgage Outstanding as of Outstanding as of
Mortgage Rate (%) Loans The Cut-off Date the Cut-off Date
-------------------------------------------- ------------- ------------------------- ---------------------------
4.501 - 5.000 ................. 2 $ 52,090.78 0.05%
5.001 - 5.500 ................. 2 174,168.90 0.17
5.501 - 6.000 ................. 6 437,693.12 0.42
6.001 - 6.500 ................. 10 678,692.12 0.65
6.501 - 7.000 ................. 41 2,993,258.20 2.86
7.001 - 7.500 ................. 51 3,873,002.14 3.71
7.501 - 8.000 ................. 159 11,228,566.60 10.74
8.001 - 8.500 ................. 177 14,549,159.65 13.92
8.501 - 9.000 ................. 139 11,351,302.35 10.86
9.001 - 9.500 ................. 97 7,708,671.94 7.38
9.501 - 10.000 ................. 154 10,378,499.68 9.93
10.001 - 10.500 ................. 90 6,016,173.94 5.76
10.501 - 11.000 ................. 109 7,484,580.81 7.16
11.001 - 11.500 ................. 110 5,985,330.80 5.73
11.501 - 12.000 ................. 111 5,628,981.12 5.39
12.001 - 12.500 ................. 87 3,537,212.13 3.38
12.501 - 13.000 ................. 85 4,198,007.94 4.02
13.001 - 13.500 ................. 43 1,703,111.58 1.63
13.501 - 14.000 ................. 83 2,556,640.77 2.45
14.001 - 14.500 ................. 36 1,527,169.60 1.46
14.501 - 15.000 ................. 32 1,319,519.18 1.26
15.001 - 15.500 ................. 21 569,181.37 0.54
15.501 - 16.000 ................. 19 268,912.25 0.26
16.001 - 16.500 ................. 2 129,697.09 0.12
16.501 - 17.000 ................. 1 148,543.61 0.14
18.501 - 19.000 ................. 1 11,935.79 0.01
-------- --------------- -------
Total............................. 1,668 $104,510,103.46 100.00%
======== =============== =======
S-24
Original Combined Loan-to-Value Ratios of the Group 1 Mortgage Loans
Aggregate % of Aggregate Group 1
Number Principal Balance Principal Balance
Original Combined of Mortgage Outstanding as of Outstanding as of
Loan-to-Value Ratio (%) Loans The Cut-off Date the Cut-off Date
-------------------------------------------- -------------- ------------------------- ---------------------------
10.01 - 15.00........................... 2 $ 34,019.17 0.03%
15.01 - 20.00........................... 3 66,352.87 0.06
20.01 - 25.00........................... 2 20,737.50 0.02
25.01 - 30.00........................... 7 349,492.65 0.33
30.01 - 35.00........................... 9 309,666.59 0.30
35.01 - 40.00........................... 12 998,278.71 0.96
40.01 - 45.00........................... 13 464,932.10 0.44
45.01 - 50.00........................... 11 556,318.64 0.53
50.01 - 55.00........................... 26 1,328,353.92 1.27
55.01 - 60.00........................... 40 2,446,562.82 2.34
60.01 - 65.00........................... 81 3,887,802.96 3.72
65.01 - 70.00........................... 80 4,924,980.95 4.71
70.01 - 75.00........................... 109 7,213,659.99 6.90
75.01 - 80.00........................... 261 20,524,501.88 19.64
80.01 - 85.00........................... 168 10,822,810.49 10.36
85.01 - 90.00........................... 212 14,146,709.89 13.54
90.01 - 95.00........................... 175 8,919,294.55 8.53
95.01 - 100.00........................... 284 16,334,139.46 15.63
100.01 >= .............................. 173 11,161,488.32 10.68
-------- --------------- ------
Total............................. 1,668 $104,510,103.46 100.00%
======== =============== ======
S-25
Geographic Distribution of the Mortgaged Properties of the Group 1 Mortgage Loans
Aggregate % of Aggregate Group 1
Number Principal Balance Principal Balance
of Mortgage Outstanding as of Outstanding as of
Location Loans The Cut-off Date the Cut-off Date
-------------------------------------------- ------------- ------------------------- ---------------------------
Florida................................... 261 $ 16,726,036.82 16.00%
California................................ 125 13,605,922.33 13.02
Texas..................................... 198 8,590,519.20 8.22
New York.................................. 75 6,681,419.62 6.39
Pennsylvania.............................. 99 4,756,991.33 4.55
North Carolina............................ 70 4,059,642.31 3.88
Maryland.................................. 42 3,949,918.42 3.78
Michigan.................................. 70 3,559,880.53 3.41
Georgia................................... 49 3,038,695.93 2.91
Illinois.................................. 49 2,954,501.21 2.83
Tennessee................................. 47 2,834,557.63 2.71
Ohio...................................... 55 2,805,725.44 2.68
New Jersey................................ 48 2,701,190.35 2.58
Colorado.................................. 23 2,627,193.83 2.51
Virginia.................................. 27 2,110,691.29 2.02
Arizona................................... 35 1,869,591.57 1.79
Alabama................................... 34 1,792,059.99 1.71
Missouri.................................. 43 1,602,165.69 1.53
Connecticut............................... 15 1,573,645.50 1.51
South Carolina............................ 25 1,542,322.98 1.48
Indiana................................... 21 1,364,875.43 1.31
Washington................................ 20 1,308,968.34 1.25
Nevada.................................... 14 1,188,271.72 1.14
Louisiana................................. 25 1,057,436.99 1.01
Mississippi............................... 22 940,902.81 0.90
Massachusetts............................. 11 937,014.00 0.90
Oklahoma.................................. 27 908,883.68 0.87
Arkansas.................................. 17 775,855.57 0.74
New Mexico................................ 9 726,500.21 0.70
Delaware.................................. 7 625,292.36 0.60
Kentucky.................................. 15 558,241.33 0.53
Minnesota................................. 10 541,983.14 0.52
Oregon.................................... 9 477,833.87 0.46
District of Columbia...................... 5 475,589.22 0.46
Kansas.................................... 11 418,845.57 0.40
Utah...................................... 4 396,678.45 0.38
New Hampshire............................. 4 344,253.16 0.33
Wisconsin................................. 7 307,873.53 0.29
Maine..................................... 4 288,259.22 0.28
Idaho..................................... 6 257,834.48 0.25
Rhode Island.............................. 5 250,037.83 0.24
Nebraska.................................. 6 186,388.64 0.18
Hawaii.................................... 2 184,507.37 0.18
Iowa...................................... 6 150,478.49 0.14
Wyoming................................... 3 100,200.08 0.10
Alaska.................................... 1 85,630.10 0.08
West Virginia............................. 3 83,707.24 0.08
Montana................................... 2 78,881.31 0.08
Puerto Rico............................... 1 77,068.55 0.07
South Dakota.............................. 1 29,138.80 0.03
-------- --------------- -------
Total............................. 1,668 $104,510,103.46 100.00%
======== =============== =======
S-26
Mortgaged Property Types of the Group 1 Mortgage Loans
Aggregate % of Aggregate Group 1
Number Principal Balance Principal Balance
of Mortgage Outstanding as of Outstanding as of
Property Type Loans The Cut-off Date the Cut-off Date
- -------------------------------------------- ------------- ------------------------- ---------------------------
Single Family Residence.................... 1,467 $ 91,036,462.22 87.11%
2 Family................................... 46 3,136,307.96 3.00
PUD........................................ 23 2,897,065.52 2.77
Mobile Home................................ 39 1,887,162.67 1.81
Condo...................................... 32 1,676,273.06 1.60
Manufactured Housing....................... 25 1,287,208.48 1.23
3 Family................................... 12 1,088,087.72 1.04
4 Family................................... 7 608,762.24 0.58
Townhouse.................................. 12 565,203.86 0.54
Co-op...................................... 1 121,139.33 0.12
Condo - High Rise (>=6 floors)............. 1 94,270.23 0.09
2-4 Family................................. 2 65,466.75 0.06
Condo - Low Rise (<=5 floors).............. 1 46,693.42 0.04
-------- --------------- ------
Total............................ 1,668 $104,510,103.46 100.00%
======== =============== ======
Mortgaged Property Occupancy Status of the Group 1 Mortgage Loans
Aggregate % of Aggregate Group 1
Number Principal Balance Principal Balance
of Mortgage Outstanding as of Outstanding as of
Occupancy Status Loans The Cut-off Date the Cut-off Date
- -------------------------------------------- ------------- ------------------------- ---------------------------
Primary.................................... 1,529 $ 97,971,790.69 93.74%
Investment................................. 128 5,851,427.05 5.60
Second Home................................ 11 686,885.72 0.66
-------- --------------- -------
Total............................. 1,668 $104,510,103.46 100.00%
======== =============== =======
The occupancy status of a Mortgaged Property is as represented by the mortgagor
in its loan application.
Loan Purpose of the Group 1 Mortgage Loans
Aggregate % of Aggregate Group 1
Number Principal Balance Principal Balance
of Mortgage Outstanding as of Outstanding as of
Loan Purpose Loans The Cut-off Date the Cut-off Date
- -------------------------------------------- ------------- ------------------------- ---------------------------
Purchase................................... 709 $ 47,042,053.44 45.01%
Refinance - Cashout........................ 766 42,940,396.59 41.09
Refinance - Rate/Term...................... 185 14,366,705.52 13.75
Construction............................... 8 160,947.91 0.15
-------- --------------- -------
Total............................. 1,668 $104,510,103.46 100.00%
======== =============== =======
S-27
Loan Programs of the Group 1 Mortgage Loans
Aggregate % of Aggregate Group 1
Number Principal Balance Principal Balance
Of Mortgage Outstanding as of Outstanding as of
Loan Program Loans The Cut-off Date the Cut-off Date
- -------------------------------------------- ------------- ------------------------- ---------------------------
Full....................................... 875 $ 63,766,407.34 61.01%
Alternative................................ 288 13,613,650.25 13.03
No Documentation........................... 283 12,518,906.29 11.98
Stated Documentation....................... 87 6,688,556.30 6.40
Limited.................................... 74 3,777,509.42 3.61
Missing.................................... 51 3,492,754.66 3.34
Streamlined................................ 10 652,319.20 0.62
-------- --------------- -------
Total............................. 1,668 $104,510,103.46 100.00%
======== =============== =======
Original Terms to Maturity of Group 1 Mortgage Loans
Aggregate % of Aggregate Group 1
Number Principal Balance Principal Balance
Of Mortgage Outstanding as of Outstanding as of
Original Terms (months) Loans The Cut-off Date the Cut-off Date
- -------------------------------------------- ------------- ------------------------- ---------------------------
<60........................................ 18 $ 1,750,039.54 1.67%
61 - 120.................................. 103 1,919,406.29 1.84
121 - 180.................................. 394 17,668,253.88 16.91
181 - 240.................................. 160 7,246,527.53 6.93
241 - 300.................................. 83 3,432,207.65 3.28
301 - 360.................................. 903 72,196,015.60 69.08
>=361...................................... 7 297,652.97 0.28
-------- --------------- -------
Total............................. 1,668 $104,510,103.46 100.00%
======== =============== =======
S-28
Group 2 Mortgage Loan Statistics
Loan Group 2 consists of 750 adjustable-rate Mortgage Loans. The Group
2 Loan Balance as of the Cut-off Date is equal to $83,330,807.59 and the
Arrearage is equal to $1,792,925.20. The Group 2 Mortgage Loans have original
terms to maturity ranging from 240 months to 360 months. The following
statistical information, unless otherwise specified, is based upon the Group 2
Loan Balance as of the Cut-off Date.
The Group 2 Mortgage Loans are secured by Mortgages which the Seller
has represented create first liens on the related Mortgaged Properties.
Approximately 12.94% of the Group 2 Mortgage Loans had a Combined Loan-to-Value
Ratio at origination in excess of 80% and do not have FHA insurance, a VA
guaranty or primary mortgage insurance. There can be no assurance that the
Combined Loan-to-Value Ratio of any Group 2 Mortgage Loan determined at any time
after origination is less than or equal to its original Combined Loan-to-Value
Ratio. Approximately 98.20% of the Group 2 Mortgage Loans have a Due Date on the
first day of each month.
Approximately 2.49% and approximately 0.46% of the Loan Group 2
Mortgage Loans are FHA and FHAUN Mortgage Loans, respectively. Approximately
0.28% of the Loan Group 2 Mortgage Loans are VA Mortgage Loans. See "--FHA
Mortgage Loans and VA Mortgage Loans."
Approximately 86.52% of the Group 2 Mortgage Loans are Performing
Mortgage Loans. Approximately 5.56% of the Group 2 Mortgage Loans are
Sub-Performing Mortgage Loans, including 0.23% that are Forbearance Plan
Mortgage Loans. Approximately 0.06% of the Group 2 Mortgage Loans are
Sub-Performing Loans that are Bankruptcy Plan Mortgage Loans. Of the Mortgage
Loans in Loan Group 2, approximately 5.56% are 30-59 days past due and none are
60-89 days past due. Approximately 7.92% of the Group 2 Mortgage Loans are
Re-Performing Mortgage Loans including 1.27% that are Forbearance Plan Mortgage
Loans and 5.97% that are Bankruptcy Plan Mortgage Loans.
Approximately 71.12% of the Group 2 Mortgage Loans provide for payment
by the mortgagor of a prepayment charge in limited circumstances on certain
prepayments. No such prepayment charge will be distributed to the holders of the
Offered Certificates.
None of the Group 2 Mortgage Loans are Balloon Loans. None of the Group
2 Mortgage Loans are Owner-Financed Mortgage Loans.
The weighted average remaining term to maturity of the Group 2 Mortgage
Loans will be approximately 345 months as of the Cut-off Date. None of the Group
2 Mortgage Loans had a first Due Date prior to October 1, 1984 or after May 1,
2001 or will have a remaining term to maturity of less than 160 months or
greater than 359 months as of the Cut-off Date. The month of the latest maturity
date of any Group 2 Mortgage Loan is April 1, 2031.
The average Principal Balance of the Group 2 Mortgage Loans at
origination was $112,186.06. The average Cut-off Date Principal Balance of the
Group 2 Mortgage Loans was $111,107.74.
A substantial majority of the Group 2 Mortgage Loans provide for
semi-annual adjustment to the Mortgage Interest Rate thereon and for
corresponding adjustments to the Monthly Payment amount due thereon, in each
case on each adjustment date applicable thereto (each such date, an "Adjustment
Date"). On each Adjustment Date for each Group 2 Mortgage Loan, the Mortgage
Interest Rate thereon will be adjusted to equal the sum of the index applicable
to determining the Mortgage Interest Rate on each Group 2 Mortgage Loan (the
"Index") and a fixed percentage amount (the "Gross Margin"). The Mortgage
Interest Rate on each such Group 2 Mortgage Loan will not increase or decrease
by a percentage ranging from 1.000% to 6.000% per annum on the first related
Adjustment Date (the "Initial Periodic Rate Cap") and from 1.000% to 3.000% per
annum on any Adjustment Date thereafter (the "Periodic Rate Cap"). The Group 2
Mortgage Loans have a weighted average Initial Periodic Rate Cap of
approximately 2.024% per annum and a weighted average Periodic Rate Cap of
approximately 1.119% per annum thereafter. Each Mortgage Interest Rate on each
such Group 2 Mortgage Loan will not exceed a specified maximum Mortgage Interest
Rate over the life of such Group 2 Mortgage Loan (the "Maximum Mortgage Interest
Rate") or (except for 8.73% of the Group 2 Mortgage Loans that do not have
Minimum Mortgage Interest Rates) be less than a specified minimum Mortgage
Interest Rate over the life of such Group 2 Mortgage Loan (the "Minimum Mortgage
Interest Rate"). Effective with the first Monthly Payment due on each Group 2
Mortgage Loan after each related Adjustment Date, the Monthly Payment amount
will be adjusted (other than for the Group 2 Mortgage Loans that are Balloon
Loans) to an amount that will amortize fully the outstanding Principal Balance
of the related Mortgage Loan over its remaining term, and pay interest at the
Mortgage Interest Rate as so adjusted. Due to the application of the Periodic
Rate Caps and the Maximum Mortgage Interest Rates, the Mortgage Interest Rate on
each such Mortgage Loan, as adjusted on any related Adjustment Date, may be less
than the sum of the Index and the related Gross Margin, rounded as described
herein. See "--The Index" in this prospectus supplement. None of the Group 2
Mortgage Loans permit the related mortgagor to convert the adjustable Mortgage
Interest Rate thereon to a fixed Mortgage Interest Rate.
S-29
None of the Group 2 Mortgage Loans have the possibility of negative
amortization because of limits on the amount by which the Monthly Payment may be
adjusted on an Adjustment Date.
The Group 2 Mortgage Loans had Mortgage Interest Rates as of the
Cut-off Date of not less than 6.375% per annum and not more than 15.500% per
annum and the weighted average Mortgage Interest Rate was approximately 10.908%
per annum. As of the Cut-off Date, the Group 2 Mortgage Loans had Gross Margins
ranging from 2.000% to 10.350%, Minimum Mortgage Interest Rates ranging from
0.500% per annum to 15.500% per annum (except for 8.73% of the Group 2 Mortgage
Loans that do not have Minimum Mortgage Interest Rates) and Maximum Mortgage
Interest Rates ranging from 10.375% per annum to 99.999% per annum. As of the
Cut-off Date, the weighted average Gross Margin was approximately 6.271%, the
weighted average Minimum Mortgage Interest Rate was approximately 10.446% per
annum (exclusive of the Mortgage Loans that do not have a Minimum Mortgage
Interest Rate) and the weighted average Maximum Mortgage Interest Rate was
approximately 17.117% per annum. The latest next Adjustment Date following the
Cut-off Date on any Group 2 Mortgage Loan occurs in March 2005 and the weighted
average number of months to the next Adjustment Date following the Cut-off Date
for all of the Group 2 Mortgage Loans is 7 months.
Each Group 2 Mortgage Loan had a Net Mortgage Interest Rate of not less
than 5.875% per annum, and not more than 15.000% per annum and as of the Cut-off
Date, the weighted average Net Mortgage Interest Rate of the Group 2 Mortgage
Loans was approximately 10.067%.
No Group 2 Mortgage Loan had a Cut-off Date Principal Balance of
greater than $989,727.99 or less than $18,126.22. The Group 2 Mortgage Loans are
expected to have the following characteristics as of the Cut-off Date (the sum
in any column may not equal the total indicated due to rounding):
S-30
Principal Balances of the Group 2 Mortgage Loans as of the Cut-off Date
Aggregate % of Aggregate Group 2
Number Principal Balance Principal Balance
Principal Balance as of Of Mortgage Outstanding as of Outstanding as of
the Cut-off Date ($) Loans The Cut-off Date the Cut-off Date
- -------------------------------------------- ------------- ------------------------- ---------------------------
0.01 - 20,000.00.............. 3 $ 56,488.64 0.07%
20,000.01 - 40,000.00.............. 87 2,706,314.33 3.25
40,000.01 - 60,000.00.............. 137 6,895,705.19 8.28
60,000.01 - 80,000.00.............. 135 9,445,024.53 11.33
80,000.01 - 100,000.00.............. 80 7,176,674.65 8.61
100,000.01 - 120,000.00.............. 80 8,730,555.08 10.48
120,000.01 - 140,000.00.............. 59 7,631,079.40 9.16
140,000.01 - 160,000.00.............. 35 5,171,453.11 6.21
160,000.01 - 180,000.00.............. 25 4,257,805.67 5.11
180,000.01 - 200,000.00.............. 20 3,805,360.85 4.57
200,000.01 - 220,000.00.............. 13 2,732,088.62 3.28
220,000.01 - 240,000.00.............. 16 3,733,327.59 4.48
240,000.01 - 260,000.00.............. 11 2,742,434.12 3.29
260,000.01 - 280,000.00.............. 9 2,426,406.24 2.91
280,000.01 - 300,000.00.............. 8 2,357,858.75 2.83
300,000.01 - 320,000.00.............. 9 2,822,896.43 3.39
320,000.01 - 340,000.00.............. 4 1,332,896.03 1.60
340,000.01 - 360,000.00.............. 6 2,106,889.93 2.53
360,000.01 - 380,000.00.............. 1 369,849.83 0.44
380,000.01 - 400,000.00.............. 2 775,656.59 0.93
400,000.01 - 420,000.00.............. 1 403,666.93 0.48
420,000.01 - 440,000.00.............. 1 438,844.03 0.53
460,000.01 - 480,000.00.............. 1 470,938.42 0.57
480,000.01 - 500,000.00.............. 3 1,481,484.41 1.78
520,000.01 - 540,000.00.............. 1 538,497.34 0.65
740,000.01 - 760,000.00.............. 1 743,464.62 0.89
980,000.01 - 1,000,000.00.............. 2 1,977,146.26 2.37
-------- --------------- -------
Total............................. 750 $ 83,330,807.59 100.00%
======== =============== =======
S-31
Mortgage Rates of the Group 2 Mortgage Loans as of the Cut-off Date
Aggregate % of Aggregate Group 2
Number Principal Balance Principal Balance
of Mortgage Outstanding as of Outstanding as of
Mortgage Rate (%) Loans The Cut-off Date The Cut-off Date
- --------------------------------------- ------------- ------------------------- ---------------------------
6.001 - 6.500 ............ 1 $ 117,288.70 0.14%
6.501 - 7.000 ............ 3 232,159.57 0.28
7.001 - 7.500 ............ 10 935,939.16 1.12
7.501 - 8.000 ............ 14 1,771,443.33 2.13
8.001 - 8.500 ............ 10 2,102,435.86 2.52
8.501 - 9.000 ............ 30 3,783,385.88 4.54
9.001 - 9.500 ............ 36 4,788,733.69 5.75
9.501 - 10.000 ............ 67 10,471,641.37 12.57
10.001 - 10.500 ............ 84 10,527,657.27 12.63
10.501 - 11.000 ............ 103 13,421,190.80 16.11
11.001 - 11.500 ............ 89 9,209,326.86 11.05
11.501 - 12.000 ............ 84 8,243,470.93 9.89
12.001 - 12.500 ............ 63 5,843,660.68 7.01
12.501 - 13.000 ............ 56 4,862,640.97 5.84
13.001 - 13.500 ............ 47 3,359,224.16 4.03
13.501 - 14.000 ............ 28 1,895,250.27 2.27
14.001 - 14.500 ............ 16 992,733.25 1.19
14.501 - 15.000 ............ 6 638,439.18 0.77
15.001 - 15.500 ............ 3 134,185.66 0.16
-------- ----------------- -------
Total.................. 750 $ 83,330,807.59 100.00%
======== ================= =======
S-32
Gross Margins of the Group 2 Mortgage Loans
Aggregate % of Aggregate Group 2
Number Principal Balance Principal Balance
of Mortgage Outstanding as of Outstanding as of
Gross Margin (%) Loans The Cut-off Date The Cut-off Date
- --------------------------------------------- ------------- ------------------------- ---------------------------
1.751 - 2.000 ................... 1 $ 110,356.53 0.13%
2.251 - 2.500 ................... 5 322,673.01 0.39
2.501 - 2.750 ................... 27 2,252,321.50 2.70
2.751 - 3.000 ................... 10 1,046,924.11 1.26
3.001 - 3.250 ................... 3 372,337.78 0.45
3.251 - 3.500 ................... 1 42,970.64 0.05
3.501 - 3.750 ................... 1 249,054.51 0.30
3.751 - 4.000 ................... 1 52,932.52 0.06
4.001 - 4.250 ................... 1 108,385.43 0.13
4.501 - 4.750 ................... 8 705,907.24 0.85
4.751 - 5.000 ................... 17 2,706,234.15 3.25
5.001 - 5.250 ................... 14 1,749,235.39 2.10
5.251 - 5.500 ................... 31 5,333,841.98 6.40
5.501 - 5.750 ................... 41 5,522,190.88 6.63
5.751 - 6.000 ................... 64 8,760,003.00 10.51
6.001 - 6.250 ................... 99 12,181,167.88 14.62
6.251 - 6.500 ................... 87 8,833,477.61 10.60
6.501 - 6.750 ................... 96 9,118,442.04 10.94
6.751 - 7.000 ................... 76 8,552,084.94 10.26
7.001 - 7.250 ................... 44 4,767,794.09 5.72
7.251 - 7.500 ................... 30 2,690,658.65 3.23
7.501 - 7.750 ................... 25 2,429,998.63 2.92
7.751 - 8.000 ................... 20 1,715,483.43 2.06
8.001 - 8.250 ................... 12 747,542.68 0.90
8.251 - 8.500 ................... 15 1,271,892.96 1.53
8.501 - 8.750 ................... 7 529,137.36 0.63
8.751 - 9.000 ................... 8 666,500.71 0.80
9.001 - 9.250 ................... 3 293,071.19 0.35
9.251 - 9.500 ................... 2 79,485.44 0.10
10.251 - 10.500 ................... 1 118,701.31 0.14
-------- ----------------- -------
Total............................. 750 $ 83,330,807.59 100.00%
======== ================= =======
S-33
Maximum Mortgage Rates of the Group 2 Mortgage Loans
Aggregate % of Aggregate Group 2
Number Principal Balance Principal Balance
of Mortgage Outstanding as of Outstanding as of
Maximum Mortgage Rate (%) Loans the Cut-off Date the Cut-off Date
- --------------------------------------------- ------------- ------------------------- ---------------------------
10.001 - 10.500............................. 3 $ 380,967.97 0.46%
10.501 - 11.000............................. 8 684,172.01 0.82
11.001 - 11.500............................. 8 721,936.19 0.87
11.501 - 12.000............................. 7 721,366.87 0.87
12.001 - 12.500............................. 5 452,967.78 0.54
13.001 - 13.500............................. 1 59,489.34 0.07
13.501 - 14.000............................. 8 1,176,699.44 1.41
14.001 - 14.500............................. 10 1,788,458.65 2.15
14.501 - 15.000............................. 18 2,165,224.42 2.60
15.001 - 15.500............................. 29 3,789,725.56 4.55
15.501 - 16.000............................. 57 9,302,522.88 11.16
16.001 - 16.500............................. 70 8,335,845.40 10.00
16.501 - 17.000............................. 90 11,342,069.14 13.61
17.001 - 17.500............................. 83 9,050,567.67 10.86
17.501 - 18.000............................. 100 11,393,125.83 13.67
18.001 - 18.500............................. 66 5,177,214.95 6.21
18.501 - 19.000............................. 63 6,305,117.64 7.57
19.001 - 19.500............................. 46 4,280,305.90 5.14
19.501 - 20.000............................. 28 2,686,400.73 3.22
20.001 - 20.500............................. 19 1,395,666.72 1.67
20.501 - 21.000............................. 14 971,656.72 1.17
21.001 - 21.500............................. 12 809,884.12 0.97
21.501 - 22.000............................. 2 195,981.91 0.24
22.001 - 22.500............................. 2 114,794.12 0.14
25.001 >=................................... 1 28,645.63 0.03
-------- ----------------- -------
Total............................. 750 $ 83,330,807.59 100.00%
======== ================= =======
S-34
Minimum Mortgage Rates of the Group 2 Mortgage Loans
Aggregate % of Aggregate Group 2
Number Principal Balance Principal Balance
Of Mortgage Outstanding as of Outstanding as of
Minimum Mortgage Rate (%) Loans the Cut-off Date The Cut-off Date
- --------------------------------------------- ------------- ------------------------- ---------------------------
<= 0.000 .............. 83 $ 7,273,593.00 8.73%
0.001 - 0.500 .............. 2 213,757.26 0.26
0.501 - 1.000 .............. 7 558,084.67 0.67
1.001 - 1.500 .............. 9 726,739.13 0.87
1.501 - 2.000 .............. 5 555,203.38 0.67
2.001 - 2.500 .............. 4 374,986.47 0.45
3.001 - 3.500 .............. 2 161,497.49 0.19
3.501 - 4.000 .............. 1 48,874.79 0.06
4.001 - 4.500 .............. 1 72,628.62 0.09
5.001 - 5.500 .............. 1 25,084.07 0.03
5.501 - 6.000 .............. 1 59,767.61 0.07
6.001 - 6.500 .............. 1 77,981.31 0.09
6.501 - 7.000 .............. 1 65,428.44 0.08
7.001 - 7.500 .............. 2 113,865.47 0.14
7.501 - 8.000 .............. 4 650,757.82 0.78
8.001 - 8.500 .............. 11 2,244,214.54 2.69
8.501 - 9.000 .............. 19 2,956,374.20 3.55
9.001 - 9.500 .............. 44 6,479,278.34 7.78
9.501 - 10.000 .............. 72 11,291,967.16 13.55
10.001 - 10.500 .............. 80 10,108,087.57 12.13
10.501 - 11.000 .............. 108 13,074,035.45 15.69
11.001 - 11.500 .............. 81 7,298,776.45 8.76
11.501 - 12.000 .............. 65 6,644,982.81 7.97
12.001 - 12.500 .............. 49 4,578,092.25 5.49
12.501 - 13.000 .............. 34 3,344,551.73 4.01
13.001 - 13.500 .............. 29 1,949,570.22 2.34
13.501 - 14.000 .............. 18 1,254,752.49 1.51
14.001 - 14.500 .............. 11 625,256.94 0.75
14.501 - 15.000 .............. 3 387,823.79 0.47
15.001 - 15.500 .............. 2 114,794.12 0.14
-------- ----------------- -------
Total............................. 750 $ 83,330,807.59 100.00%
======== ================= =======
S-35
Original Combined Loan-to-Value Ratios of the Group 2 Mortgage Loans
% of Aggregate
Aggregate Group 2
Number Principal Balance Principal Balance
Original Combined of Mortgage Outstanding as of Outstanding as of
Loan-to-Value Ratio (%) Loans the Cut-off Date the Cut-off Date
- --------------------------------------------- ------------- ------------------------- ---------------------------
5.01 - 10.00............................... 1 $ 25,825.54 0.03%
15.01 - 20.00............................... 1 56,939.42 0.07
20.01 - 25.00............................... 4 154,208.15 0.19
30.01 - 35.00............................... 2 91,960.35 0.11
40.01 - 45.00............................... 1 79,114.71 0.09
45.01 - 50.00............................... 6 1,307,405.20 1.57
50.01 - 55.00............................... 12 1,035,226.74 1.24
55.01 - 60.00............................... 31 3,693,539.28 4.43
60.01 - 65.00............................... 97 9,856,364.49 11.83
65.01 - 70.00............................... 81 7,521,292.32 9.03
70.01 - 75.00............................... 110 11,490,190.20 13.79
75.01 - 80.00............................... 174 20,269,401.32 24.32
80.01 - 85.00............................... 74 9,558,175.18 11.47
85.01 - 90.00............................... 88 10,913,579.64 13.10
90.01 - 95.00............................... 33 4,069,091.76 4.88
95.01 - 100.00.............................. 26 2,463,469.62 2.96
100.01 >=................................... 9 745,023.67 0.89
-------- ----------------- -------
Total............................. 750 $ 83,330,807.59 100.00%
======== ================= =======
S-36
Geographic Distribution of the Mortgaged Properties of the Group 2 Mortgage Loans
Aggregate % of Aggregate Group 2
Number Principal Balance Principal Balance
of Mortgage Outstanding as of Outstanding as of
Location Loans the Cut-off Date the Cut-off Date
- --------------------------------------------- ------------- ------------------------- ---------------------------
California.................................. 137 $ 24,516,430.37 29.42%
Illinois.................................... 49 4,829,165.00 5.80
Michigan.................................... 57 4,588,325.99 5.51
New York.................................... 19 4,217,642.87 5.06
Texas....................................... 28 3,039,386.85 3.65
Ohio........................................ 35 2,461,138.65 2.95
Washington.................................. 18 2,449,291.00 2.94
Florida..................................... 31 2,331,466.43 2.80
Maryland.................................... 22 2,328,161.47 2.79
Massachusetts............................... 19 2,167,554.29 2.60
Colorado.................................... 14 2,140,771.99 2.57
Pennsylvania................................ 29 2,048,818.87 2.46
Arizona..................................... 18 1,729,810.84 2.08
Georgia..................................... 14 1,713,314.33 2.06
Missouri.................................... 24 1,581,656.01 1.90
Connecticut................................. 12 1,572,103.59 1.89
Utah........................................ 14 1,568,735.36 1.88
Tennessee................................... 15 1,431,364.37 1.72
Nevada...................................... 12 1,347,221.92 1.62
Oregon...................................... 11 1,344,168.68 1.61
Indiana..................................... 19 1,318,055.91 1.58
North Carolina.............................. 17 1,233,304.43 1.48
New Jersey.................................. 11 1,170,938.82 1.41
Hawaii...................................... 3 888,990.76 1.07
Minnesota................................... 7 851,971.23 1.02
Alabama..................................... 9 779,533.99 0.94
Idaho....................................... 6 712,614.61 0.86
South Carolina.............................. 9 623,408.09 0.75
Kentucky.................................... 9 621,518.63 0.75
Virginia.................................... 9 561,942.24 0.67
Wisconsin................................... 6 542,089.08 0.65
New Mexico.................................. 6 520,264.53 0.62
Louisiana................................... 8 510,017.46 0.61
Oklahoma.................................... 6 405,280.03 0.49
Maine....................................... 5 367,006.95 0.44
West Virginia............................... 7 336,037.00 0.40
Rhode Island................................ 5 325,477.17 0.39
Delaware.................................... 4 322,526.38 0.39
District of Columbia........................ 2 307,188.93 0.37
Mississippi................................. 5 290,528.13 0.35
Iowa........................................ 6 281,940.95 0.34
Kansas...................................... 4 251,548.88 0.30
Montana..................................... 3 245,319.87 0.29
New Hampshire............................... 2 209,533.33 0.25
South Dakota................................ 2 115,655.73 0.14
Arkansas.................................... 1 71,925.12 0.09
Nebraska.................................... 1 59,660.46 0.07
-------- ----------------- -------
Total............................. 750 $ 83,330,807.59 100.00%
======== ================= =======
S-37
Mortgaged Property Types of the Group 2 Mortgage Loans
Aggregate % of Aggregate Group 2
Number Principal Balance Principal Balance
of Mortgage Outstanding as of Outstanding as of
Property Type Loans the Cut-off Date the Cut-off Date
- --------------------------------------------- ------------- ------------------------- ---------------------------
Single Family Residence..................... 603 $ 66,399,972.08 79.68%
Condo....................................... 30 4,613,112.94 5.54
2 Family.................................... 37 4,144,691.15 4.97
PUD......................................... 20 3,443,417.38 4.13
3 Family.................................... 14 1,014,131.68 1.22
4 Family.................................... 6 992,359.86 1.19
Mobile Home................................. 12 860,760.23 1.03
Manufactured Housing........................ 15 777,885.97 0.93
Condo - Low Rise (>=6 floors)............... 6 501,048.91 0.60
Condo - High Rise (<=5 floors).............. 3 340,834.71 0.41
Townhouse................................... 4 242,592.68 0.29
-------- ----------------- -------
Total............................. 750 $ 83,330,807.59 100.00%
======== ================= =======
Mortgaged Property Occupancy Status of the Group 2 Mortgage Loans
Aggregate % of Aggregate Group 2
Number Principal Balance Principal Balance
of Mortgage Outstanding as of Outstanding as of
Occupancy Status Loans the Cut-off Date the Cut-off Date
- --------------------------------------------- ------------- ------------------------- ---------------------------
Primary..................................... 684 $ 78,576,364.41 94.29%
Investment.................................. 59 4,083,826.55 4.90
Second Home................................. 7 670,616.63 0.80
-------- ----------------- -------
Total............................. 750 $ 83,330,807.59 100.00%
======== ================= =======
The occupancy status of a Mortgaged Property is as represented by the mortgagor
in the mortgagor's loan application.
S-38
Loan Purpose of the Group 2 Mortgage Loans
Aggregate % of Aggregate Group 2
Number Principal Balance Principal Balance
of Mortgage Outstanding as of Outstanding as of
Loan Purpose Loans the Cut-off Date the Cut-off Date
- --------------------------------------------- ------------- ------------------------- ---------------------------
Refinance - Cashout......................... 394 $ 43,701,967.00 52.44%
Purchase.................................... 253 28,699,794.66 34.44
Refinance - Rate/Term....................... 103 10,929,045.93 13.12
-------- ----------------- -------
Total............................. 750 $ 83,330,807.59 100.00%
======== ================= =======
Loan Programs of the Group 2 Mortgage Loans
Aggregate % of Aggregate Group 2
Number Principal Balance Principal Balance
of Mortgage Outstanding as of Outstanding as of
Loan Program Loans the Cut-off Date the Cut-off Date
- --------------------------------------------- ------------- ------------------------- ---------------------------
Full........................................ 460 $48,784,667.01 58.54%
Stated Documentation........................ 163 23,047,962.17 27.66
Alternative................................. 76 6,572,986.61 7.89
Limited..................................... 21 2,076,811.97 2.49
No Documentation............................ 15 1,557,508.21 1.87
Missing..................................... 10 839,206.82 1.01
Streamlined................................. 5 451,664.80 0.54
-------- ----------------- -------
Total............................. 750 $ 83,330,807.59 100.00%
======== ================= =======
S-39
Next Adjustment Dates for the Group 2 Mortgage Loans
Aggregate % of Aggregate Group 2
Number Principal Balance Principal Balance
of Mortgage Outstanding as of Outstanding as of
Month of Next Adjustment Date Loans the Cut-off Date the Cut-off Date
- --------------------------------------------- ------------- ------------------------- ---------------------------
June 2001................................. 4 $ 273,294.39 0.33%
July 2001................................. 25 2,365,093.43 2.84
August 2001............................... 19 2,747,804.66 3.30
September 2001............................ 18 1,700,719.94 2.04
October 2001.............................. 53 6,484,381.64 7.78
November 2001............................. 37 3,784,108.24 4.54
December 2001............................. 35 3,442,391.00 4.13
January 2002.............................. 20 1,451,275.76 1.74
February 2002............................. 12 1,262,624.54 1.52
March 2002................................ 13 1,127,139.29 1.35
April 2002................................ 13 1,470,471.06 1.76
May 2002.................................. 15 1,686,848.46 2.02
June 2002................................. 15 1,396,296.80 1.68
July 2002................................. 11 838,532.42 1.01
August 2002............................... 7 949,370.63 1.14
September 2002............................ 19 2,184,070.69 2.62
October 2002.............................. 31 3,281,982.42 3.94
November 2002............................. 30 3,495,505.43 4.19
December 2002............................. 31 3,431,922.44 4.12
January 2003.............................. 41 3,475,208.38 4.17
February 2003............................. 44 6,368,292.77 7.64
March 2003................................ 30 3,928,650.94 4.71
April 2003................................ 6 379,543.50 0.46
May 2003.................................. 2 157,218.56 0.19
June 2003................................. 6 660,833.45 0.79
July 2003................................. 5 288,476.65 0.35
August 2003............................... 11 1,050,722.23 1.26
September 2003............................ 21 2,717,821.12 3.26
October 2003.............................. 28 3,171,396.02 3.81
November 2003............................. 28 3,668,160.90 4.40
December 2003............................. 16 2,824,086.00 3.39
January 2004.............................. 19 2,013,799.19 2.42
February 2004............................. 33 4,069,028.97 4.88
March 2004................................ 37 4,403,060.36 5.28
April 2004................................ 4 236,910.37 0.28
May 2004.................................. 2 87,214.06 0.10
June 2004................................. 2 158,989.24 0.19
July 2004................................. 4 165,191.48 0.20
August 2004............................... 1 45,393.06 0.05
December 2004............................. 1 43,765.15 0.05
March 2005................................ 1 43,211.95 0.05
-------- ---------------- -------
Total........................... 750 $ 83,330,807.59 100.00%
======== ================ =======
S-40
Initial Periodic Rate Caps of the Group 2 Mortgage Loans
Aggregate % of Aggregate Group 2
Number Principal Balance Principal Balance
of Mortgage Outstanding as of Outstanding as of
Initial Periodic Rate Cap (%) Loans the Cut-off Date the Cut-off Date
- --------------------------------------------- ------------- ------------------------- ---------------------------
1.000....................................... 108 $12,083,847.04 14.50%
1.500....................................... 198 22,846,342.24 27.42
2.000....................................... 195 23,170,723.04 27.81
3.000....................................... 248 25,129,626.76 30.16
6.000....................................... 1 100,268.51 0.12
-------- ---------------- -------
Total............................. 750 $83,330,807.59 100.00%
======== ================ =======
Subsequent Periodic Rate Caps of the Group 2 Mortgage Loans
Aggregate % of Aggregate Group 2
Number Principal Balance Principal Balance
of Mortgage Outstanding as of Outstanding as of
Subsequent Periodic Rate Cap (%) Loans The Cut-off Date the Cut-off Date
- --------------------------------------------- ------------- ------------------------- ---------------------------
1.000....................................... 620 $ 68,017,425.34 81.62%
1.500....................................... 101 11,056,134.23 13.27
2.000....................................... 28 4,155,120.45 4.99
3.000....................................... 1 102,127.57 0.12
-------- ---------------- -------
Total............................. 750 $ 83,330,807.59 100.00%
======== ================ =======
The Index
With respect to approximately 91.72% of the Group 2 Mortgage Loans, the
Index is the average of interbank offered rates for six-month U.S. dollar
deposits in the London market based on quotations of major banks, and most
recently available as of a day specified in the related note as published by
Fannie Mae ("Six Month LIBOR"); with respect to approximately 7.51% of the Group
2 Mortgage Loans, the Index is the weekly average yield on United States
Treasury securities adjusted to a constant maturity of one year as published by
the Federal Reserve Board in Statistical Release H.15(519) and most recently
available as of a day specified in the related note ("One Year CMT"); and with
respect to approximately 0.77% of the Group 2 Mortgage Loans, the Index is a
variety of indices, none of which comprise more than 0.30% of the Group 2
Mortgage Loans. Listed below are some historical values for the months indicated
of two of the indices.
S-41
Six-Month LIBOR
Year
-----------------------------------------------------------------------------
Month 2001 2000 1999 1998 1997 1996 1995
----- ---- ---- ---- ---- ---- ---- ----
January 5.26% 6.29% 4.97% 5.63% 5.69% 5.27% 6.69%
February 4.91% 6.33% 5.13% 5.70% 5.69% 5.30% 6.44%
March 4.71% 6.53% 5.06% 5.75% 5.94% 5.50% 6.50%
April 4.30% 6.73% 5.04% 5.81% 6.00% 5.56% 6.38%
May 3.98% 7.11% 5.25% 5.75% 6.00% 5.63% 6.00%
June -- 7.00% 5.65% 5.78% 5.91% 5.79% 6.00%
July -- 6.89% 5.71% 5.75% 5.80% 5.88% 5.88%
August -- 6.83% 5.92% 5.59% 5.84% 5.77% 5.91%
September -- 6.76% 5.96% 5.25% 5.84% 5.73% 5.95%
October -- 6.72% 6.12% 4.98% 5.79% 5.57% 5.88%
November -- 6.64% 6.06% 5.15% 5.91% 5.54% 5.69%
December -- 6.20% 6.13% 5.07% 5.84% 5.60% 5.51%
One Year CMT
Year
--------------------------------------------------------------------------
Month 2001 2000 1999 1998 1997 1996 1995
----- ---- ---- ---- ---- ---- ---- ----
January 4.81% 6.12% 4.51% 5.24% 5.61% 5.09% 7.05%
February 4.68% 6.22% 4.70% 5.31% 5.53% 4.94% 6.70%
March 4.30% 6.22% 4.78% 5.39% 5.80% 5.34% 6.43%
April 3.98% 6.15% 4.69% 5.38% 5.99% 5.54% 6.27%
May 3.78% 6.33% 4.85% 5.44% 5.87% 5.64% 6.00%
June -- 6.17% 5.10% 5.41% 5.69% 5.81% 5.64%
July -- 6.08% 5.03% 5.36% 5.54% 5.85% 5.59%
August -- 6.18% 5.20% 5.21% 5.56% 5.67% 5.75%
September -- 6.13% 5.25% 4.71% 5.52% 5.83% 5.62%
October -- 6.01% 5.43% 4.12% 5.46% 5.55% 5.59%
November -- 6.09% 5.55% 4.53% 5.46% 5.42% 5.43%
December -- 5.60% 5.84% 4.52% 5.53% 5.47% 5.31%
If any Index becomes unpublished or is otherwise unavailable, the
Servicer will select an alternative index which is based upon comparable
information.
FHA Mortgage Loans and VA Mortgage Loans
As noted above, approximately 14.05% of the Group 1 Mortgage Loans and
approximately 2.77% of the Group 2 Mortgage Loans are subject to either FHA
insurance as described herein (the "FHA Mortgage Loans") or are subject to a VA
guaranty as described herein (the "VA Mortgage Loans"). Approximately 4.55% of
the Group 1 Mortgage Loans and approximately 0.46% of the Group 2 Mortgage Loans
are Mortgage Loans which were originated using FHA documents but, for varying
reasons, are not subject to FHA insurance (the "FHAUN Mortgage Loans").
Approximately 0.10% of the Group 1 Mortgage Loans are Mortgage Loans which were
originated using VA documents but, for varying reasons, are not subject to a VA
guaranty (the "VANG Mortgage Loans"). The Seller acquired the FHAUN Mortgage
Loans without any FHA insurance in effect and acquired the VANG Mortgage Loans
without any VA guaranty in effect. All FHA Mortgage Loans and VA Mortgage Loans
must conform to HUD or VA origination guidelines, as the case may be, at the
time of origination. The FHA Mortgage Loans will be insured by the Federal
Housing Administration (the "FHA") of the United States Department of Housing
and Urban Development ("HUD") as authorized under the National Housing Act of
1934, as amended (the "National Housing Act"), and the United States Housing Act
of 1937, as amended (the "United States Housing Act"). No FHA Mortgage Loan may
have an interest rate or original principal amount exceeding the applicable FHA
limits at the time of origination of such FHA Mortgage Loan.
S-42
The VA Mortgage Loans will be partially guaranteed by The United States
Department of Veterans Affairs (the "VA") under the Servicemen's Readjustment
Act of 1944, as amended. The Servicemen's Readjustment Act of 1944, as amended,
permits a veteran (or in certain instances the spouse of a veteran) to obtain a
mortgage loan guaranty by the VA covering mortgage financing of the purchase of
a one- to four-family dwelling unit at interest rates permitted by the VA. The
program has a current mortgage loan limit of $203,000, requires no down payment
from the purchaser and permits the guarantee of mortgage loans of generally up
to 30 years' duration. However, no VA Mortgage Loan will have an original
principal amount greater than five times the amount of the related guarantee.
The Servicer collects insurance premiums for the FHA Mortgage Loans and
pays them to the FHA. The regulations governing FHA-insured single-family
mortgage insurance programs generally provide that insurance benefits are
payable upon foreclosure (or other acquisition of possession) and conveyance of
the mortgaged premises to HUD. With respect to a defaulted FHA Mortgage Loan,
the Servicer may be limited in its ability to initiate foreclosure proceedings.
Historically, pursuant to an assignment program (the "Assignment Program"), HUD
in certain circumstances offered qualified mortgagors who had defaulted on an
FHA insured mortgage loan an opportunity to avoid foreclosure and retain their
homes. Under the Assignment Program, the FHA serviced FHA-insured mortgage loans
that had defaulted and been assigned to HUD under the Assignment Program. In
addition, HUD gave forbearance for a period of no longer than 36 months to
mortgagors who had demonstrated a temporary inability to make full payments due
to circumstances beyond the mortgagor's control such as a reduction in income or
increase in expenses. The Assignment Program was terminated and replaced with
mandatory loss mitigation procedures in April 1996 whereby servicers of
defaulted FHA-insured mortgage loans must choose from a variety of tools to cure
a default prior to filing an FHA insurance claim.
HUD has the option, in most cases, to pay insurance claims in cash or
in debentures issued by HUD. Presently, claims for most programs are being paid
in cash and, for the most part, claims have not been paid in debentures since
1965. HUD debentures issued in satisfaction of FHA insurance claims bear
interest at the applicable HUD debenture interest rate and mature 20 years from
the date of issue.
The amount of insurance benefits generally paid by the FHA is equal to
the entire unpaid principal amount of the defaulted FHA Mortgage Loan, adjusted
to reimburse the Servicer of that FHA Mortgage Loan for certain costs and
expenses and to deduct certain amounts the Servicer receives or retains after
default. When entitlement to insurance benefits results from foreclosure (or
other acquisition of possession) and conveyance to HUD, the Servicer is
generally compensated for no more than two-thirds of its foreclosure costs and
attorneys' fees (which fees are evaluated based upon HUD guidelines), and is
compensated for accrued and unpaid mortgage interest for a limited period prior
to the institution of foreclosure or other acquisition in general only to the
extent it was allowed pursuant to a forbearance plan approved by HUD, and the
Servicer is otherwise in material compliance with FHA regulations. Provided that
the Servicer is in material compliance with FHA regulations, the Servicer will
generally be entitled to the debenture interest which would have been earned, as
of the date the cash payment is received, had the benefits been paid in
debentures. Except where unpaid mortgage interest is recoverable pursuant to an
approved special forbearance plan, such debenture interest is generally payable
from a date 60 days after the mortgagor's first uncorrected failure to perform
any obligation or make any payment due under the mortgage loan, which results in
no recovery of interest accrued during the first two months of delinquency.
Under certain circumstances, as set forth in the regulations, HUD is
authorized to request or require the Servicer to pursue a deficiency judgment
against any defaulting mortgagor. In this regard, HUD may request or require the
Servicer (as the case may be under the regulations) to pursue a deficiency
judgment in connection with the foreclosure. Under neither case would the
Servicer be responsible for collecting on the judgment. Further, in all cases,
HUD may reimburse the Servicer for all additional costs of seeking the judgment.
As of the date hereof, the maximum guaranty that may be issued by the
VA under a VA Mortgage Loan is generally (a) as to loans with an original
principal amount of $45,000 or less, 50% of such loan, (b) as to loans with an
original principal amount of greater than $45,000, but not more than $56,250,
$22,500; (c) as to loans with an original principal amount of more than $56,250,
but not more than $144,000, the lesser of $36,000 or 40% of the loan, and (d) as
to loans with an original principal amount of more than $144,000 (for an
owner-occupied, single-family home or condominium unit), the lesser of $50,750
or 25% of the loan. The liability on the guaranty is reduced or increased pro
rata with any reduction or increase in the amount of indebtedness, but in no
event will the amount payable on the guaranty exceed the amount of the original
guaranty. The VA may, at its option and without regard to the guaranty, make
full payment to a mortgage holder of unsatisfied indebtedness on a mortgage upon
its assignment to the VA.
S-43
With respect to a defaulted VA Mortgage Loan, the Servicer is, absent
exceptional circumstances, authorized to announce its intention to foreclose
only when the default has continued for three months. However, notwithstanding
the foregoing, the regulations require the Servicer to take immediate action if
it determines that the property to be foreclosed upon has been abandoned by the
debtor or has been or may be subject to extraordinary waste or if there exist
conditions justifying the appointment of a receiver for the property. Generally,
a claim for the guaranty is submitted after liquidation of the mortgaged
property. Upon default and subsequent termination of a VA-guaranteed loan by a
servicer, the VA makes a determination, using a formula, whether it will reduce
its maximum claim liability by acquiring and reselling the property or by paying
the claim on its guaranty without such acquisition. If the VA determines it will
acquire the property, it will establish a maximum price, known as the specified
amount, which a servicer may bid at the foreclosure sale in order for such
servicer to subsequently convey the property to the VA. If a servicer purchases
the property at the sale for no more than such specified amount, it may convey
the property to the VA in return for the payment of such amount. The VA also
pays, up to the maximum amount of the loan guaranty, the claim for the
difference between the price paid for the property and any balance remaining on
the loan. If, however, the VA determines that acquiring and disposing of the
property would increase rather than reduce the government's loss, it will not
establish a maximum bid price for the holder to bid at the foreclosure sale
(thus, a "no-bid"), but rather will solely pay the guaranty claim up to the
maximum amount of the guaranty, once the loss on the loan has been established.
In the event of a no-bid, the Servicer must foreclose on the defaulted VA
Mortgage Loan and thus a loss may be incurred on such mortgage loan in an amount
equal to the difference between (a) the total indebtedness and (b) the sum of
(i) the guaranteed amount and (ii) the proceeds of any foreclosure.
The amount payable under the guaranty will be the percentage of the VA
Mortgage Loan originally guaranteed applied to the indebtedness outstanding as
of the applicable date of computation specified in the VA regulations. Payments
under the guaranty will be applied to the unpaid principal amount of the VA
Mortgage Loan, interest accrued on the unpaid balance thereof to the appropriate
date of computation and limited expenses of the mortgagee, but in each case only
to the extent that such amounts have not been recovered through liquidation of
the mortgaged property. The amount payable under the guaranty may in no event
exceed the amount of the original guaranty.
Terms of the Mortgage Loans
The Mortgage Loans accrue interest on a simple interest basis (the
"Simple Interest Mortgage Loans") or a self-amortizing basis (the "Actuarial
Mortgage Loans"). Approximately 4.54% of the Mortgage Loans are expected to be
Simple Interest Mortgage Loans, and approximately 95.46% of the Mortgage Loans
are expected to be Actuarial Mortgage Loans, in each case as a percentage of the
Cut-off Date Principal Balance.
For Simple Interest Mortgage Loans, the Mortgage Loan is amortized over
a series of equal monthly payments. Each monthly interest payment is calculated
by multiplying the outstanding Principal Balance of the loan by the stated
interest rate. Such product is then multiplied by a fraction, the numerator of
which is the number of days elapsed since the preceding payment of interest was
made and the denominator of which is either 365 or 360, depending on applicable
state law. Payments received on a Simple Interest Mortgage Loan are applied
first to interest accrued to the date payment is received and second to reduce
the unpaid Principal Balance of the Mortgage Loan. Accordingly, if a mortgagor
makes a payment on the Mortgage Loan less than 30 days after the previous
payment, the interest collected for the period since the preceding payment was
made will be less than 30 days' interest, and the amount of principal repaid in
such month will be correspondingly greater. Conversely, if a mortgagor makes a
payment on the Mortgage Loan more than 30 days after the previous payment, the
interest collected for the period since the preceding payment was made will be
greater than 30 days' interest, and the amount of principal repaid in the month
will be correspondingly reduced. As a result, based on the payment
characteristics of a particular mortgagor, the principal due on the final due
date of a Simple Interest Mortgage Loan may vary from the principal payment that
would be made if payments for such Mortgage Loan were always made on their due
dates.
For Actuarial Mortgage Loans, interest will be calculated based on a
360-day year of twelve 30-day months. When a full prepayment of principal is
made on an Actuarial Mortgage Loan during a month, the mortgagor is charged
interest only on the days of the month actually elapsed up to the date of such
prepayment, at a daily interest rate that is applied to the principal amount of
the loan so prepaid. When a partial prepayment of principal is made on an
Actuarial Mortgage Loan during a month, the mortgagor generally is not charged
interest on the amount of the partial prepayment during the month in which such
prepayment is made.
S-44
If a mortgagor pays more than one installment on a Simple Interest
Mortgage Loan at a time, the regular installment will be treated as described
above. However, the entire amount of the additional installment will be treated
as a receipt of one or more regular principal payments and applied to reduce the
Principal Balance of the related Mortgage Loan. Although such mortgagor will not
be required to make the next monthly installment, interest will continue to
accrue on the Principal Balance of such Mortgage Loan, as reduced by the
application of the early installment. As a result, when such mortgagor pays the
next required installment on a Simple Interest Mortgage Loan, such payment may
be insufficient to cover the interest that has accrued since the last payment by
the mortgagor. Notwithstanding such insufficiency, such Mortgage Loan would be
considered to be current. This situation would continue until the monthly
installments are once again sufficient to cover all accrued interest and to
reduce the Principal Balance of such Mortgage Loan. Depending on the Principal
Balance and interest rate of the related Mortgage Loan and on the number of
installments paid early, there may be extended periods of time during which
Simple Interest Mortgage Loans in respect of which such additional installments
have been made are not amortizing and are considered current.
Primary Mortgage Insurance
Approximately 28.78% of the Group 1 Mortgage Loans and approximately
37.07% of the Group 2 Mortgage Loans (in each case, by aggregate Principal
Balance as of the Cut-off Date) are covered by a primary mortgage insurance
policy (the "PMI Policy") obtained by the Servicer (the "PMI Mortgage Loans").
Pursuant to the Pooling and Servicing Agreement, the Servicer will be required
to pay all premiums due under the PMI Policy with respect to the PMI Mortgage
Loans from amounts collected on such PMI Mortgage Loans (the "PMI Premium"). In
addition, approximately 2.75% of the Group 1 Mortgage Loans and approximately
0.22% of the Group 2 Mortgage Loans (in each case, by aggregate Principal
Balance as of the Cut-off Date) are covered by a primary mortgage insurance
policy obtained by the related mortgagor.
Underwriting Standards of the Seller and Representations Concerning the Mortgage
Loans
The information set forth in this section with regard to the Seller's
underwriting standards has been provided to the Depositor or compiled from
information provided to the Depositor by the Seller. None of the Depositor, the
Trustee, the Servicer, the Underwriters or any of their respective affiliates
has made any independent investigation of this information or has made or will
make any representation as to the accuracy or completeness of this information.
Each Mortgage Loan included in the Trust Fund has satisfied the credit,
appraisal and underwriting guidelines established by the Seller that are
described below. To determine satisfaction of such guidelines, the Seller or a
loan reviewer reviewed the files related to the Mortgage Loans in connection
with the acquisition of the Mortgage Loans by the Seller. These files include
the documentation pursuant to which the mortgage loan was originally
underwritten, as well as the mortgagor's payment history on the mortgage loan.
The Seller's underwriting guidelines when re-underwriting mortgage loans are
intended to evaluate the mortgagor's credit standing, repayment ability and
willingness to repay debt, as well as the value and adequacy of the mortgaged
property as collateral. In general, to establish the adequacy of the mortgaged
property as collateral, the Seller will obtain a current appraisal, broker's
price opinion, and/or drive-by or desk review of such property, prepared within
six months of the Seller's purchase. A mortgagor's ability and willingness to
repay debts (including the Mortgage Loan) in a timely fashion must be
demonstrated by the quality, quantity and durability of income history, history
of debt management, history of debt repayment, and net worth accumulation.
Accordingly, the Seller also obtains and reviews a current credit report for the
mortgagor.
The Seller purchases mortgage loans that were originated pursuant to
one of the following documentation programs:
Full Documentation. Mortgage loans originally underwritten with "Full
Documentation" include a detailed application designed to provide pertinent
credit information. As part of the description of the mortgagor's financial
condition, the mortgagor was required to fill out a detailed application
designed to provide pertinent credit information. As part of the description of
the mortgagor's financial condition, the mortgagor provided a balance sheet,
current as of the origination of the mortgage loan, describing assets and
liabilities and a statement of income and expenses, as well as authorizing the
originator to obtain a credit report which summarizes the mortgagor's credit
history with local merchants and lenders and any record of bankruptcy. In
addition, an employment verification was obtained wherein the employer reported
the length of employment with that organization, the mortgagor's salary as of
the mortgage loan's origination, and an indication as to whether it is expected
that the mortgagor will continue such employment after the mortgage loan's
origination. If a mortgagor was self-employed when such mortgagor's loan was
originated, the mortgagor submitted copies of signed tax returns. The originator
was also provided with deposit verification at all financial institutions where
the mortgagor had demand or savings accounts.
S-45
In determining the adequacy of the property as collateral at
origination, an independent appraisal was made of each property considered for
financing. The appraiser inspected the property and verified that it was in good
condition and that construction, if new, had been completed at the time of the
loan's origination. Such appraisal was based on the appraiser's judgment of
values, giving appropriate weight to both the then market value of comparable
homes and the cost of replacing the property.
Other Levels of Documentation. Other mortgage loans purchased and
re-underwritten by the Seller were originally underwritten pursuant to
alternative documentation programs that require less documentation and
verification than do traditional "Full Documentation" programs, including "No
Documentation," "Limited Documentation" and "Alternative Documentation" programs
for certain qualifying mortgage loans. Under a "No Documentation" program, the
originator does not undertake verification of a mortgagor's income or assets.
Under a "Limited Documentation" program, certain underwriting documentation
concerning income and employment verification is waived. "Alternative
Documentation" programs allow a mortgagor to provide W-2 forms instead of tax
returns, permit bank statements in lieu of verification of deposits and permit
alternative methods of employment verification. Under "Stated Documentation"
programs, a mortgagor's income is deemed to be that stated on the mortgage
application and is not independently verified by the originator. These are
underwriting programs designed to streamline the underwriting process by
eliminating the requirement for income verification. Depending on the facts and
circumstances of a particular case, the originator of the mortgage loan may have
accepted other information based on limited documentation that eliminated the
need for either income verification and/or asset verification. The objective use
of limited documentation is to shift the emphasis of the underwriting process
from the credit standing of the mortgagor to the value and adequacy of the
mortgaged property as collateral.
Owner-Financed Mortgage Loans. The Owner-financed Mortgage Loans
comprise approximately 11.98% of the Group 1 Mortgage Loans and none of the
Group 2 Mortgage Loans (in each case, by aggregate Principal Balance as of the
Cut-off Date).
The Seller routinely purchases mortgage loans which are owner-financed
mortgage loans ("Owner-financed Mortgage Loans"). Owner-financed Mortgage Loans
are originated by the individual sellers of the related mortgaged property who
generally are inexperienced in matters pertaining to mortgage banking. These
mortgage loans were originated with less stringent standards than the other
mortgage loans the Seller typically purchases. The mortgagor under an
owner-financed mortgage loan generally does not complete a mortgage loan
application and the seller of the related property generally does not verify the
income or employment of the related mortgagor. In connection with the Seller's
acquisition of an Owner-financed Mortgage Loan, the Seller obtained and reviewed
the credit history and payment history of the mortgagor. In deciding to purchase
Owner-financed Mortgage Loans, the Seller generally places considerable emphasis
on the value of the mortgaged property. The Seller, in connection with its
underwriting of an Owner-financed Mortgage Loan, calculates the loan-to-value
ratio of the mortgage loan at the time of acquisition for underwriting purposes
to determine the mortgagor's equity in the related mortgaged property. A
drive-by appraisal of the market value of each mortgaged property relating to an
Owner-financed Mortgage Loan generally was obtained within 90 days prior to the
Seller's purchase of such mortgage loan. However, in certain instances, the
Seller may have utilized a previous appraisal if it was completed within one
year prior to the Seller's purchase, in which case the Seller will generally
require the appraiser to recertify the value in such appraisal. The Seller may
have acquired an Owner-financed Mortgage Loan based upon a statistical valuation
provided by independent data providers of the mortgaged property and
subsequently obtained a drive-by appraisal, generally within three months of
acquisition.
S-46
For a discussion of the certain risks related to Owner-financed
Mortgage Loans that a Certificateholder should consider prior to purchase, see
"Risk Factors--There are risks related to owner-financed mortgage loans" in this
prospectus supplement.
Additional Information Concerning the Mortgage Loans
The description in this prospectus supplement of the Mortgage Pool and
the Mortgaged Properties is based upon the Mortgage Pool as constituted as of
the close of business on the Cut-off Date, as adjusted for the scheduled
principal payments due on or before such date. Prior to the issuance of the
Certificates, Mortgage Loans may be removed from the Mortgage Pool as a result
of incomplete documentation or otherwise if the Depositor deems the removal
necessary or desirable, and may be prepaid at any time. A limited number of
other mortgage loans may be included in the Mortgage Pool prior to the issuance
of the certificates unless including these mortgage loans would materially alter
the characteristics of the Mortgage Pool as described in this prospectus
supplement. The Depositor believes that the information set forth in this
prospectus supplement will be representative of the characteristics of the
Mortgage Pool as it will be constituted at the time the Certificates are issued,
although the range of Mortgage Rates and maturities and other characteristics of
the Mortgage Loans may vary.
YIELD ON THE CERTIFICATES
Yield, Prepayment and Maturity Considerations
The yields to maturity and weighted average lives of the Offered
Certificates will depend upon, among other things, the price at which such
Offered Certificates are purchased, the amount and timing of principal payments
on the applicable Loan Group, the allocation of Available Funds to various
classes of Offered Certificates, the amount and timing of mortgagor
delinquencies and defaults on the Mortgage Loans, the rate of liquidations and
Realized Losses and the allocation of Realized Losses to various classes of
Offered Certificates.
The rate of payment of principal, the aggregate amount of distributions
and the yield to maturity of the Offered Certificates will be affected by the
rate of defaults resulting in Realized Losses, by the severity of these losses
and by the timing thereof. If a purchaser of an Offered Certificate calculates
its anticipated yield based on an assumed rate of default and amount of Realized
Losses that is lower than the default rate and amount of losses actually
incurred, its actual yield to maturity will be lower than that so calculated.
The timing of Realized Losses will also affect an investor's actual yield to
maturity, even if the average rate of defaults and severity of losses are
consistent with an investor's expectations. In general, the earlier a loss
occurs, the greater is the effect on an investor's yield to maturity. There can
be no assurance as to the delinquency, foreclosure or loss experience with
respect to the Mortgage Loans. Some of the Mortgage Loans may have a greater
than normal risk of future defaults and delinquencies, as compared to newly
originated, high quality one- to four-family residential mortgage loans of
comparable size and geographic concentration because such Mortgage Loans have in
the past defaulted, and in addition, the Bankruptcy Plan Mortgage Loans have
been involved in subsequent proceedings under the federal Bankruptcy Code,
either as liquidations under Chapter 7 or reorganizations with approved
bankruptcy plans under Chapter 11 or Chapter 13. See "The Mortgage
Pool--General" in this Prospectus Supplement.
The rate of principal payments, the aggregate amount of distributions
and the yields to maturity of the Offered Certificates will be related to the
rate and timing of payments of principal on the Mortgage Loans. The rate of
principal payments on the Mortgage Loans will in turn be affected by the
amortization schedules of the Mortgage Loans and by the rate of principal
prepayments (including for this purpose prepayments resulting from refinancing,
liquidations of the Mortgage Loans due to defaults, casualties or condemnations
and repurchases by the Seller or Servicer). Because certain of the Mortgage
Loans contain prepayment penalties, the rate of principal payments may be less
than the rate of principal payments for mortgage loans which did not have
prepayment penalties. The Mortgage Loans are subject to the "due-on-sale"
provisions included therein. See "The Mortgage Pool" in this Prospectus
Supplement.
Unscheduled payments of principal (whether resulting from prepayments,
repurchases, liquidations, casualties or condemnations) will result in
distributions on the related Offered Certificates of principal amounts which
would otherwise be distributed over the remaining terms of the Mortgage Loans.
Since the rate of payment of principal on the Mortgage Loans will depend on
future events and a variety of other factors, no assurance can be given as to
such rate or the rate of principal prepayments. The extent to which the yield to
maturity of a class of Offered Certificates may vary from the anticipated yield
will depend upon the degree to which such class of Offered Certificates is
purchased at a discount or premium, and the degree to which the timing of
payments thereon is sensitive to prepayments, liquidations and purchases of the
Mortgage Loans. Further, an investor should consider the risk that, in the case
of any Offered Certificate purchased at a discount, a slower than anticipated
rate of principal payments (including prepayments) on the Mortgage Loans could
result in an actual yield to such investor that is lower than the anticipated
yield and, in the case of any Offered Certificate purchased at a premium, a
faster than anticipated rate of principal payments on the Mortgage Loans could
result in an actual yield to such investor that is lower than the anticipated
yield.
S-47
The rate of principal payments (including prepayments) on pools of
mortgage loans may vary significantly over time and may be influenced by a
variety of economic, geographic, social and other factors, including changes in
mortgagors' housing needs, job transfers, unemployment, mortgagors' net equity
in the mortgaged properties and servicing decisions. In general, if prevailing
interest rates were to fall significantly below the Mortgage Interest Rates on
the Mortgage Loans, such Mortgage Loans could be subject to higher prepayment
rates than if prevailing interest rates were to remain at or above the Mortgage
Interest Rates on such Mortgage Loans. Conversely, if prevailing interest rates
were to rise significantly, the rate of prepayments on such Mortgage Loans would
generally be expected to decrease. As is the case with the Group 1 Mortgage
Loans, the Group 2 Mortgage Loans may be subject to a greater rate of principal
prepayments in a low interest rate environment. For example, if prevailing
interest rates were to fall, mortgagors with adjustable-rate Mortgage Loans may
be inclined to refinance their adjustable-rate Mortgage Loans with a fixed-rate
loan to "lock in" a lower interest rate. The existence of the applicable
Periodic Rate Cap and Maximum Rate also may affect the likelihood of prepayments
resulting from refinancings. No assurances can be given as to the rate of
prepayments on the Mortgage Loans in stable or changing interest rate
environments. In addition, the delinquency and loss experience of the Group 2
Mortgage Loans may differ from that on the Group 1 Mortgage Loans because the
amount of the Monthly Payments on the Group 2 Mortgage Loans are subject to
adjustment on each Adjustment Date. In addition, a majority of the Group 2
Mortgage Loans will not have their initial Adjustment Date for one to five years
after the origination thereof (the "Delayed First Adjustment Mortgage Loans").
The prepayment experience of the Delayed First Adjustment Mortgage Loans may
differ from that of the other Group 2 Mortgage Loans. The Delayed First
Adjustment Mortgage Loans may be subject to greater rates of prepayments as they
approach their initial Adjustment Dates even if market interest rates are only
slightly higher or lower than the Mortgage Interest Rates on the Delayed First
Adjustment Mortgage Loans as borrowers seek to avoid changes in their Monthly
Payments.
The weighted average life and yield to maturity of each class of
Certificates will also be influenced by the amount of Monthly Excess Cashflow
Amounts generated by the Mortgage Loans and applied in reduction of the
Certificate Principal Balances of such Certificates. The level of Monthly Excess
Cashflow Amounts available on any Distribution Date to be applied in reduction
of the Certificate Principal Balance of the Certificates will be influenced by,
among other factors, (i) the overcollateralization level of the Mortgage Loans
at such time (i.e., the extent to which interest on the Mortgage Loans is
accruing on a higher Principal Balance than the aggregate Certificate Principal
Balance of the Certificates); (ii) the delinquency and default experience of the
Mortgage Loans; and (iii) the level of the various indices for the Group 2
Mortgage Loans. To the extent that greater amounts of Monthly Excess Cashflow
Amounts are distributed in reduction of the Certificate Principal Balance of a
class of Certificates, the weighted average life thereof can be expected to
shorten. No assurance can be given as to the amount of Monthly Excess Cashflow
Amounts distributed at any time or in the aggregate.
The prepayment, delinquency and loss experience on the Subordinated
Certificates will reflect a combination of the experience of both Loan Groups.
There can be no assurance that any such combined experience will correlate with
the experience expected on a particular sub-group or loan group of Mortgage
Loans.
The Subordinated Certificates are not expected to receive any principal
distributions until at least the Distribution Date in June 2004 (unless the
aggregate Certificate Principal Balance of the Senior Certificates are reduced
to zero prior thereto). As a result, the weighted average lives of the
Subordinated Certificates will be longer than would have been the case if
principal distributions were to be made on a pro rata basis. The longer weighted
average lives may increase the risk that an Applied Realized Loss Amount will be
allocated to one or more classes of Subordinated Certificates.
S-48
Sensitivity of the Class A-IO Certificates
The yield to investors on the Class A-IO Certificates will be sensitive
to the rate of principal payments (including prepayments) of the Mortgage Loans.
The Mortgage Loans generally can be prepaid at any time.
Based on the Structuring Assumptions, a purchase price of 2.943946% of
the Notional Amount, plus accrued interest, and a constant level of CPR, the
yield on the Class A-IO Certificates remains constant at approximately 5.745% if
the constant level of CPR is below approximately 56% CPR. Based on the
Structuring Assumptions, a purchase price of 2.943946% of the Notional Amount,
plus accrued interest, and a constant level of CPR of approximately 65% CPR, the
yield to optional termination on the Class A-IO Certificates is approximately
0%.
No representation is made as to the actual rate of principal payments
on the Mortgage Loans for any period or over the life of the Class A-IO
Certificates or as to the yields on the Class A-IO Certificates. Investors must
make their own decisions as to the appropriate prepayment assumptions to be used
in deciding whether to purchase the Class A-IO Certificates.
Additional Information
The Depositor has filed certain yield tables and other computational
materials with respect to certain classes of the Class A Certificates with the
Commission in a report on Form 8-K and may file certain additional yield tables
and other computational materials with respect to one or more classes of Offered
Certificates with the Commission in a report on Form 8-K. Such tables and
materials were prepared by one or more of the Underwriters at the request of
certain prospective investors, based on assumptions provided by, and satisfying
the special requirements of, such prospective investors. Such tables and
assumptions may be based on assumptions that differ from the Structuring
Assumptions. Accordingly, such tables and other materials may not be relevant to
or appropriate for investors other than those specifically requesting them.
Weighted Average Lives
The timing of changes in the rate of principal prepayments on the
Mortgage Loans may significantly affect an investor's actual yield to maturity,
even if the average rate of principal prepayments is consistent with such
investor's expectation. In general, the earlier a principal prepayment on the
Mortgage Loans occurs, the greater the effect of such principal prepayment on an
investor's yield to maturity. The effect on an investor's yield of principal
prepayments occurring at a rate higher (or lower) than the rate anticipated by
the investor during the period immediately following the issuance of the Offered
Certificates may not be offset by a subsequent like decrease (or increase) in
the rate of principal prepayments.
The projected weighted average life of any class of Offered
Certificates is the average amount of time that will elapse from the Closing
Date, until each dollar of principal is scheduled to be repaid to the investors
in such class of Offered Certificates. Because it is expected that there will be
prepayments and defaults on the Mortgage Loans, the actual weighted average
lives of the classes of Offered Certificates are expected to vary substantially
from the weighted average remaining terms to stated maturity of the Mortgage
Loans as set forth in this Prospectus Supplement under "The Mortgage Pool."
Prepayments on mortgage loans are commonly measured relative to a
prepayment model or standard. The prepayment models used in this Prospectus
Supplement ("Prepayment Models") are based on an assumed rate of prepayment each
month of the then unpaid principal balance of a pool of mortgage loans similar
to the Mortgage Loans. The Prepayment Model used in this Prospectus Supplement
(the "Constant Prepayment Rate" or "CPR") for Loan Group 1 is a prepayment
assumption which represents a constant assumed rate of prepayment each month
relative to the then outstanding principal balance of a pool of mortgage loans
for the life of such mortgage loans. For Loan Group 1, a 100% prepayment
assumption assumes a prepayment rate of 12% CPR with respect to the FHA Mortgage
Loans and VA Mortgage Loans and 21% CPR with respect to the Mortgage Loans not
covered by FHA insurance or a VA guaranty.
For Loan Group 2, the Prepayment Model used in this Prospectus
Supplement (the "Prepayment Vector" or "PPV") is a prepayment assumption which
represents an assumed rate of prepayment each month relative to the then
outstanding principal balance of a pool of mortgage loans for the life of such
mortgage loans. A 100% Prepayment Vector for the Group 2 Loans assumes
prepayment rates of 3.5% per annum of the then outstanding principal balance of
the related mortgage loans in the first month of life of those mortgage loans
and an additional 3.5% per annum in each month thereafter up to and including
the 10th month, from the 11th month through the 22nd month a prepayment rate of
35% CPR, from the 23rd month through the 25th month a prepayment rate of 50%
CPR, from the 26th month through the 34th month a prepayment rate of 35% CPR, in
the 35th month through the 37th month a prepayment rate of 50% CPR and in the
38th month and in each month thereafter during the life of those mortgage loans
a prepayment rate of 35% CPR.
S-49
No Prepayment Model purports to be a historical description of
prepayment experience or a prediction of the anticipated rate of prepayment of
any pool of mortgage loans, including the Mortgage Loans.
The percentages and weighted average lives in the tables on pages S-52
through S-58 were determined using the following assumptions collectively (the
"Structuring Assumptions"): (i) the Mortgage Loans consist of 2 groups of loans
with the characteristics set forth in the table below, (ii) the closing date for
the Offered Certificates occurs on June 14, 2001 and the Offered Certificates
were sold to investors on such date, (iii) distributions on the Certificates are
made on the 25th day of each month regardless of the day on which the
Distribution Date actually occurs, commencing in June 2001, in accordance with
the allocation of Available Funds set forth above under "Description of the
Certificates," (iv) the Mortgage Loans prepay in accordance with the Prepayment
Models indicated, (v) prepayments include thirty days' interest thereon, (vi)
the Seller is not required to substitute or repurchase any or all of the
Mortgage Loans pursuant to the Pooling and Servicing Agreement and no optional
termination is exercised, except with respect to the entries identified by the
row heading "Weighted Average Life to Call" in the tables below, (vii) the
Overcollateralization Target Amount is set initially as specified herein and
thereafter decreases as described in the definition thereof, (viii) scheduled
payments for all Mortgage Loans are received on the Due Date commencing in May
2001, the principal portion of such payments is computed prior to giving effect
to prepayments received in such month and there are no losses or delinquencies
with respect to such Mortgage Loans, (ix) all Mortgage Loans prepay at the same
rate within their related Loan Group and all such payments are treated as
prepayments in full of individual Mortgage Loans, with no shortfalls in
collection of interest, (x) such prepayments are received on the last day of
each month commencing in May 2001, (xi) the aggregate of the annualized rates at
which the Servicing Fee and the Trustee Fee are calculated is 0.512%, (xii)
LIBOR is at all times equal to 4.01125%, (xiii) the Pass-Through Rates for the
Offered Certificates are as set forth or described on the cover of this
Prospectus Supplement, (xiv) the Mortgage Interest Rate for each Adjustable Rate
Mortgage Loan is adjusted on its next Adjustment Date (and on subsequent
Adjustment Dates, if necessary) to equal the sum of (a) the assumed level of the
Index and (b) the respective Gross Margin (such sum being subject to the
applicable Periodic Rate Caps, Minimum Mortgage Interest Rates and Maximum
Mortgage Interest Rates), (xv) with respect to the Adjustable Rate Mortgage
Loans without Minimum Mortgage Interest Rates, the Minimum Mortgage Interest
Rates were assumed to be the applicable Gross Margin, and (xvi) with respect to
the Adjustable Rate Mortgage Loans, the 1 Year CMT Index is equal to 3.620%; and
6 Month LIBOR is equal to 3.91813%. Nothing contained in the foregoing
assumptions should be construed as a representation that the Mortgage Loans will
not experience delinquencies or losses.
Based on the foregoing assumptions and the following prepayment
scenarios and assumed mortgage loan characteristics, the tables indicate the
projected weighted average lives of each class of Offered Certificates, and set
forth the percentages of the original Certificate Principal Balance of each such
class that would be outstanding after each of the dates shown.
S-50
Assumed Mortgage Loan Characteristics
Mortgage Amortized
Interest Original Original Remaining
Principal Rate Term Term Term Gross Lifetime
Description Balance ($) (%) (months) (months) (months) Index Margin (%) Cap (%)
----------- ----------- --- -------- -------- -------- ----- ---------- -------
Loan Group 1
Fixed FHA/VA 19,483,416.79 8.357 356 355 284 N/A N/A N/A
Fixed FHA/VA 59,049.14 12.730 259 138 98 N/A N/A N/A
Fixed 6,021,078.47 10.695 350 137 105 N/A N/A N/A
Fixed 4,038,228.63 11.484 360 180 159 N/A N/A N/A
Fixed 8,805,638.77 10.367 165 165 132 N/A N/A N/A
Fixed 2,003,195.69 11.116 174 174 158 N/A N/A N/A
Fixed 41,818,960.79 9.842 341 341 295 N/A N/A N/A
Fixed 22,280,535.18 10.741 346 346 332 N/A N/A N/A
Loan Group 2
Adjustable 25,937.84 13.700 360 360 354 6 Month Libor 7.100 20.700
Adjustable 10,374,144.31 11.033 360 360 345 6 Month Libor 6.475 17.062
Adjustable 30,885,174.32 11.126 360 360 351 6 Month Libor 6.475 17.578
Adjustable 2,554,629.84 11.270 360 360 348 6 Month Libor 6.445 17.972
Adjustable 24,286,044.38 10.783 360 360 353 6 Month Libor 6.437 17.303
Adjustable 1,144,064.44 10.514 360 360 341 6 Month Libor 6.267 16.514
Adjustable 2,308,807.87 10.276 360 360 339 6 Month Libor 6.230 16.276
Adjustable 86,977.10 10.956 360 360 344 6 Month Libor 6.250 16.956
Adjustable 3,733,378.96 12.207 360 360 323 6 Month Libor 6.481 17.675
Adjustable 1,423,606.94 11.312 358 358 313 6 Month Libor 6.722 16.794
Adjustable 6,258,588.51 9.336 360 360 306 1 Year CMT 4.002 14.038
Adjustable 249,453.08 12.308 360 360 339 1 Year CMT 6.115 16.442
Months to Initial
Next Periodic
Lifetime Adjustment Rate Cap Periodic
Description Floor (%) Date (%) Rate Cap (%)
----------- --------- ---- --- ------------
Loan Group 1
Fixed FHA/VA N/A N/A N/A N/A
Fixed FHA/VA N/A N/A N/A N/A
Fixed N/A N/A N/A N/A
Fixed N/A N/A N/A N/A
Fixed N/A N/A N/A N/A
Fixed N/A N/A N/A N/A
Fixed N/A N/A N/A N/A
Fixed N/A N/A N/A N/A
Loan Group 2
Adjustable 13.700 18 2.000 1.000
Adjustable 9.621 12 1.968 1.081
Adjustable 9.400 16 1.792 1.085
Adjustable 11.084 26 2.240 1.008
Adjustable 10.609 29 2.299 1.041
Adjustable 10.310 29 3.000 1.000
Adjustable 10.276 27 3.000 1.000
Adjustable 10.956 44 3.000 1.000
Adjustable 10.359 5 1.771 1.195
Adjustable 9.572 4 2.371 1.338
Adjustable 4.676 7 1.632 1.632
Adjustable 0.000 3 2.000 2.000
Prepayment Scenarios (Percentage of Applicable Prepayment Model)
Loan Group Scenario I Scenario II Scenario III Scenario IV Scenario V
Loan Group 1 50 75 100 125 150
Loan Group 2 50 75 100 125 150
S-51
Percentage of Original Principal Balance Outstanding(1)
Class A-1F
---------------------------------------------------------------------
Distribution Date Scenario I Scenario II Scenario III Scenario IV Scenario V
- ----------------- ---------- ----------- ------------ ----------- ----------
Initial Percentage 100 100 100 100 100
May 25, 2002 72 60 48 36 24
May 25, 2003 48 27 7 0 0
May 25, 2004 25 0 0 0 0
May 25, 2005 5 0 0 0 0
May 25, 2006 0 0 0 0 0
May 25, 2007 0 0 0 0 0
May 25, 2008 0 0 0 0 0
May 25, 2009 0 0 0 0 0
May 25, 2010 0 0 0 0 0
May 25, 2011 0 0 0 0 0
May 25, 2012 0 0 0 0 0
May 25, 2013 0 0 0 0 0
May 25, 2014 0 0 0 0 0
May 25, 2015 0 0 0 0 0
May 25, 2016 0 0 0 0 0
May 25, 2017 0 0 0 0 0
May 25, 2018 0 0 0 0 0
May 25, 2019 0 0 0 0 0
May 25, 2020 0 0 0 0 0
May 25, 2021 0 0 0 0 0
May 25, 2022 0 0 0 0 0
May 25, 2023 0 0 0 0 0
May 25, 2024 0 0 0 0 0
May 25, 2025 0 0 0 0 0
May 25, 2026 0 0 0 0 0
May 25, 2027 0 0 0 0 0
May 25, 2028 0 0 0 0 0
May 25, 2029 0 0 0 0 0
May 25, 2030 0 0 0 0 0
Weighted Avg. Life to
Maturity (in years) (2) 1.97 1.34 1.00 0.78 0.64
Weighted Avg. Life
to Call (in years) (2) 1.97 1.34 1.00 0.78 0.64
- ---------
- ---------------
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the aggregate amount of the assumed net reduction in the Certificate
Principal Balance of such class of Certificates.
S-52
Percentage of Original Principal Balance Outstanding(1)
Class A-2F
---------------------------------------------------------------------
Distribution Date Scenario I Scenario II Scenario III Scenario IV Scenario V
- ----------------- ---------- ----------- ------------ ----------- ----------
Initial Percentage 100 100 100 100 100
May 25, 2002 100 100 100 100 100
May 25, 2003 100 100 100 73 30
May 25, 2004 100 96 38 0 0
May 25, 2005 100 51 5 0 0
May 25, 2006 73 13 0 0 0
May 25, 2007 42 0 0 0 0
May 25, 2008 14 0 0 0 0
May 25, 2009 0 0 0 0 0
May 25, 2010 0 0 0 0 0
May 25, 2011 0 0 0 0 0
May 25, 2012 0 0 0 0 0
May 25, 2013 0 0 0 0 0
May 25, 2014 0 0 0 0 0
May 25, 2015 0 0 0 0 0
May 25, 2016 0 0 0 0 0
May 25, 2017 0 0 0 0 0
May 25, 2018 0 0 0 0 0
May 25, 2019 0 0 0 0 0
May 25, 2020 0 0 0 0 0
May 25, 2021 0 0 0 0 0
May 25, 2022 0 0 0 0 0
May 25, 2023 0 0 0 0 0
May 25, 2024 0 0 0 0 0
May 25, 2025 0 0 0 0 0
May 25, 2026 0 0 0 0 0
May 25, 2027 0 0 0 0 0
May 25, 2028 0 0 0 0 0
May 25, 2029 0 0 0 0 0
May 25, 2030 0 0 0 0 0
Weighted Avg. Life to
Maturity (in years) (2) 5.78 4.06 3.00 2.24 1.82
Weighted Avg. Life
to Call (in years) (2) 5.78 4.06 3.00 2.24 1.82
- ---------
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the aggregate amount of the assumed net reduction in the Certificate
Principal Balance of such class of Certificates.
S-53
Percentage of Original Principal Balance Outstanding(1)
Class A-3F
---------------------------------------------------------------------
Distribution Date Scenario I Scenario II Scenario III Scenario IV Scenario V
- ----------------- ---------- ----------- ------------ ----------- ----------
Initial Percentage 100 100 100 100 100
May 25, 2002 100 100 100 100 100
May 25, 2003 100 100 100 100 100
May 25, 2004 100 100 100 90 60
May 25, 2005 100 100 100 79 60
May 25, 2006 100 100 77 54 39
May 25, 2007 100 86 56 35 23
May 25, 2008 100 68 39 21 11
May 25, 2009 93 52 25 10 3
May 25, 2010 71 35 13 1 0
May 25, 2011 58 24 4 0 0
May 25, 2012 46 15 0 0 0
May 25, 2013 36 7 0 0 0
May 25, 2014 28 1 0 0 0
May 25, 2015 18 0 0 0 0
May 25, 2016 11 0 0 0 0
May 25, 2017 5 0 0 0 0
May 25, 2018 0 0 0 0 0
May 25, 2019 0 0 0 0 0
May 25, 2020 0 0 0 0 0
May 25, 2021 0 0 0 0 0
May 25, 2022 0 0 0 0 0
May 25, 2023 0 0 0 0 0
May 25, 2024 0 0 0 0 0
May 25, 2025 0 0 0 0 0
May 25, 2026 0 0 0 0 0
May 25, 2027 0 0 0 0 0
May 25, 2028 0 0 0 0 0
May 25, 2029 0 0 0 0 0
May 25, 2030 0 0 0 0 0
Weighted Avg. Life to
Maturity (in years) (2) 11.14 8.38 6.62 5.45 4.49
Weighted Avg. Life
to Call (in years) (2) 10.95 8.12 6.34 5.09 3.98
- ---------
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the aggregate amount of the assumed net reduction in the Certificate
Principal Balance of such class of Certificates.
S-54
Percentage of Original Principal Balance Outstanding(1)
Class A-1A
---------------------------------------------------------------------
Distribution Date Scenario I Scenario II Scenario III Scenario IV Scenario V
- ----------------- ---------- ----------- ------------ ----------- ----------
Initial Percentage 100 100 100 100 100
May 25, 2002 82 73 64 55 46
May 25, 2003 66 52 39 28 19
May 25, 2004 53 37 24 15 8
May 25, 2005 43 29 20 13 8
May 25, 2006 36 24 16 10 7
May 25, 2007 31 20 13 9 6
May 25, 2008 27 17 11 8 6
May 25, 2009 24 14 10 8 5
May 25, 2010 21 13 9 7 4
May 25, 2011 19 12 9 6 3
May 25, 2012 17 11 8 4 2
May 25, 2013 15 10 6 3 1
May 25, 2014 14 10 5 2 1
May 25, 2015 13 8 4 1 0
May 25, 2016 12 6 3 1 0
May 25, 2017 12 5 2 0 0
May 25, 2018 11 4 1 0 0
May 25, 2019 9 3 1 0 0
May 25, 2020 7 2 0 0 0
May 25, 2021 6 1 0 0 0
May 25, 2022 4 1 0 0 0
May 25, 2023 3 0 0 0 0
May 25, 2024 1 0 0 0 0
May 25, 2025 0 0 0 0 0
May 25, 2026 0 0 0 0 0
May 25, 2027 0 0 0 0 0
May 25, 2028 0 0 0 0 0
May 25, 2029 0 0 0 0 0
May 25, 2030 0 0 0 0 0
Weighted Avg. Life to
Maturity (in years) (2) 5.72 3.96 2.90 2.15 1.59
Weighted Avg. Life
to Call (in years) (2) 5.05 3.34 2.38 1.74 1.28
- ---------
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the aggregate amount of the assumed net reduction in the Certificate
Principal Balance of such class of Certificates.
S-55
Percentage of Original Principal Balance Outstanding(1)
Class M-1
---------------------------------------------------------------------
Distribution Date Scenario I Scenario II Scenario III Scenario IV Scenario V
- ----------------- ---------- ----------- ------------ ----------- ----------
Initial Percentage 100 100 100 100 100
May 25, 2002 100 100 100 100 100
May 25, 2003 100 100 100 100 100
May 25, 2004 100 100 100 100 100
May 25, 2005 100 80 58 43 43
May 25, 2006 93 64 44 31 21
May 25, 2007 80 52 34 22 15
May 25, 2008 69 42 26 16 10
May 25, 2009 59 34 20 12 7
May 25, 2010 48 27 15 9 3
May 25, 2011 41 22 12 7 0
May 25, 2012 35 17 9 2 0
May 25, 2013 30 14 7 0 0
May 25, 2014 26 12 4 0 0
May 25, 2015 21 9 0 0 0
May 25, 2016 18 7 0 0 0
May 25, 2017 15 5 0 0 0
May 25, 2018 12 1 0 0 0
May 25, 2019 10 0 0 0 0
May 25, 2020 8 0 0 0 0
May 25, 2021 6 0 0 0 0
May 25, 2022 2 0 0 0 0
May 25, 2023 0 0 0 0 0
May 25, 2024 0 0 0 0 0
May 25, 2025 0 0 0 0 0
May 25, 2026 0 0 0 0 0
May 25, 2027 0 0 0 0 0
May 25, 2028 0 0 0 0 0
May 25, 2029 0 0 0 0 0
May 25, 2030 0 0 0 0 0
Weighted Avg. Life to 10.24 7.35 5.73 4.91 4.60
Maturity (in years) (2)
Weighted Avg. Life
to Call (in years) (2) 9.48 6.66 5.17 4.43 4.17
- ---------
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the aggregate amount of the assumed net reduction in the Certificate
Principal Balance of such class of Certificates.
S-56
Percentage of Original Principal Balance Outstanding(1)
Class M-2
---------------------------------------------------------------------
Distribution Date Scenario I Scenario II Scenario III Scenario IV Scenario V
- ----------------- ---------- ----------- ------------ ----------- ----------
Initial Percentage 100 100 100 100 100
May 25, 2002 100 100 100 100 100
May 25, 2003 100 100 100 100 100
May 25, 2004 100 100 100 100 100
May 25, 2005 100 80 58 43 31
May 25, 2006 93 64 44 31 21
May 25, 2007 80 52 34 22 15
May 25, 2008 69 42 26 16 10
May 25, 2009 59 34 20 12 4
May 25, 2010 48 27 15 8 0
May 25, 2011 41 22 12 1 0
May 25, 2012 35 17 9 0 0
May 25, 2013 30 14 3 0 0
May 25, 2014 26 12 0 0 0
May 25, 2015 21 9 0 0 0
May 25, 2016 18 4 0 0 0
May 25, 2017 15 0 0 0 0
May 25, 2018 12 0 0 0 0
May 25, 2019 10 0 0 0 0
May 25, 2020 6 0 0 0 0
May 25, 2021 1 0 0 0 0
May 25, 2022 0 0 0 0 0
May 25, 2023 0 0 0 0 0
May 25, 2024 0 0 0 0 0
May 25, 2025 0 0 0 0 0
May 25, 2026 0 0 0 0 0
May 25, 2027 0 0 0 0 0
May 25, 2028 0 0 0 0 0
May 25, 2029 0 0 0 0 0
May 25, 2030 0 0 0 0 0
Weighted Avg. Life to
Maturity (in years) (2) 10.15 7.24 5.61 4.73 4.31
Weighted Avg. Life
to Call (in years) (2) 9.48 6.66 5.14 4.34 3.94
- ---------
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the aggregate amount of the assumed net reduction in the Certificate
Principal Balance of such class of Certificates.
S-57
Percentage of Original Principal Balance Outstanding(1)
Class B-1
---------------------------------------------------------------------
Distribution Date Scenario I Scenario II Scenario III Scenario IV Scenario V
- ----------------- ---------- ----------- ------------ ----------- ----------
Initial Percentage 100 100 100 100 100
May 25, 2002 100 100 100 100 100
May 25, 2003 100 100 100 100 100
May 25, 2004 100 100 100 100 100
May 25, 2005 100 80 58 43 31
May 25, 2006 93 64 44 31 21
May 25, 2007 80 52 34 22 15
May 25, 2008 69 42 26 16 3
May 25, 2009 59 34 20 8 0
May 25, 2010 48 27 15 0 0
May 25, 2011 41 22 6 0 0
May 25, 2012 35 17 0 0 0
May 25, 2013 30 13 0 0 0
May 25, 2014 26 6 0 0 0
May 25, 2015 21 0 0 0 0
May 25, 2016 18 0 0 0 0
May 25, 2017 15 0 0 0 0
May 25, 2018 9 0 0 0 0
May 25, 2019 3 0 0 0 0
May 25, 2020 0 0 0 0 0
May 25, 2021 0 0 0 0 0
May 25, 2022 0 0 0 0 0
May 25, 2023 0 0 0 0 0
May 25, 2024 0 0 0 0 0
May 25, 2025 0 0 0 0 0
May 25, 2026 0 0 0 0 0
May 25, 2027 0 0 0 0 0
May 25, 2028 0 0 0 0 0
May 25, 2029 0 0 0 0 0
May 25, 2030 0 0 0 0 0
Weighted Avg. Life to
Maturity (in years) (2) 9.96 7.06 5.43 4.55 4.06
Weighted Avg. Life
to Call (in years) (2) 9.48 6.66 5.13 4.28 3.82
- ---------
(1) Rounded to the nearest whole percentage
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the aggregate amount of the assumed net reduction in the Certificate
Principal Balance of such class of Certificates.
S-58
There is no assurance that prepayments of the Mortgage Loans included
will conform to any of the levels of CPR indicated in the immediately preceding
tables, or to any other level, or that the actual weighted average lives of the
Offered Certificates will conform to any of the weighted average lives set forth
in the immediately preceding tables. Furthermore, the information contained in
the tables with respect to the weighted average lives of the Offered
Certificates is not necessarily indicative of the weighted average lives that
might be calculated or projected under different or varying prepayment
assumptions.
The characteristics of the Mortgage Loans will differ from those
assumed in preparing the immediately preceding tables. In addition, it is
unlikely that any Mortgage Loan will prepay at any constant percentage until
maturity, 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.
Yield Sensitivity of the Subordinated Certificates
If the Certificate Principal Balances of the Class X/N Certificates,
the Class B-2 and Class B-1 Certificates and the Class M-2 Certificates have
been reduced to zero, the yield to maturity on the Class M-1 Certificates will
become extremely sensitive to losses on the Mortgage Loans (and the timing
thereof) that are covered by subordination, because the entire amount of any
Realized Losses (to the extent not covered by Net Monthly Excess Cashflow) will
be allocated to the Class M-1 Certificates. If the Certificate Principal
Balances of the Class X/N Certificates and the Class B-2 and Class B-1
Certificates have been reduced to zero, the yield to maturity on the Class M-2
Certificates will become extremely sensitive to losses on the Mortgage Loans
(and the timing thereof) that are covered by subordination, because the entire
amount of any Realized Losses (to the extent not covered by Net Monthly Excess
Cashflow) will be allocated to the Class M-2 Certificates. If the Certificate
Principal Balances of the Class X/N Certificates and the Class B-2 Certificates
have been reduced to zero, the yield to maturity on the Class B-1 Certificates
will become extremely sensitive to losses on the Mortgage Loans (and the timing
thereof) that are covered by subordination, because the entire amount of any
Realized Losses (to the extent not covered by Net Monthly Excess Cashflow) will
be allocated to the Class B-1 Certificates. The initial undivided interests in
the trust fund evidenced by the Class M-1 Certificates, the Class M-2
Certificates, the Class B-1 Certificates, the Class B-2 Certificates and the
Class X/N Certificates are approximately 3.50%, approximately 2.60%,
approximately 2.00%, approximately 2.40% and approximately 1.00%, respectively.
Investors in the Subordinated Certificates should fully consider the risk that
Realized Losses on the Mortgage Loans could result in the failure of investors
to fully recover their investments. In addition, once Realized Losses have been
allocated to the Subordinated Certificates, their Certificate Principal Balances
will be permanently reduced by the amounts so allocated. Therefore, the amounts
of Realized Losses allocated to the Subordinated Certificates will no longer
accrue interest nor will these amounts be reinstated thereafter. However,
Allocated Realized Loss Amounts may be paid to the holders of the Subordinated
Certificates from Net Monthly Excess Cashflow in the priorities set forth under
"Description of the Certificates --Application of Monthly Excess Cashflow
Amount" in this prospectus supplement.
Unless the Certificate Principal Balance of the Class A Certificates
has been reduced to zero, the Subordinated Certificates will not be entitled to
any principal distributions until the Stepdown Date or during any period in
which a Trigger Event is in effect. As a result, the weighted average lives of
the Subordinated Certificates will be longer than would otherwise be the case if
distributions of principal were allocated on a pro rata basis among all of the
Offered Certificates. As a result of the longer weighted average lives of the
Subordinated Certificates, the holders of such certificates have a greater risk
of suffering a loss on their investments. Further, because a Trigger Event is
based on delinquencies and not losses, it is possible for the Subordinated
Certificates to receive no principal distributions (unless the Certificate
Principal Balance of the Class A Certificates has been reduced to zero) on and
after the Stepdown Date even if no losses have occurred on the Mortgage Pool.
For additional considerations relating to the yield on the Subordinated
Certificates, see "Yield Considerations" in the prospectus.
Final Scheduled Distribution Dates
The Final Scheduled Distribution Date of each class of Offered
Certificates (other than the Class A-IO Certificates) is set forth under
"Summary of Prospectus Supplement" in this Prospectus Supplement. The Final
Scheduled Distribution Date for the Class A-1F and Class A-2F Certificates has
been calculated on the basis of the Structuring Assumptions and the assumptions
that there are no prepayments and no Monthly Excess Interest Amounts are used to
create overcollateralization. The Final Scheduled Distribution Date for each
other class of Offered Certificates has been set to equal the Distribution Date
in the first month after the month of maturity of the latest maturing Mortgage
Loan. Since the rate of distributions in reduction of the Certificate Principal
Balance of each class of Offered Certificates will depend on the rate of payment
(including prepayments) of the Mortgage Loans, the Certificate Principal Balance
of any such class could be reduced to zero significantly earlier or later than
the Final Scheduled Distribution Date. The rate of payments on the Mortgage
Loans will depend on their particular characteristics, as well as on prevailing
interest rates from time to time and other economic factors, and no assurance
can be given as to the actual payment experience of the Mortgage Loans.
S-59
DESCRIPTION OF THE CERTIFICATES
General
The Trust will issue the Class A-IO, Class A-1F, Class A-2F, Class
A-3F, Class A-1A Certificates (the "Class A Certificates" or the "Senior
Certificates"), the Class M-1, Class M-2, Class B-1, Class B-2, Class N and
Class X Certificates (the "Subordinated Certificates") and the Class R
Certificates (the "Residual Certificates"). The Senior Certificates, the
Subordinated Certificates and the Residual Certificates are collectively
referred to herein as the "Certificates." Only the Class A, Class M-1, Class M-2
and Class B-1 Certificates are offered hereby (the "Offered Certificates"). The
Class B-2, Class X and Class N Certificates (the Class X and Class N
Certificates collectively, the "Class X/N Certificates") and the Residual
Certificates are not being offered by this prospectus supplement.
The Offered Certificates will have the respective original Certificate
Principal Balances (or Notional Amount in the case of the Class A-IO
Certificates) specified on the cover hereof, subject to a permitted variance of
plus or minus five percent.
The Offered Certificates will be issued in book-entry form as described
below. The Offered Certificates will be issued in minimum dollar denominations
of $25,000 and integral multiples of $1 in excess thereof.
Distributions on the Offered Certificates will be made by the Trustee
on the 25th day of each month, or if such day is not a Business Day, on the
first Business Day thereafter, commencing in June 2001 (each, a "Distribution
Date"), to the persons in whose names such Certificates are registered at the
close of business on the Record Date. With respect to the Offered Certificates
(other than the Class A-1A Certificates), the "Record Date" is the last Business
Day of the month immediately preceding the month in which the related
Distribution Date occurs or the Closing Date, in the case of the first
Distribution Date. With respect to the Class A-1A Certificates, the "Record
Date" is the Business Day immediately preceding such Distribution Date;
provided, however, that if any Class A-1A Certificate becomes a Definitive
Certificate (as defined herein), the Record Date for such Certificate will be
the last Business Day of the month immediately preceding the month in which the
related Distribution Date occurs.
Book-Entry Certificates
The Offered Certificates will be book-entry Certificates (for so long
as they are registered in the name of the applicable depository or its nominee,
the "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 Banking Luxembourg, formerly known as Cedelbank SA
("Clearstream"), or the Euroclear System ("Euroclear") in Europe, if they are
participants of such systems, or indirectly through organizations which are
participants in such systems. The Book-Entry Certificates will be issued in one
or more certificates which equal the aggregate Certificate Principal Balance of
such Certificates and will initially be registered in the name of Cede & Co.,
the nominee of DTC. Clearstream and Euroclear will hold omnibus positions on
behalf of their participants through customers' securities accounts in
Clearstream's and Euroclear's names on the books of their respective
depositaries which in turn will hold such positions in customers' securities
accounts in the depositaries' names on the books of DTC. Citibank will act as
depositary for Clearstream and The Chase Manhattan Bank will act as depositary
for Euroclear (in such capacities, individually the "Relevant Depositary" and
collectively the "European Depositaries"). Investors may hold such beneficial
interests in the Book-Entry Certificates in minimum denominations of $25,000.
Except as described below, no Certificate Owner acquiring a Book-Entry
Certificate (each, a "beneficial owner") will be entitled to receive a physical
certificate representing such Certificate (a "Definitive Certificate"). Unless
and until Definitive Certificates are issued, it is anticipated that the only
"Certificateholder" of the Offered Certificates will be Cede & Co., as nominee
of DTC. Certificate Owners will not be Certificateholders as that term is used
in the Pooling and Servicing Agreement. Certificate Owners are only permitted to
exercise their rights indirectly through DTC and participants of DTC ("DTC
Participants").
S-60
The Certificate 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
Certificate 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 DTC 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. DTC
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.
Certificate Owners 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, Certificate Owners who are not DTC
Participants may transfer ownership of Book-Entry Certificates only through DTC
Participants and indirect participants by instructing such DTC 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 DTC
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 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 Certificate Owners.
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 Participants or Clearstream Participants (each as defined
below) 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
Certificates, see "Global Clearance, Settlement and Tax Documentation
Procedures--Certain U.S. Federal Income Tax Documentation Requirements" in Annex
I hereto.
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 DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Clearstream Participants and Euroclear Participants may not deliver
instructions directly to the European Depositaries.
S-61
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
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, 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 the Euroclear Operator (as
defined below) 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 the 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 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.
S-62
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to Cede & Co. 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 Certificate 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 Certificate Owners of the Book-Entry
Certificates that it represents.
Under a book-entry format, Certificate 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 "Material Federal Income Tax Considerations--REMICS--Taxation of Certain
Foreign Investors" in the prospectus. Because DTC can only act on behalf of
Financial Intermediaries, the ability of a Certificate 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 permitted to be taken by the
holders of the Book-Entry Certificates under the Pooling and Servicing Agreement
only at the direction of one or more Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates are credited, to the extent that 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 and Servicing 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 DTC 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 Certificate Owners of the
Book-Entry Certificates, or their nominees, rather than to DTC or its nominee,
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, with the consent of the Trustee, elects to
terminate a book-entry system through DTC or (c) after the occurrence of a
Servicer Event of Default (as defined in the Pooling and Servicing Agreement),
Certificate Owners having percentage interests aggregating not less than 51% 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 Certificate Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all Certificate
Owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as
Certificateholders under the Pooling and Servicing Agreement.
S-63
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Book-Entry Certificates among DTC
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.
Allocation of Available Funds
Distributions to holders of each class of Offered Certificates will be
made on each Distribution Date from Available Funds. "Available Funds" will be
equal to the sum of the following amounts with respect to the Mortgage Loans,
net of amounts reimbursable or payable to the Servicer, including the Servicing
Fee and any accrued and unpaid Servicing Fee and the PMI Premium: (i) the
aggregate amount of Monthly Payments on the Mortgage Loans due during the
related Collection Period and received by the Trustee one business day prior to
the related Distribution Date, (ii) certain unscheduled payments in respect of
the Mortgage Loans, including prepayments (but excluding any prepayment
penalties and Arrearages collected), insurance proceeds and liquidation proceeds
net of certain expenses received during the related Prepayment Period, (iii)
payments from the Servicer in connection with Advances and Prepayment Interest
Shortfalls for such Distribution Date, (iv) the Purchase Price for any
repurchased Mortgage Loan deposited to the Collection Account during the related
Prepayment Period, (v) any Substitution Shortfall Amounts deposited in the
Collection Account during the related Prepayment Period, and (vi) on the
Distribution Date on which the Trust is to be terminated in accordance with the
Pooling and Servicing Agreement, the Termination Price.
The "Collection Period" with respect to any Distribution Date means the
period from the second day of the calendar month preceding the month in which
such Distribution Date occurs through the first day of the month in which such
Distribution Date occurs.
The "Prepayment Period" with respect to any Distribution Date means the
calendar month preceding the month in which such Distribution Date occurs.
Interest Distributions
On each Distribution Date, based upon the information provided to it in
the Remittance Report, the Trustee will distribute the Interest Remittance
Amount in the following order of priority to the extent available:
first, to the Trustee, the Trustee Fee;
second, concurrently, to the Class A-IO, Class A-1F, Class A-2F, Class
A-3F and Class A-1A Certificates, pro rata, the applicable Accrued Certificate
Interest for such Distribution Date;
third, concurrently, to the Class A-IO, Class A-1F, Class A-2F, Class
A-3F and Class A-1A Certificates, pro rata, the applicable Interest Carry
Forward Amount for the Class A-IO, Class A-1F, Class A-2F, Class A-3F and Class
A-1A Certificates, respectively;
fourth, to the Class M-1 Certificates, the Accrued Certificate Interest
thereon for such Distribution Date;
fifth, to the Class M-2 Certificates, the Accrued Certificate Interest
thereon for such Distribution Date;
sixth, to the Class B-1 Certificates, the Accrued Certificate Interest
thereon for such Distribution Date;
seventh, to the Class B-2 Certificates, the Accrued Certificate
Interest thereon for such Distribution Date; and
S-64
eighth, the amount, if any, of the Interest Remittance Amount remaining
after application with respect to the priorities set forth above which is
defined below as the "Monthly Excess Interest Amount" for such Distribution Date
and will be applied as described below under "--Application of Monthly Excess
Cashflow Amounts."
"Accrued Certificate Interest" for each Class of Offered Certificates
and each Distribution Date means an amount equal to the interest accrued during
the related Interest Accrual Period on the Certificate Principal Balance or
Notional Amount of such class of Certificates, minus each class's Interest
Percentage of shortfalls caused by the Relief Act for such Distribution Date.
"Interest Carry Forward Amount" means for any class of Certificates and
any Distribution Date the sum of (a) the excess, if any, of the Accrued
Certificate Interest and any Interest Carry Forward Amount for the prior
Distribution Date, over the amount in respect of interest actually distributed
on each class on such prior Distribution Date and (b) interest on such excess at
the applicable Pass-Through Rate (x) with respect to the Offered Certificates
(other than the Class A-1A Certificates) on the basis of a 360-day year
consisting of twelve 30-day months and (y) with respect to the Class A-1A
Certificates, on the basis of the actual number of days elapsed since the prior
Distribution Date. The "Class A Interest Carry Forward Amount" for any
Distribution Date is the sum of the Interest Carry Forward Amounts for the Class
A Certificates for such Distribution Date.
"Interest Remittance Amount" means, as of any Determination Date, the
sum, without duplication, of (i) all interest collected or advanced with respect
to the related Collection Period on the Mortgage Loans (less the Servicing Fee,
the PMI Premium, certain amounts available for reimbursement of Advances and
Servicing Advances as described above under "Description of the
Certificates--Advances" and certain other reimbursable expenses pursuant to the
Pooling and Servicing Agreement), (ii) all Compensating Interest paid by the
Servicer on such Determination Date with respect to the Mortgage Loans and (iii)
the portion of any payment in connection with any substitution, Purchase Price,
Termination Price, liquidation proceeds (net of certain expenses) or insurance
proceeds relating to interest with respect to the Mortgage Loans received during
the related Prepayment Period.
The "Interest Accrual Period" for any Distribution Date and each class
of Offered Certificates, other than the Class A-1A Certificates, will be from
and including the first day of each month, commencing May 1, 2001, to and
including the last day of such month. With respect to the Offered Certificates
other than the Class A-1A Certificates, all calculations of interest will be
made on the basis of a 360-day year assumed to consist of twelve 30-day months.
With respect to the A-1A Certificates, the "Interest Accrual Period" for any
Distribution Date will be the period from the preceding Distribution Date, or in
the case of the first Distribution Date, from the Closing Date, to the day prior
to the current Distribution Date, and calculations of interest will be made on
the basis of the actual number of days in the Interest Accrual Period and on a
360-day year.
The "Interest Percentage" is, with respect to any class of Certificates
and any Distribution Date, the ratio (expressed as a decimal carried to six
places) of the Accrued Certificate Interest for such class to the Accrued
Certificate Interest for all classes, in each case with respect to such
Distribution Date.
If the Interest Remittance Amount and the Monthly Excess Cashflow
Amount are insufficient on any Distribution Date to distribute the aggregate
Accrued Certificate Interest on the Class A Certificates entitled to
distributions of interest, any shortfall in available amounts will be allocated
to the Class A Certificates pro rata in accordance with their Interest
Percentages.
Principal Distributions
With respect to each Distribution Date (a) before the Stepdown Date or
(b) with respect to which a Trigger Event is in effect, Holders of the Class
A-1F, Class A-2F and Class A-3F Certificates will in the aggregate be entitled
to receive the Group 1 Principal Percentage of the Principal Distribution Amount
for such Distribution Date and the Holders of the Class A-1A Certificates will
be entitled to receive the Group 2 Principal Percentage of the Principal
Distribution Amount for such Distribution Date, until the Certificate Principal
Balances thereof have been reduced to zero. Principal amounts otherwise
distributable to the Class A-1F, Class A-2F and Class A-3F Certificates will be
distributed to the Class A-1A Certificates once the Certificate Principal
Balances of the Class A-1F, Class A-2F and Class A-3F Certificates have been
reduced to zero. Principal amounts otherwise distributable to the Class A-1A
Certificates will be distributed to the Class A-1F, Class A-2F and Class A-3F
Certificates once the Certificates Principal Balance of the Class A-1A
Certificates has been reduced to zero. Amounts allocated to the Class A-1F,
Class A-2F and Class A-3F Certificates will be distributed sequentially to the
Class A-1F, Class A-2F and Class A-3F Certificates, in that order, until the
Certificate Principal Balances thereof are reduced to zero. Once the Certificate
Principal Balances of the Class A Certificates have been reduced to zero, the
Holders of the Class M-1 Certificates will be entitled to receive 100% of the
Principal Distribution Amount for such Distribution Date until the Certificate
Principal Balance of the Class M-1 Certificates has been reduced to zero. Once
the Certificate Principal Balance of the Class M-1 Certificates has been reduced
to zero, the Holders of the Class M-2 Certificates will be entitled to receive
100% of the Principal Distribution Amount until the Certificate Principal
Balance of the Class M-2 Certificates has been reduced to zero. Similarly, once
the Certificate Principal Balance of the Class M-2 Certificates has been reduced
to zero, the Holders of the Class B-1 Certificates will be entitled to receive
100% of the Principal Distribution Amount until the Certificate Principal
Balance of the Class B-1 Certificates has been reduced to zero. Finally, once
the Certificate Principal Balance of the Class B-1 Certificates has been reduced
to zero, the Holders of the Class B-2 Certificates will be entitled to receive
100% of the Principal Distribution Amount until the Certificate Principal
Balance of the Class B-2 Certificates has been reduced to zero.
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The "Group 1 Principal Percentage" with respect to any Distribution
Date and the Class A-1F, Class A-2F and Class A-3F Certificates, will be the
percentage equivalent of a fraction, the numerator of which is the amount of
principal collections (including any principal advanced by the Servicer)
allocable to Loan Group 1 for the related Collection Period or Prepayment
Period, as applicable, and the denominator of which is the amount of principal
collections (including any principal advanced by the Servicer) allocable to Loan
Group 1 and Loan Group 2 for the related Collection Period or Prepayment Period,
as applicable. The "Group 2 Principal Percentage" with respect to any
Distribution Date and the Class A-1A Certificates, will be the percentage
equivalent of a fraction, the numerator of which is the amount of principal
collections (including any principal advanced by the Servicer) allocable to Loan
Group 2 for the related Collection Period or Prepayment Period, as applicable,
and the denominator of which is the amount of principal collections (including
any principal advanced by the Servicer) allocable to Loan Group 1 and Loan Group
2 for the related Collection Period or Prepayment Period, as applicable.
With respect to each Distribution Date (a) on or after the Stepdown
Date and (b) as long as a Trigger Event is not in effect, the Holders of all
classes of Certificates will be entitled to receive payments of principal, in
the order of priority and in the amounts set forth below:
first, concurrently as follows:
(i) the Group 1 Principal Percentage of the lesser of (x) the
Principal Distribution Amount and (y) the Class A Principal Distribution Amount
will be distributed sequentially, to the Class A-1F, Class A-2F and Class A-3F
Certificates, in that order, until the Certificate Principal Balance of each
such class has been reduced to zero and then to the Class A-1A Certificates,
until the Certificate Principal Balance of such class has been reduced to zero;
and
(ii) the Group 2 Principal Percentage of the lesser of (x) the
Principal Distribution Amount and (y) the Class A Principal Distribution Amount
will be distributed to the Class A-1A Certificates, until the Certificate
Principal Balance of such class has been reduced to zero and then sequentially
to the Class A-1F, Class A-2F and Class A-3F Certificates, in that order, until
the Certificates Principal Balance of each such class has been reduced to zero;
second, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the amount distributed to the Class A Certificates in priority
first above and (y) the Class M-1 Principal Distribution Amount will be
distributed to the Class M-1 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero;
third, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the sum of the amount distributed to the Class A Certificates
in priority first above and the amount distributed to the Class M-1 Certificates
in priority second above and (y) the Class M-2 Principal Distribution Amount
will be distributed to the Class M-2 Certificates, until the Certificate
Principal Balance thereof has been reduced to zero;
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fourth, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the sum of the amount distributed to the Class A Certificates
pursuant to priority first above, the amount distributed to the Class M-1
Certificates pursuant to priority second above and the amount distributed to the
Class M-2 Certificates pursuant to priority third above and (y) the Class B-1
Principal Distribution Amount will be distributed to the Class B-1 Certificates,
until the Certificate Principal Balance thereof has been reduced to zero;
fifth, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the sum of the amount distributed to the Class A Certificates
pursuant to priority first above, the amount distributed to the Class M-1
Certificates pursuant to priority second above, the amount distributed to the
Class M-2 Certificates pursuant to priority third above and the amount
distributed to the Class B-1 Certificates pursuant to priority fourth above and
(y) the Class B-2 Principal Distribution Amount will be distributed to the Class
B-2 Certificates, until the Certificate Principal Balance thereof has been
reduced to zero;
sixth, any amount of the Principal Distribution Amount remaining after
making all of the distributions in priority first, second, third, fourth and
fifth above will be included as part of the Monthly Excess Cashflow Amount and
will be applied as described below under "--Application of Monthly Excess
Cashflow Amounts."
For purposes of the foregoing, the following terms will have the
respective meanings set forth below.
The "Certificate Principal Balance" with respect to any class of
Certificates and any Distribution Date, will equal the principal balance of such
class on the date of the initial issuance of the Certificates as reduced, but
not below zero, by:
o all amounts distributed on previous Distribution Dates on such
class on account of principal; and
o such class's pro rata share of any Applied Realized Loss Amount
for previous Distribution Dates.
The "Notional Amount" with respect to the Class A-IO Certificates (A)
for any Distribution Date prior to February 2003, will equal the lesser of (i)
$50,000,000 and (ii) the Pool Balance, and (B) $0.00 thereafter.
"Class A Principal Distribution Amount" means as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the excess of (x) the sum of the Certificate Principal Balances of the
Class A Certificates immediately prior to such Distribution Date over (y) the
lesser of (A) the product of (i) approximately 77.00% and (ii) the Pool Balance
as of the last day of the related Collection Period and (B) the Pool Balance as
of the last day of the related Collection Period minus the product of (i) 0.50%
and (ii) the Pool Balance on the Cut-off Date.
"Class M-1 Principal Distribution Amount" means as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the excess of (x) the sum of (i) the sum of the Certificate Principal
Balances of the Class A Certificates (after taking into account the payment of
the Class A Principal Distribution Amount on such Distribution Date) and (ii)
the Certificate Principal Balance of the Class M-1 Certificates immediately
prior to such Distribution Date over (y) the lesser of (A) the product of (i)
approximately 84.00% and (ii) the Pool Balance as of the last day of the related
Collection Period and (B) the Pool Balance as of the last day of the related
Collection Period minus the product of (i) 0.50% and (ii) the Pool Balance on
the Cut-off Date.
"Class M-2 Principal Distribution Amount" means as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the excess of (x) the sum of (i) the sum of the Certificate Principal
Balances of the Class A Certificates (after taking into account the payment of
the Class A Principal Distribution Amount on such Distribution Date), (ii) the
Certificate Principal Balance of the Class M-1 Certificates (after taking into
account the payment of the Class M-1 Principal Distribution Amount on such
Distribution Date) and (iii) the Certificate Principal Balance of the Class M-2
Certificates immediately prior to such Distribution Date over (y) the lesser of
(A) the product of (i) approximately 89.20% and (ii) the Pool Balance as of the
last day of the related Collection Period and (B) the Pool Balance as of the
last day of the related Collection Period minus the product of (i) 0.50% and
(ii) the Pool Balance on the Cut-off Date.
S-67
"Class B-1 Principal Distribution Amount" means as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the excess of (x) the sum of (i) the sum of the Certificate Principal
Balances of the Class A Certificates (after taking into account the payment of
the Class A Principal Distribution Amount on such Distribution Date), (ii) the
Certificate Principal Balance of the Class M-1 Certificates (after taking into
account the payment of the Class M-1 Principal Distribution Amount on such
Distribution Date), (iii) the Certificate Principal Balance of the Class M-2
Certificates (after taking into account the payment of the Class M-2 Principal
Distribution Amount on such Distribution Date), and (iv) the Certificate
Principal Balance of the Class B-1 Certificates immediately prior to such
Distribution Date over (y) the lesser of (A) the product of (i) approximately
93.20% and (ii) the Pool Balance as of the last day of the related Collection
Period and (B) the Pool Balance as of the last day of the related Collection
Period minus the product of (i) 0.50% and (ii) the Pool Balance on the Cut-off
Date.
"Class B-2 Principal Distribution Amount" means as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the excess of (x) the sum of (i) the sum of the Certificate Principal
Balances of the Class A Certificates (after taking into account the payment of
the Class A Principal Distribution Amount on such Distribution Date), (ii) the
Certificate Principal Balance of the Class M-1 Certificates (after taking into
account the payment of the Class M-1 Principal Distribution Amount on such
Distribution Date), (iii) the Certificate Principal Balance of the Class M-2
Certificates (after taking into account the payment of the Class M-2 Principal
Distribution Amount on such Distribution Date), (iv) the Certificate Principal
Balance of the Class B-1 Certificates (after taking into account the payment of
the Class B-1 Principal Distribution Amount on such Distribution Date), and (v)
the Certificate Principal Balance of the Class B-2 Certificates immediately
prior to such Distribution Date over (y) the lesser of (A) the product of (i)
approximately 98.00% and (ii) the Pool Balance as of the last day of the related
Collection Period and (B) the Pool Balance as of the last day of the related
Collection Period minus the product of (i) 0.50% and (ii) the Pool Balance on
the Cut-off Date.
"Extra Principal Distribution Amount" means, as of any Distribution
Date, the lesser of (x) the Monthly Excess Interest Amount for such Distribution
Date and (y) the Overcollateralization Deficiency for such Distribution Date.
"Overcollateralization Amount" means, as of any Distribution Date the
excess, if any, of (x) the Pool Balance as of the last day of the immediately
preceding Collection Period over (y) the aggregate Certificate Principal Balance
of all classes of Offered Certificates (after taking into account all
distributions of principal on such Distribution Date).
"Overcollateralization Deficiency" means, as of any Distribution Date,
the excess, if any, of (x) the Targeted Overcollateralization Amount for such
Distribution Date over (y) the Overcollateralization Amount for such
Distribution Date, calculated for this purpose after taking into account the
reduction on such Distribution Date of the Certificate Principal Balances of all
classes of Certificates resulting from the distribution of the Principal
Distribution Amount (but not the Extra Principal Distribution Amount) on such
Distribution Date, but prior to taking into account any Applied Realized Loss
Amounts on such Distribution Date.
"Overcollateralization Release Amount" means, with respect to any
Distribution Date on or after the Stepdown Date on which a Trigger Event is not
in effect, the lesser of (x) the Principal Remittance Amount for such
Distribution Date and (y) the excess, if any, of (i) the Overcollateralization
Amount for such Distribution Date, assuming that 100% of the Principal
Remittance Amount is applied as a principal payment on the Certificates on such
Distribution Date, over (ii) the Targeted Overcollateralization Amount for such
Distribution Date. With respect to any Distribution Date on which a Trigger
Event is in effect, the Overcollateralization Release Amount will be zero.
"Principal Distribution Amount" means as of any Distribution Date, the
sum of (i) the Principal Remittance Amount (minus the Overcollateralization
Release Amount, if any) and (ii) the Extra Principal Distribution Amount, if
any.
"Principal Remittance Amount" means, with respect to any Distribution
Date, to the extent of funds available therefor as described herein, the amount
equal to the sum (less certain amounts available for reimbursement of Advances
and Servicing Advances as described above under "Description of the
Certificates--Advances" and certain other reimbursable expenses pursuant to the
Pooling and Servicing Agreement) of the following amounts (without duplication)
with respect to the Mortgage Loans and the immediately preceding Collection
Period: (i) each payment of principal on a Mortgage Loan due during such
Collection Period and received by the Servicer on or prior to the related
Determination Date, including any Advances with respect thereto, (ii) all full
and partial principal prepayments received by the Servicer during the related
Prepayment Period, (iii) the liquidation proceeds (net of certain expenses)
allocable to principal actually collected by the Servicer during the related
Prepayment Period, (iv) the portion of the Purchase Price allocable to principal
of all repurchased Defective Mortgage Loans with respect to such Prepayment
Period and (v) any Substitution Shortfall Amounts received on or prior to the
previous Determination Date and not yet distributed, and (vi) on the
Distribution Date on which the Trust is to be terminated in accordance with the
Pooling and Servicing Agreement, that portion of the Termination Price in
respect of principal.
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"Re-Performing 60+ Day Delinquent Loan" means each Mortgage Loan with
respect to which, as of any date of determination, (x) any portion of a Monthly
Payment is, as of the last day of the prior Collection Period, two months or
more past due and (y) with respect to which the mortgagor has made three Monthly
Payments within the three calendar months preceding such date of determination.
To the extent that, as of any date of determination, more than 25% of the
Mortgage Loans (measured by aggregate principal balance) are Re-Performing 60+
Day Delinquent Loans, the Re-Performing 60+ Day Delinquent Loans constituting
such excess shall be deemed to be 60+ Day Delinquent Loans.
"Senior Enhancement Percentage" for any Distribution Date is the
percentage obtained by dividing (x) the sum of (i) the aggregate Certificate
Principal Balance of the Subordinated Certificates and (ii) the
Overcollateralization Amount, in each case before taking into account the
distribution of the Principal Distribution Amount on such Distribution Date by
(y) the Pool Balance as of the last day of the related Collection Period.
"Senior Specified Enhancement Percentage" on any date of determination
thereof means approximately 23.00%.
"60+ Day Delinquent Loan" means each Mortgage Loan with respect to
which any portion of a Monthly Payment is, as of the last day of the prior
Collection Period, two months or more past due, each Mortgage Loan in
foreclosure, all REO Property and each Mortgage Loan for which the mortgagor has
filed for bankruptcy after the Closing Date. Any Re-Performing 60+ Day
Delinquent Loan will not be considered to be a 60+ Day Delinquent Loan, unless
such Re-Performing 60+ Day Delinquent Loan constitutes the portion of
Re-Performing 60+ Day Delinquent Loans in excess of the percentage specified in
the definition of "Re-Performing 60+ Day Delinquent Loan" above.
"Stepdown Date" means the later to occur of (x) the earlier to occur of
(A) the Distribution Date in June 2004 and (B) the Distribution Date on which
the aggregate Certificate Principal Balance of the Class A Certificates is
reduced to zero, and (y) the first Distribution Date on which the Senior
Enhancement Percentage is greater than or equal to the Senior Specified
Enhancement Percentage.
"Targeted Overcollateralization Amount" means as of any Distribution
Date, (x) prior to the Stepdown Date, approximately 1.00% of the initial Pool
Balance and (y) on and after the Stepdown Date, the lesser of (i) approximately
1.00% of the initial Pool Balance and (ii) the greater of (A) approximately
2.00% of the Pool Balance as of the last day of the related Collection Period
and (B) 0.50% of the initial Pool Balance.
A "Trigger Event" has occurred on a Distribution Date if (i) the
six-month rolling average of 60+ Day Delinquent Loans equals or exceeds 45% of
the Senior Enhancement Percentage; provided, that if the Certificate Principal
Balance of the Senior Certificates has been reduced to zero, a Trigger Event
will have occurred if the six-month rolling average of 60+ Day Delinquent Loans
equals or exceeds 20% or (ii) the aggregate amount of Realized Losses incurred
since the Cut-off Date through the last day of the related Collection Period
divided by the initial Pool Balance exceeds the applicable percentages set forth
below with respect to such Distribution Date:
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Distribution Date Occurring In Percentage
------------------------------ ----------
June 2004 through May 2005 3.00%
June 2005 through May 2006 3.75%
June 2006 through May 2007 4.25%
June 2007 and thereafter 4.75%
Allocation of Losses
A "Realized Loss" is:
o as to any Liquidated Mortgage Loan, the unpaid Principal Balance
thereof plus accrued and unpaid interest thereon at the Mortgage
Interest Rate through the last day of the month of liquidation,
less the net proceeds from the liquidation of, and any insurance
proceeds from, such Mortgage Loan and the related Mortgaged
Property.
o as to any Mortgage Loan, a Deficient Valuation.
o as to any Mortgage Loan, a reduction in the Principal Balance
thereof resulting from a Servicer Modification.
A "Liquidated Mortgage Loan" is any defaulted Mortgage Loan as to which
the Servicer has determined that all amounts which it expects to recover from or
on account of such Mortgage Loan have been recovered.
A Realized Loss may result from the personal bankruptcy of a mortgagor
if the bankruptcy court establishes the value of the Mortgaged Property at an
amount less than the then outstanding Principal Balance of the Mortgage Loan
secured by such Mortgaged Property and reduces the secured debt to such value.
In such case, the Trust, as the holder of such Mortgage Loan, would become an
unsecured creditor to the extent of the difference between the outstanding
Principal Balance of such mortgage loan and such reduced secured debt (such
difference, a "Deficient Valuation").
If a Mortgage Loan is in default, or if default is reasonably
foreseeable, the Servicer may permit a modification of such Mortgage Loan to
reduce its Principal Balance and/or extend its term to a term not longer than
the latest maturity date of any other Mortgage Loan (any such modification, a
"Servicer Modification"). Any such principal reduction will constitute a
Realized Loss at the time of such reduction. An extension of the term will not
result in a Realized Loss unless coupled with a principal reduction.
Realized Losses will, in effect, be absorbed first by the Class X
Certificates (through the application of the Monthly Excess Interest Amount to
fund such deficiency, as well as through a reduction in the
Overcollateralization Amount).
If, after giving effect to the distribution of the Principal
Distribution Amount on any Distribution Date the aggregate Certificate Principal
Balance of the Offered Certificates exceeds the Pool Balance as of the end of
the related Collection Period, such excess will be allocated against the Class
B-2, Class B-1, Class M-2 and Class M-1 Certificates and, pro rata, the Class
A-1F, Class A-2F, Class A-3F and Class A-1A Certificates, in that order and
until the respective Certificate Principal Balances thereof are reduced to zero.
Any allocation of such excess in reduction of a Certificate Principal Balance is
referred to as an "Applied Realized Loss Amount." Any such reduction of a
Certificate Principal Balance will not be reversed or reinstated. However, on
future Distribution Dates, Certificateholders of the related class may receive
amounts in respect of prior reductions in the related Certificate Principal
Balances as described below. Such subsequent payments will be applied in the
reverse of the order set forth above.
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Application of Monthly Excess Cashflow Amounts
The weighted average Net Mortgage Interest Rate for the Mortgage Loans
is generally expected to be higher than the weighted average of the Pass-Through
Rates on the Offered Certificates, thus generating certain excess interest
collections which, in the absence of losses, will not be necessary to fund
interest distributions on the Certificates. This excess interest for a
Collection Period, together with interest on the Overcollateralization Amount
itself, is the "Monthly Excess Interest Amount."
The "Net Mortgage Interest Rate" for each Mortgage Loan is the
applicable Mortgage Interest Rate less the sum of (i) the Servicing Fee Rate,
(ii) the rate at which the Trustee Fee accrues and (iii) the rate at which the
PMI Premium, if any, is calculated.
The required level of overcollateralization for any Distribution Date
is the Targeted Overcollateralization Amount. The Targeted Overcollateralization
Amount is initially $1,878,409.11.
If Realized Losses not covered by an application of the Monthly Excess
Interest Amount occur, such Realized Losses will result in an
Overcollateralization Deficiency (since it will reduce the Pool Balance without
giving rise to a corresponding reduction of the aggregate Certificate Principal
Balance of the Certificates). The cashflow priorities of the Trust Fund require
that, in this situation, an Extra Principal Distribution Amount be paid (subject
to the availability of any Monthly Excess Cashflow Amount in subsequent months)
for the purpose of re-establishing the Overcollateralization Amount at the
then-required Targeted Overcollateralization Amount.
On and after the Stepdown Date and assuming that a Trigger Event is not
in effect, the Targeted Overcollateralization Amount may be permitted to
decrease or "step-down." If the Targeted Overcollateralization Amount is
permitted to "step-down" on a Distribution Date, the Pooling and Servicing
Agreement permits a portion of the Principal Remittance Amount for such
Distribution Date not to be passed through as a distribution of principal on the
Offered Certificates on such Distribution Date. This has the effect of
decelerating the amortization of the Certificates relative to the Pool Balance,
thereby reducing the actual level of the Overcollateralization Amount to the
new, lower Targeted Overcollateralization Amount. This portion of the Principal
Remittance Amount not distributed as principal on the Certificates therefore
releases overcollateralization from the Trust Fund. The amount of such releases
are the "Overcollateralization Release Amounts."
On any Distribution Date, the sum of the Monthly Excess Interest
Amount, the Overcollateralization Release Amount and any portion of the
Principal Distribution Amount (without duplication) remaining after principal
distributions on the Offered Certificates is the "Monthly Excess Cashflow
Amount", which is required to be applied in the following order of priority (the
"Monthly Excess Cashflow Allocation") on such Distribution Date:
i. to fund any remaining applicable Accrued Certificate Interest for such
Distribution Date, pro rata, among the Class A-IO, Class A-1F, Class
A-2F, Class A-3F and Class A-1A Certificates;
ii. to fund the remaining Interest Carry Forward Amounts for the classes of
Class A Certificates, if any, pro rata, among the Class A-IO, Class
A-1F, Class A-2F, Class A-3F and Class A-1A Certificates;
iii. to fund the Extra Principal Distribution Amount for such Distribution
Date;
iv. to fund any remaining Accrued Certificate Interest for such Distribution
Date for the Class M-1 Certificates;
v. to fund the Interest Carry Forward Amount for the Class M-1
Certificates, if any;
vi. to fund the Class M-1 Realized Loss Amortization Amount for such
Distribution Date;
vii. to fund any remaining Accrued Certificate Interest for such Distribution
Date for the Class M-2 Certificates;
viii. to fund the Interest Carry Forward Amount for the Class M-2
Certificates, if any;
ix. to fund the Class M-2 Realized Loss Amortization Amount for such
Distribution Date;
x. to fund any remaining Accrued Certificate Interest for such Distribution
Date for the Class B-1 Certificates;
S-71
xi. to fund the Interest Carry Forward Amount for the Class B-1 Certificates,
if any;
xii. to fund the Class B-1 Realized Loss Amortization Amount for such
Distribution Date;
xiii. to fund any remaining Accrued Certificate Interest for such Distribution
Date for the Class B-2 Certificates;
xiv. to fund the Interest Carry Forward Amount for the Class B-2
Certificates, if any;
xv. to fund the Class B-2 Realized Loss Amortization Amount for such
Distribution Date;
xvi. to fund the amount of any LIBOR Carryover Amount;
xvii. to pay any Special Servicing Fees for such Distribution Date or which
remain unpaid from any previous Distribution Date; and
xviii. to fund distributions to the Holders of the Class N, Class X and Class R
Certificates in the amounts specified in the Pooling and Servicing
Agreement.
For purposes of the foregoing, the following terms will have the
respective meanings set forth below.
"Class M-1 Applied Realized Loss Amount" means, as to the Class M-1
Certificates and as of any Distribution Date, the lesser of (x) the Certificate
Principal Balance thereof (after taking into account the distribution of the
Principal Distribution Amount on such Distribution Date, but prior to the
application of the Class M-1 Applied Realized Loss Amount, if any, on such
Distribution Date) and (y) the excess of (i) the Applied Realized Loss Amount as
of such Distribution Date over (ii) the sum of the Class M-2 Applied Realized
Loss Amount, the Class B-1 Applied Realized Loss Amount and the Class B-2
Applied Realized Loss Amount, in each case as of such Distribution Date.
"Class M-1 Realized Loss Amortization Amount" means, as to the Class
M-1 Certificates and as of any Distribution Date, the lesser of (x) the Unpaid
Realized Loss Amount for the Class M-1 Certificates as of such Distribution Date
and (y) the excess of (i) the Monthly Excess Cashflow Amount over (ii) the sum
of the amounts described in clauses (i) through (v) of the Monthly Excess
Cashflow Allocation for such Distribution Date.
"Class M-2 Applied Realized Loss Amount" means, as to the Class M-2
Certificates and as of any Distribution Date, the lesser of (x) the Certificate
Principal Balance thereof (after taking into account the distribution of the
Principal Distribution Amount on such Distribution Date, but prior to the
application of the Class M-2 Applied Realized Loss Amount, if any, on such
Distribution Date) and (y) the excess of (i) the Applied Realized Loss Amount as
of such Distribution Date over (ii) the sum of the Class B-1 Applied Realized
Loss Amount and the Class B-2 Applied Realized Loss Amount, in each case as of
such Distribution Date.
"Class M-2 Realized Loss Amortization Amount" means, as to the Class
M-2 Certificates and as of any Distribution Date, the lesser of (x) the Unpaid
Realized Loss Amount for the Class M-2 Certificates as of such Distribution Date
and (y) the excess of (i) the Monthly Excess Cashflow Amount over (ii) the sum
of the amounts described in clauses (i) through (viii) of the Monthly Excess
Cashflow Allocation for such Distribution Date.
"Class B-1 Applied Realized Loss Amount" means, as to the Class B-1
Certificates and as of any Distribution Date, the lesser of (x) the Certificate
Principal Balance thereof (after taking into account the distribution of the
Principal Distribution Amount on such Distribution Date, but prior to the
application of the Class B-1 Applied Realized Loss Amount, if any, on such
Distribution Date) and (y) the excess of (i) the related Applied Realized Loss
Amount as of such Distribution Date over (ii) the Class B-2 Applied Realized
Loss Amount as of such Distribution Date.
"Class B-1 Realized Loss Amortization Amount" means, as to the Class
B-1 Certificates and as of any Distribution Date, the lesser of (x) the Unpaid
Realized Loss Amount for the Class B-1 Certificates as of such Distribution Date
and (y) the excess of (i) the Monthly Excess Cashflow Amount over (ii) the sum
of the amounts described in clauses (i) through (xi) of the Monthly Excess
Cashflow Allocation for such Distribution Date.
"Class B-2 Applied Realized Loss Amount" means, as to the Class B-2
Certificates and as of any Distribution Date, the lesser of (x) the Certificate
Principal Balance thereof (after taking into account the distribution of the
Principal Distribution Amount on such Distribution Date, but prior to the
application of the Class B-2 Applied Realized Loss Amount, if any, on such
Distribution Date) and (y) the Applied Realized Loss Amount as of such
Distribution Date.
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"Class B-2 Realized Loss Amortization Amount" means, as to the Class
B-2 Certificates and as of any Distribution Date, the lesser of (x) the Unpaid
Realized Loss Amount for the Class B-2 Certificates as of such Distribution Date
and (y) the excess of (i) the Monthly Excess Cashflow Amount over (ii) the sum
of the amounts described in clauses (i) through (xiv) of the Monthly Excess
Cashflow Allocation for such Distribution Date.
"Realized Loss Amortization Amount" means each of the Class M-1
Realized Loss Amortization Amount, the Class M-2 Realized Loss Amortization
Amount, the Class B-1 Realized Loss Amortization Amount and the Class B-2
Realized Loss Amortization Amount.
"Unpaid Realized Loss Amount" means for any class of Subordinated
Certificates and as to any Distribution Date, the excess of (x) the cumulative
amount of related Applied Realized Loss Amounts with respect to such class for
all prior Distribution Dates over (y) the cumulative amount of related Realized
Loss Amortization Amounts with respect to such class for all prior Distribution
Dates.
Pass-Through Rates
Interest for each Distribution Date will accrue on the Offered
Certificates (other than the Class A-1A and Class A-IO Certificates) during the
related Interest Accrual Period at a rate equal to the lesser of (i) the
applicable per annum rate for such class as set forth on the cover page of this
Prospectus Supplement (each such rate, a "Pass-Through Rate") and (ii) the Pool
Cap for such Distribution Date.
Interest for each Distribution Date will accrue on the Class A-1F,
Class A-2F and Class A-3F Certificates during the related Interest Accrual
Period at a rate equal to the lesser of (i) 5.102% per annum, 5.974% per annum
and 7.122% per annum, respectively, or on each Distribution Date following the
Optional Termination Date in the case of the Class A-2F and Class A-3F
Certificates, 6.474% per annum and 7.622% per annum, respectively (each such
rate, a "Pass-Through Rate") and (ii) the Pool Cap for such Distribution Date.
Interest for each Distribution Date will accrue on the Class A-IO
Certificates during the related Interest Accrual Period at a rate equal to (i)
during the first twenty Interest Accrual Periods following the Closing Date,
2.00% and thereafter (ii) 0%. As a result no distributions will be made on the
Class A-IO Certificates after the January 2003 Distribution Date.
Interest for each Distribution Date will accrue on the Class A-1A
Certificates during the related Interest Accrual Period at a rate equal to the
lesser of (i) the Pass-Through Rate for the Class A-1A Certificates for such
Distribution Date and (ii) the Class A-1A Cap for such Distribution Date.
With respect to the Offered Certificates, other than the Class A-1A
Certificates, interest in respect of any Distribution Date will accrue during
the related Interest Accrual Period on the basis of a 360-day year consisting of
twelve 30-day months. With respect to the Class A-1A Certificates, interest in
respect of any Distribution Date will accrue during the related Interest Accrual
Period on the basis of a 360-day year and the actual number of days elapsed.
The "Pass-Through Rate" for the Class A-1A Certificates for each
Distribution Date will be the sum of LIBOR as of the related LIBOR Determination
Date plus the Class A-1A Certificate Margin. The "Class A-1A Certificate Margin"
on each Distribution Date on or prior to the Optional Termination Date will
equal 0.290% per annum and on each Distribution Date following the Optional
Termination Date, will equal 0.580% per annum.
The "Pool Cap" for any Distribution Date will equal the average of the
Net Mortgage Interest Rates (adjusted, for purposes of the calculation
applicable to the Class A-1A Certificates, to an effective rate reflecting the
calculation of interest on the basis of the actual number of days elapsed during
the related Interest Accrual Period and a 360-day year), weighted on the basis
of the Mortgage Loan balances as of the first day of the related Collection
Period, less a fraction (expressed as a percentage) the numerator of which the
amount of Accrued Certificate Interest paid with respect to the Class A-IO
Certificates on such Distribution Date and the denominator of which is the Pool
Balance.
S-73
The "Class A-1A Cap" for any Distribution Date will equal the sum of
(i) the Pool Cap and (ii) a fraction (expressed as a percentage) (A) the
numerator of which is the lesser of (1) the product of the excess, if any, of
the Group 2 Net WAC over the Pool Cap and the Certificate Principal Balance of
the Class A-1A Certificates (prior to the distribution of any principal on such
Distribution Date) and (2) the product of the excess, if any, of the Pool Cap
over the weighted average of the Pass-Through Rates of the Certificates (other
than the Class A-1A and the Class X/N Certificates) (weighted on the basis of
the Certificate Principal Balance prior to the distribution of any principal on
such Distribution Date) and the aggregate Certificate Principal Balance of the
Certificates (other than the Class A-1A and the Class X/N Certificates) and (B)
the denominator of which is the Certificate Principal Balance of the Class A-1A
Certificates.
The "Group 2 Net WAC" for any Distribution Date will equal the average
of the Net Mortgage Interest Rates of the Mortgage Loans in Loan Group 2
(adjusted, for purposes of the calculation applicable to the Class A-1A
Certificates, to an effective rate reflecting the calculation of interest on the
basis of the actual number of days elapsed during the related Interest Accrual
Period and a 360-day year), weighted on the basis of the Mortgage Loan balances
as of the first day of the related Collection Period.
If on any Distribution Date, the Accrued Certificate Interest for the
Class A-1A Certificates is based on the Class A-1A Cap, the excess of (i) the
amount of interest the Class A-1A Certificates would have been entitled to
receive on such Distribution Date based on its applicable Pass-Through Rate,
over (ii) the amount of interest the Class A-1A Certificates received on such
Distribution Date based on the Class A-1A Cap, together with the unpaid portion
of any such excess from prior Distribution Dates (and interest accrued thereon
at the then applicable Pass-Through Rate on the Class A-1A Certificates) will be
the "LIBOR Carryover Amount." Any LIBOR Carryover Amount will be paid on future
Distribution Dates from amounts that would otherwise be distributed on the Class
X Certificates.
Calculation of LIBOR
LIBOR for the first Distribution Date will be determined on the second
business day preceding the Closing Date and for each subsequent Distribution
Date will be determined on the second business day prior to the immediately
preceding Distribution Date (each such date, a "LIBOR Determination Date"). With
respect to each Distribution Date, "LIBOR" will equal the interbank offered rate
for one-month United States dollar deposits in the London market as quoted on
Telerate Page 3750 as of 11:00 A.M., London time, on the related LIBOR
Determination Date. "Telerate Page 3750" means the display designated as page
3750 on the Bridge Telerate (or such other page as may replace page 3750 on that
service for the purpose of displaying London interbank offered rates of major
banks). If such rate does not appear on such page (or such other page as may
replace that page on that service, or if such service is no longer offered, such
other service for displaying LIBOR or comparable rates as may be selected by the
Trustee after consultation with the Servicer), the rate will be the Reference
Bank Rate. The "Reference Bank Rate" will be determined on the basis of the
rates at which deposits in U.S. Dollars are offered by the reference banks
(which shall be three major banks that are engaged in transactions in the London
interbank market, selected by the Trustee after consultation with the Servicer)
as of 11:00 A.M., London time, on the related LIBOR Determination Date to prime
banks in the London interbank market for a period of one month in amounts
approximately equal to the Certificate Principal Balance of the A-1A
Certificates. The Trustee will request the principal London office of each of
the reference banks to provide a quotation of its rate. If at least two such
quotations are provided, the rate will be the arithmetic mean of the quotations.
If on such date fewer than two quotations are provided as requested, the rate
will be the arithmetic mean of the rates quoted by one or more major banks in
New York City, selected by the Trustee after consultation with the Servicer, as
of 11:00 A.M., New York City time, on such date for loans in U.S. Dollars to
leading European banks for a period of one month in amounts approximately equal
to the Certificate Principal Balance of the Class A-1A Certificates. If no such
quotations can be obtained, the rate will be LIBOR for the prior Distribution
Date.
S-74
The establishment of LIBOR on each LIBOR Determination Date by the
Trustee and the Trustee's calculation of the rate of interest applicable to the
Class A-1A Certificates for the related Interest Accrual Period shall (in the
absence of manifest error) be final and binding.
Advances
Subject to the following limitations, the Servicer will be obligated to
advance or cause to be advanced at least one Business Day prior to each
Distribution Date its own funds, or funds in the Collection Account that are not
included in the Available Funds for such Distribution Date, in an amount equal
to the aggregate of all payments of principal and interest, net of the Servicing
Fee and PMI Premium that were due during the related Collection Period on the
Actuarial Mortgage Loans, other than Balloon Payments, and that were not
received by the related Determination Date and, with respect to Balloon Loans
which are Actuarial Mortgage Loans, with respect to which the Balloon Payment is
not made when due, an assumed monthly payment that would have been due on the
related Due Date based on the original principal amortization schedule for such
Balloon Loan (any such advance, an "Advance").
The Servicer will not make any Advances of principal or interest with
respect to Simple Interest Mortgage Loans or REO Properties.
Advances with respect to Actuarial Mortgage Loans are required to be
made only to the extent the Servicer deems them to be recoverable from related
late collections, insurance proceeds or liquidation proceeds. The purpose of
making such Advances is to maintain a regular cash flow to the
Certificateholders, rather than to guarantee or insure against losses. The
Servicer will not be required, however, to make any Advances with respect to
reductions in the amount of the Monthly Payments on the Mortgage Loans due to
bankruptcy proceedings or the application of the Soldiers' and Sailors' Civil
Relief Act of 1940, as amended (the "Relief Act"). Subject to the recoverability
standard above, the Servicer's obligation to make Advances as to any Actuarial
Mortgage Loan will continue until the earlier of such time as the Trust acquires
title to the related Mortgaged Property or such Mortgage Loan is paid in full by
the mortgagor or disposed of by the Trust.
All Advances will be reimbursable to the Servicer from late
collections, insurance proceeds and liquidation proceeds from the Mortgage Loan
as to which the unreimbursed Advance was made. In addition, any Advances
previously made in respect of any Mortgage Loan that are deemed by the Servicer
to be nonrecoverable from related late collections, insurance proceeds or
liquidation proceeds may be reimbursed to the Servicer out of any funds in the
distribution account prior to the distributions on the Certificates. In the
event that the Servicer fails in its obligation to make any required Advance,
the Trustee or other successor servicer (which may be the Trustee) will be
obligated to make the Advance, in each case, to the extent required in the
Pooling and Servicing Agreement.
Reports to Certificateholders
On each Distribution Date, the Trustee will provide or make available
to each holder of a Certificate a statement (based on information received from
the Servicer) setting forth, among other things, the information set forth in
the prospectus under "Description of the Securities--Reports to
Securityholders." The Trustee will make such statement (and, at its option, any
additional files containing the same information in an alternative format)
available each month to via the Trustee's internet website. The Trustee's
internet website shall initially be located at www.usbank.com/abs. Assistance in
using the website can be obtained by calling the Trustee's customer service desk
at (612) 973-5800. Parties that are unable to use the above distribution options
are entitled to have a paper copy mailed to them via first class mail by calling
the customer service desk and indicating such. The Trustee shall have the right
to change the way such statements are distributed in order to make such
distribution more convenient and/or more accessible to the above parties and the
Trustee shall provide timely and adequate notification to all above parties
regarding any such changes.
In addition, within a reasonable period of time after the end of each
calendar year, the Trustee will prepare and deliver to each holder of a
Certificate of record during the previous calendar year a statement containing
information necessary to enable Certificateholders to prepare their tax returns.
Such statements will not have been examined and reported upon by an independent
public accountant.
S-75
THE SELLER
Credit-Based Asset Servicing and Securitization LLC is a Delaware
limited liability company with its principal place of business in New York, New
York. The information set forth in the following paragraphs has been provided by
the Seller and neither the Depositor nor any other party makes any
representation as to the accuracy or completeness of such information.
The Seller was established in July 1996 as a venture of Mortgage
Guaranty Insurance Corporation ("MGIC"), Enhance Financial Services Group, Inc.
("EFSG") and certain members of management of the Seller. Each of MGIC and EFSG
has approximately a 46% interest in the Seller with the remainder owned by
management of the Seller. On February 28, 2001, Radian Group 1nc. ("Radian")
acquired EFSG, including EFSG's 46% interest in the Seller. Radian and MGIC are
publicly traded companies which file such periodic reports with the Securities
and Exchange Commission (the "Commission") as are required by the Securities
Exchange Act of 1934, as amended, and the rules and regulations of the
Commission thereunder, as interpreted by the staff of the Commission thereunder.
At March 31, 2001, the Seller had approximately $845.3 million in
assets, approximately $602.0 million in liabilities and approximately $243.3
million in equity.
The Seller's principal business is the purchasing of performing,
sub-performing and non-performing residential mortgage loans from banks and
other financial institutions and individuals and mortgage-related securities,
including non-investment grade subordinated securities, for investment and
securitization. Substantially all of the mortgage loans the Seller owns are
serviced by its wholly-owned subsidiary, Litton Loan Servicing LP. The Seller
does not originate mortgages. The Seller is a HUD-approved investing mortgagee.
POOLING AND SERVICING AGREEMENT
General
The certificates will be issued under the Pooling and Servicing
Agreement (the "Pooling and Servicing Agreement"), dated as of May 1, 2001 among
the Depositor, the Seller, the Servicer and the Trustee, a form of which is
filed as an exhibit to the registration statement. A Current Report on Form 8-K
relating to the certificates containing a copy of the Pooling and Servicing
Agreement as executed will be filed by the Depositor with the Securities and
Exchange Commission ("SEC") within fifteen days of the initial issuance of the
certificates. The trust fund created under the Pooling and Servicing Agreement
will consist of (i) all of the Depositor's right, title and interest in the
Mortgage Loans, the related mortgage notes, mortgages and other related
documents; (ii) all payments on or collections in respect of the Mortgage Loans
due after the Cut-off Date, together with any proceeds of the Mortgage Loans;
(iii) any Mortgaged Properties acquired on behalf of certificateholders by
foreclosure or by deed in lieu of foreclosure, and any revenues received on
these mortgaged properties; (iv) the rights of the Trustee under all insurance
policies required to be maintained under the Pooling and Servicing Agreement;
and (v) the rights of the Depositor under the Mortgage Loan Purchase Agreement.
Reference is made to the prospectus for important information in addition to
that set forth in this prospectus supplement regarding the trust fund, the terms
and conditions of the Pooling and Servicing Agreement and the Offered
Certificates. The Depositor will provide to a prospective or actual
certificateholder without charge, on written request, a copy, without exhibits,
of the Pooling and Servicing Agreement. Requests should be addressed to 6707
Fairview Road, Suite D, Charlotte, North Carolina 28210.
Assignment of the Mortgage Loans
On the Closing Date, the Depositor will transfer to the trust all of
its right, title and interest in and to each Mortgage Loan, the related mortgage
note, mortgage, assignment of mortgage in recordable form to the Trustee and
other related documents (collectively, the "Related Documents"), including all
scheduled payments with respect to each such Mortgage Loan due after the Cut-off
Date. The Trustee, concurrently with such transfer, will deliver the
certificates to the Depositor. Each Mortgage Loan transferred to the trust will
be identified on a schedule (the "Mortgage Loan Schedule") delivered to the
Trustee pursuant to the Pooling and Servicing Agreement. The Mortgage Loan
Schedule will include information such as the principal balance of each Mortgage
Loan as of the Cut-off Date, its Mortgage Rate as well as other information with
respect to each Mortgage Loan.
S-76
The Pooling and Servicing Agreement will require that, within the time
period specified therein, the Depositor will deliver or cause to be delivered to
the Trustee (or a custodian, as the Trustee's agent for such purpose) the
mortgage notes endorsed to the Trustee on behalf of the certificateholders and
the Related Documents. In lieu of delivery of original mortgages or mortgage
notes, if such original is not available or lost, the Depositor may deliver or
cause to be delivered true and correct copies thereof, or, with respect to a
lost mortgage note, a lost note affidavit. The assignments of mortgage are
generally required to be recorded by or on behalf of the Depositor in the
appropriate offices for real property records.
On or prior to the Closing Date, the Trustee will review the Mortgage
Loans and the Related Documents pursuant to the Pooling and Servicing Agreement
and if any Mortgage Loan or Related Document is found to be defective in any
material respect and such defect is not cured within 90 days following
notification thereof to the Seller by the Trustee, the Seller will be obligated
to either (i) substitute for such Mortgage Loan a Qualified Substitute Mortgage
Loan; however, such substitution is permitted only within two years of the
Closing Date and may not be made unless an opinion of counsel is provided to the
effect that such substitution will not disqualify any of the REMICs (as defined
in the Pooling and Servicing Agreement) as a REMIC or result in a prohibited
transaction tax under the Code or (ii) purchase such Mortgage Loan at a price
(the "Purchase Price") equal to the outstanding principal balance of such
Mortgage Loan as of the date of purchase, plus all accrued and unpaid interest
thereon, computed at the Mortgage Rate through the end of the calendar month in
which the purchase is effected, plus the amount of any unreimbursed Advances and
servicing advances made by the Servicer. The Purchase Price will be required to
be remitted to the Servicer for deposit in the Collection Account (as defined
herein) on or prior to the next succeeding Determination Date after such
obligation arises. The obligation of the Seller to repurchase or substitute for
a Deleted Mortgage Loan (as defined herein) is the sole remedy regarding any
defects in the Mortgage Loans and Related Documents available to the
certificateholders.
In connection with the substitution of a Qualified Substitute Mortgage
Loan, the Seller will be required to remit to the Servicer for deposit in the
Collection Account on or prior to the next succeeding Determination Date after
such obligation arises an amount (the "Substitution Shortfall Amount") equal to
the excess of the principal balance of the related Deleted Mortgage Loan over
the principal balance of such Qualified Substitute Mortgage Loan.
A "Qualified Substitute Mortgage Loan" is a mortgage loan substituted
for a Deleted Mortgage Loan which must, on the date of such substitution, (i)
have an outstanding principal balance (or in the case of a substitution of more
than one Mortgage Loan for a Deleted Mortgage Loan, an aggregate principal
balance), not in excess of the principal balance of the Deleted Mortgage Loan;
(ii) have a Mortgage Rate not less than the Mortgage Rate of the Deleted
Mortgage Loan and not more than 1% in excess of the Mortgage Rate of such
Deleted Mortgage Loan; (iii) have a Maximum Mortgage Rate and Minimum Mortgage
Rate not less than the respective rate for the Deleted Mortgage Loan and have a
Gross Margin equal to or greater than the Deleted Mortgage Loan; (iv) have the
same Due Date as the Deleted Mortgage Loan; (v) have a remaining term to
maturity not more than one year earlier and not later than the remaining term to
maturity of the Deleted Mortgage Loan; (vi) comply with each representation and
warranty as to the Mortgage Loans set forth in the Mortgage Loan Purchase
Agreement (deemed to be made as of the date of substitution); (vii) be of the
same or better credit quality as the Mortgage Loan being replaced and (viii)
satisfy certain other conditions specified in the Pooling and Servicing
Agreement.
The Seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
Trustee with respect to each Mortgage Loan. In addition, the Seller will
represent and warrant, as of the Closing Date, that, among other things: (i) at
the time of transfer to the Depositor, the Seller has transferred or assigned
all of its right, title and interest in each Mortgage Loan and the Related
Documents, free of any lien, (ii) each Mortgage Loan complied, at the time of
origination, in all material respects with applicable state and federal laws,
(iii) the Mortgage Loans are not subject to the requirements of the Home
Ownership and Equity Protection Act of 1994 (the "Homeownership Act"); (iv) no
proceeds from any Mortgage Loan were used to purchase single premium credit
insurance policies as part of the origination of, or as a condition to closing,
such Mortgage Loan and (v) no Mortgage Loan has a Prepayment Charge longer than
five years after its date of origination. In addition, the Servicer will
represent that it will accurately and fully report its mortgagor credit files to
each of the credit repositories in a timely manner. Upon discovery of a breach
of any such representation and warranty which materially and adversely affects
the interests of the certificateholders in the related Mortgage Loan and Related
Documents, the Seller (or the Servicer, in the event of a breach of the
Servicer's representation) will have a period of 90 days after the earlier of
discovery or receipt of written notice of the breach to effect a cure. If the
breach cannot be cured within the 90-day period, the Seller or the Servicer will
be obligated to (i) substitute for such Deleted Mortgage Loan a Qualified
Substitute Mortgage Loan or (ii) purchase such Deleted Mortgage Loan from the
trust. The same procedure and limitations that are set forth above for the
substitution or purchase of Deleted Mortgage Loans as a result of deficient
documentation relating thereto will apply to the substitution or purchase of a
Deleted Mortgage Loan as a result of a breach of a representation or warranty in
the Mortgage Loan Purchase Agreement that materially and adversely affects the
interests of the certificateholders.
S-77
Mortgage Loans required to be transferred to the Seller as described in
the preceding paragraphs are referred to as "Deleted Mortgage Loans."
Payments on Mortgage Loans; Deposits to Collection Account and Distribution
Account
The Servicer shall establish and maintain or cause to be maintained a
separate trust account (the "Collection Account") for the benefit of the
certificateholders. The Collection Account will be an Eligible Account (as
defined in the Pooling and Servicing Agreement). Upon receipt by the Servicer of
amounts in respect of the Mortgage Loans (excluding amounts representing the
Servicing Fee or other servicing compensation, reimbursement for Advances and
servicing advances and insurance proceeds to be applied to the restoration or
repair of a Mortgaged Property or similar items), the Servicer will deposit such
amounts in the Collection Account. Amounts so deposited may be invested in
Permitted Investments (as defined in the Pooling and Servicing Agreement)
maturing no later than one Business Day prior to the date on which the amount on
deposit therein is required to be deposited in the Distribution Account. The
Trustee will establish an account (the "Distribution Account") into which will
be deposited amounts withdrawn from the Collection Account for distribution to
certificateholders on a Distribution Date and payment of certain fees and
expenses of the trust. The Distribution Account will be an Eligible Account.
Amounts on deposit therein may be invested in Permitted Investments maturing on
or before the Business Day prior to the related Distribution Date unless such
Permitted Investments are invested in investments managed or advised by the
Trustee or an affiliate thereof, in which case such Permitted Investments may
mature on the related Distribution Date.
The Servicer
The information set forth in the following paragraphs has been provided
by the Servicer. None of the Depositor, the Seller, the Trustee, any Underwriter
or any of their respective affiliates has made or will make any representation
as to the accuracy or completeness of the information. Any obligation specified
to be performed by the master servicer in the prospectus is an obligation to be
performed by the Servicer with respect to the Mortgage Loans.
Litton Loan Servicing LP, a Delaware limited partnership and a
wholly-owned subsidiary of the Seller, will act as the servicer of the Mortgage
Loans pursuant to the Pooling and Servicing Agreement. The Servicer was formed
in December 1996.
The Servicer currently employs approximately 347 individuals. The main
office of the Servicer is located at 5373 W. Alabama, Houston, Texas 77056. The
Servicer is currently a Fannie Mae and Freddie Mac approved servicer and an
approved FHA and VA lender with a servicing portfolio in excess of $6.3 billion.
The Servicer specializes in servicing sub-performing mortgage loans and entering
into workouts with the related mortgagors. The Servicer is servicing
approximately 13 securitizations for the Seller and 36 securitizations for third
parties.
Fitch, Inc. ("Fitch") assigned the Servicer its RSS1 residential
special servicer rating on November 16, 1999. The rating is based on the
Servicer's ability to manage and liquidate nonperforming residential mortgage
loans and real estate owned assets. This RSS1 rating is the highest special
servicer rating attainable from Fitch which reflects the Servicer's
sophisticated proprietary default management technology, the financial strength
of its well-capitalized parent and its highly experienced management and staff.
S-78
In January 2001, Fitch assigned the Servicer its RPS1 primary servicer
rating for sub-prime and high loan-to-value ratio product. The RPS1 rating is
currently the highest subprime primary servicer rating attainable from Fitch for
any subprime servicer, which is based on the strength of the Servicer's loan
administration processes including new loan set-up procedures and related
technology, loan accounting/cash management and loan reporting. The RPS1 rating
for high loan-to-value ratio product is based, in part, on the Servicer's
intensive focus on early collection and loss mitigation.
Also in January 2001, Standard and Poor's Ratings Services, a division
of The McGraw-Hill Companies, Inc. ("S&P" and together with Fitch and Moody's
Investors Service, Inc ("Moody's"), the "Rating Agencies") raised the Servicer's
ranking from "Above Average" to "Strong" for both its residential special and
sub-prime servicing categories. The "Strong" rating is S&P's highest possible
rating for these categories. The rankings are based on the Servicer's
established history of servicing distressed assets for a diverse investor base,
technological improvements that have increased operational efficiencies,
superior management depth, and very good internal controls.
In June 2001, Moody's assigned the Servicer its top servicer quality
rating (SQ1) as a primary servicer of prime and subprime mortgage loans, second
liens and as a special servicer. The rating is based on the Servicer's
outstanding ability as a servicer and the stability of its servicing operations.
Delinquency and Foreclosure Experience. The following table sets forth
the delinquency and foreclosure experience of the mortgage loans the Servicer
serviced as of the dates indicated. The Servicer's portfolio of mortgage loans
may differ significantly from the Mortgage Loans in terms of mortgage rates,
principal balances, geographic distribution, types of properties and other
possibly relevant characteristics. There can be no assurance, and no
representation is made, that the delinquency and foreclosure experience with
respect to the Mortgage Loans will be similar to that reflected in the table
below, nor is any representation made as to the rate at which losses may be
experienced on liquidation of defaulted Mortgage Loans. The actual delinquency
experience on the Mortgage Loans will depend, among other things, upon the value
of the real estate securing such Mortgage Loans and the ability of the related
mortgagor to make required payments. It should be noted that the Servicer's
business emphasizes to a certain degree the acquisition of servicing rights with
respect to non-performing and subperforming mortgage loans and the Servicer has
been an active participant in the market for such servicing rights since 1997.
The acquisition of such servicing rights may have affected the delinquency and
foreclosure experience of the Servicer.
Delinquency and Foreclosure Experience(1)
As of March 31, 2001 As of December 31, 2000 As of December 31, 1999
-------------------------------- --------------------------------- ----------------------------------
% by % by % by
No. of Principal Principal No. of Principal Principal No. of Principal Principal
Loans Balance(2) Balance Loans Balance(2) Balance Loans Balance(2) Balance
----- ---------- ------- ----- ---------- ------- ----- ---------- -------
Current Loans....... 57,390 3,933,857,281 62.14% 49,371 $ 3,500,827,158 58.83% 37,105 $2,580,776,677 69.98%
Period of
Delinquency(3) 7,526 $ 561,609,871 8.87% 9,285 $ 653,499,039 10.98% 4,638 $ 323,122,291 8.76%
30 Days...........
60-89 Days........ 3,046 $ 226,844,333 3.58% 3,545 $ 248,529,128 4.18% 1,886 $ 133,339,006 3.62%
90 Days or More... 7,671 $ 474,204,399 7.49% 10,498 $ 664,349,263 11.16% 2,056 $ 127,745,979 3.46%
----- -------------- ------ ----- -------------- ------ ------ -------------- ------
Total Delinquency... 18,243 $1,262,658,603 19.94% 23,328 $1,566,368,430 26.32% 8,580 $ 584,207,276 15.84%
====== ============== ====== ====== ============== ====== ======= ============== ======
Foreclosures/
Bankruptcy(4)..... 12,374 $ 972,407,947 15.36% 9,686 $ 743,491,868 12.49% 5,503 $ 433,109,387 11.74%
Real Estate Owned... 2,452 $ 162,171,355 2.56% 2,135 $ 139,634,200 2.35% 1,264 $ 89,691,707 2.43%
----- -------------- ------ ----- -------------- ------ ------ -------------- ------
Total Portfolio..... 90,459 $6,331,095,186 100.00% 84,520 $5,950,321,656 100.00% 52,452 $3,687,785,047 100.00%
====== ============== ====== ====== ============== ====== ======= ============== ======
- ---------
(1) The table shows mortgage loans which were delinquent or for which
foreclosure proceedings had been instituted as of the date indicated.
(2) For the Real Estate Owned properties, the principal balance is at the time
of foreclosure.
(3) No mortgage loan is included in this section of the table as
delinquent until it is 30 days past due.
(4) Exclusive of the number of loans and principal balance shown in Period of
Delinquency.
It is unlikely that the delinquency experience of the Mortgage Loans
will correspond to the delinquency experience of the Servicer's mortgage
portfolio set forth in the foregoing table. The statistics shown above represent
the delinquency experience on the Mortgage Loans will depend on the results
obtained over the life of the Mortgage Pool. The Servicer does not have
significant historical delinquency, bankruptcy, foreclosure or default
experience that may be referred to for purposes of estimating the future
delinquency and loss experience of the Mortgage Loans. There can be no assurance
that the Mortgage Loans will perform consistently with the delinquency or
foreclosure experience described herein. 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 timely payment by mortgagors of scheduled payments of
principal and interest on the Mortgage Loans and, accordingly, the actual rates
of delinquencies and foreclosures with respect to the Mortgage Pool.
S-79
The Trustee
U.S. Bank National Association, a national banking association, will
act as trustee for the Certificates under the Pooling and Servicing Agreement.
The Trustee's offices for notices under the Pooling and Servicing Agreement are
located at 180 East Fifth Street, St. Paul, Minnesota 55101, and its telephone
number is (612) 973-5800.
The principal compensation to be paid to the Trustee in respect of its
obligations under the Pooling and Servicing Agreement will be equal to the
related portion of accrued interest at the Trustee Fee Rate of 0.012% per annum
on the Principal Balance of the Mortgage Loans (the "Trustee Fee"). The Pooling
and Servicing Agreement will provide that the Trustee and any director, officer,
employee or agent of the Trustee will be indemnified by the Trust and will be
held harmless against any loss, liability or expense (not including expenses,
disbursements and advances incurred or made by the Trustee, including the
compensation and the expenses and disbursements of its agents and counsel, in
the ordinary course of the Trustee's performance in accordance with the
provisions of the Pooling and Servicing Agreement), incurred by the Trustee in
connection with any pending or threatened claim or legal action arising out of
or in connection with the acceptance or administration of its obligations and
duties under the Pooling and Servicing Agreement, other than any loss, liability
or expense (i) for which the Trustee is indemnified by the Servicer under the
Pooling and Servicing Agreement, (ii) that constitutes a specific liability of
the Trustee under the Pooling and Servicing Agreement or (iii) incurred by
reason of willful misfeasance, bad faith or negligence in the performance of the
Trustee's duties under the Pooling and Servicing Agreement or as a result of a
breach, or by reason of reckless disregard, of the Trustee's obligations and
duties under the Pooling and Servicing Agreement.
Servicing and Other Compensation and Payment of Expenses
The principal compensation to be paid to the Servicer in respect of its
servicing activities for the certificates will be equal to accrued interest at a
rate (the "Servicing Fee Rate") of 0.50% per annum with respect to each Mortgage
Loan on the Principal Balance of each Mortgage Loan (the "Servicing Fee"). As
additional servicing compensation, the Servicer is entitled to retain all
assumption fees, late payment charges, and other miscellaneous servicing fees in
respect of the Mortgage Loans (with the exception of Prepayment Charges, which
will be distributed to the holders of the Class X/N Certificates), to the extent
collected from mortgagors, together with any interest or other income earned on
funds held in the collection account and any escrow accounts. The Servicer will
also be entitled to a "Special Servicing Fee" with respect to Mortgage Loans
which are delinquent 90 or more days and which are not Re-Performing Loans. The
Special Servicing Fee for each Mortgage Loan of this type will be equal to $150
for each month that the Mortgage Loan is delinquent, to a maximum of 18
consecutive months, and will be payable only to the extent of the available Net
Monthly Excess Cashflow and according to the priorities as described in this
prospectus supplement.
The Servicer is obligated to offset any Prepayment Interest Shortfall
on any Distribution Date, with Compensating Interest to the extent of one-half
of its Servicing Fee for each Distribution Date. The Servicer is obligated to
pay insurance premiums and other ongoing expenses associated with the Mortgage
Pool incurred by the Servicer in connection with its responsibilities under the
Pooling and Servicing Agreement and is entitled to reimbursement for these
expenses as provided in the Pooling and servicing agreement. See "Description of
the Agreements--Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements--Retained Interest; Servicing Compensation and
Payment of Expenses" in the prospectus for information regarding expenses
payable by the Servicer and "Federal Income Tax Consequences" in this prospectus
supplement regarding taxes payable by the Servicer.
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Events of Default
In addition to those events of default described under "Description of
the Agreements --Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements--Events of Default under the Agreement and
- --Rights Upon Events of Default under the Agreements" in the prospectus, upon
the occurrence of loss triggers with respect to the Mortgage Loans, the Servicer
may be removed as Servicer of the Mortgage Loans in accordance with the terms of
the Pooling and Servicing Agreement.
Any successor to the Servicer appointed under the Pooling and Servicing
Agreement must be a housing loan servicing institution, acceptable to each
rating agency, with a net worth at the time of the appointment of at least
$15,000,000. See "Description of the Agreements --Material Terms of the Pooling
and Servicing Agreements and Underlying Servicing Agreements--Events of Default
under the Agreement and --Rights Upon Event of Default under the Agreements" in
the prospectus.
Pledge and Assignment of Servicer's Rights
On the Closing Date, the Servicer will pledge and assign all of its
right, title and interest in, to and under the Pooling and Servicing Agreement
to First Union National Bank, as the representative of certain lenders. In the
event that an Event of Servicing Termination (as defined below) occurs, the
Trustee and the Depositor have agreed to the appointment of First Union National
Bank or its designee as the successor servicer, provided that at the time of
such appointment First Union National Bank or such designee meets the
requirements of a successor servicer described in the Pooling and Servicing
Agreement (including being acceptable to the Rating Agencies) and that First
Union National Bank or such designee agrees to be subject to the terms of the
Pooling and Servicing Agreement.
Voting Rights
With respect to any date of determination, the percentage of all the
Voting Rights allocated among holders of the Certificates (other than the Class
N, Class X and Class R Certificates) will be 98% and will be allocated among the
classes of such Certificates in the proportion that the aggregate Certificate
Principal Balance of all the Certificates of such class then outstanding bear to
the aggregate Certificate Principal Balance of all Certificates then
outstanding. With respect to any date of determination, the percentage of all
the Voting Rights allocated among holders of the Class N and Class X
Certificates will be 2%. The Voting Rights allocated to a class of Certificates
will be allocated among all holders of each such class in proportion to the
outstanding certificate balances (or Percentage Interest) of such Certificates.
The Class A-IO Certificates and the Class R Certificates will not have any
Voting Rights.
Termination
The circumstances under which the obligations created by the Pooling
and Servicing Agreement will terminate in respect of the Certificates are
described in "Description of the Securities--Termination" in the prospectus. The
Servicer (or an affiliate of the Servicer) will have the right, subject to
certain conditions specified in the Pooling and Servicing Agreement, to purchase
all remaining Mortgage Loans and any properties acquired in respect thereof and
thereby effect early retirement of the certificates on any Distribution Date
following the Collection Period during which the aggregate principal balance of
the Mortgage Loans and properties acquired in respect thereof remaining in the
trust fund at the time of purchase is reduced to less than 10% of the aggregate
principal balance of the Mortgage Loans as of the Cut-off Date. In the event the
Servicer (or an affiliate of the Servicer) exercises the option, the purchase
price payable in connection with the option will be equal to the greater of par
or the fair market value of the Mortgage Loans and such properties, plus accrued
interest for each Mortgage Loan at the related Mortgage Rate to but not
including the first day of the month in which the repurchase price is
distributed, net of any amounts due to the Servicer for unpaid Servicing Fees
and any unreimbursed advances. In the event the Servicer (or an affiliate of the
Servicer) exercises this option, the portion of the purchase price allocable to
the Offered Certificates will be, to the extent of available funds, (i) 100% of
the then outstanding Certificate Principal Balance of the Offered Certificates,
plus (ii) one month's interest on the then outstanding Certificate Principal
Balance or Notional Amount of the Offered Certificates at the then applicable
Pass-Through Rate for the class, plus (iii) any previously accrued but unpaid
interest thereon to which the holders of the Offered Certificates are entitled,
together with the amount of any LIBOR Carryover Amounts, plus (iv) in the case
of the Subordinated Certificates, any previously unpaid Allocated Realized Loss
Amount. The holders of the Residual Certificates shall pledge any amount
received in a termination in excess of par to the holders of the Class X/N
Certificates. In no event will the trust created by the Pooling and Servicing
Agreement continue beyond the expiration of 21 years from the death of the
survivor of the persons named in the Pooling and Servicing Agreement. See
"Description of the Securities--Termination" in the prospectus.
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Optional Purchase of Defaulted Loans
As to any Mortgage Loan which is delinquent in payment by 120 days or
more, the Servicer (or an affiliate of the Servicer) may, at its option but
subject to certain conditions specified in the Pooling and Servicing Agreement,
purchase such Mortgage Loan at a price equal to 100% of the Principal Balance
thereof plus accrued interest thereon at the applicable Mortgage Interest Rate
(net of the Servicing Fee Rate), from the date through which interest was last
paid by the related mortgagor or advanced to the first day of the month in which
such amount is to be distributed.
FEDERAL INCOME TAX CONSEQUENCES
The Pooling and Servicing Agreement provides that the Trust Fund will
comprise multiple REMICs organized in a tiered REMIC structure consisting of one
or more Lower Tier REMICs and one or more Upper Tier REMICs. Each Lower Tier
REMIC will issue uncertificated regular interests and those interests will be
held entirely by a REMIC above it in the tiered structure. Each of the Lower
Tier REMICs and Upper Tier REMICs will designate a single class of interests as
the residual interest in that REMIC. Elections will be made to treat each Lower
Tier REMIC and Upper Tier REMIC as a REMIC for federal income tax purposes.
Except to the extent described in the next paragraph, each class of Offered
Certificates will represent beneficial ownership of the corresponding class of
regular interests issued by the applicable Upper Tier REMIC. The Trust Fund will
also include the Interest Rate Cap Arrangements, as defined below.
The Offered Certificates will represent beneficial ownership of the
corresponding class of regular interests issued by the applicable Upper Tier
REMIC and in the case of the Class A-1A Certificates, the right to receive
amounts in excess of the Pool Cap (including LIBOR Carryover Amounts). Holders
of the Class A-1A Certificates must allocate their basis between their regular
interest and their right to receive such excess amount payments as set forth
below under "--Taxation of Interest Rate Cap Arrangements."
Upon the issuance of the Offered Certificates, Sidley Austin Brown &
Wood LLP ("Tax Counsel") will deliver its opinion to the effect that, assuming
compliance with the Pooling and Servicing Agreement, for federal income tax
purposes, each Lower Tier REMIC and Upper Tier REMIC will qualify as a REMIC
within the meaning of Section 860D of the Internal Revenue Code of 1986, as
amended (the "Code"). In addition, Tax Counsel will deliver an opinion
concluding that the rights of the holders of the Class A-1A Certificates to
receive payments in excess of the Pool Cap (the "Interest Rate Cap Arrangement")
represent, for federal income tax purposes, contractual rights coupled with
regular interest within the meaning of Treasury regulations ss.1.860G-2(i).
Taxation of Regular Interests
Interest on a regular interest must be included in income by a holder
under the accrual method of accounting, regardless of the holder's regular
method of accounting. In addition, a regular interest could be considered to
have been issued with OID. Although the tax treatment is not entirely certain,
the Class A-IO Certificates will be treated as having been issued with OID for
federal income tax purposes equal to the excess of all expected payments of
interest on the certificates over their issue price. Although unclear, a holder
of a Class A-IO Certificate may be entitled to deduct a loss to the extent that
its remaining basis exceeds the maximum amount of future payments to which the
Certificateholder would be entitled if there were no further prepayments of the
mortgage loans. The prepayment assumption that will be used in determining the
rate of accrual of original issue discount, premium and market discount, if any,
for federal income tax purposes will be based on the assumption that subsequent
to the date of any determination the Mortgage Loans will prepay at a constant
rate of 12% CPR with respect to Loan Subgroup 1A, 21% CPR with respect to Loan
Subgroup 1B and 100% PPV with respect to Loan Group 2. No representation is made
that the Mortgage Loans will prepay at such rate or at any other rate. See
"Federal Income Tax Consequences--REMICs--Taxation of Owners of Regular
Securities--Original Issue Discount" in the Prospectus.
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The IRS has issued regulations (the "OID Regulations") under Sections
1271 to 1275 of the Code generally addressing the treatment of debt instruments
issued with original issue discount. Purchasers of the Offered Certificates
should be aware that the OID Regulations do not adequately address certain
issues relevant to, or are not applicable to, securities such as the Offered
Certificates. Because of the uncertainty concerning the application of Section
1272(a)(6) of the Code to such Certificates, and because the rules of the OID
Regulations are limited in their application in ways that could preclude their
application to such Certificates even in the absence of Section 1272(a)(6) of
the Code, the IRS could assert that the Offered Certificates should be treated
as issued with original issue discount or should be governed by the rules
applicable to debt instruments having contingent payments or by some other
manner not yet set forth in regulations. Prospective purchasers of the Offered
Certificates are advised to consult their tax advisors concerning the tax
treatment of such Certificates.
The Offered Certificates generally will be treated as assets described
in Section 7701(a)(19)(C) of the Code and "real estate assets" under Section
856(c)(4)(A) of the Code, in the same proportion that the assets in the Trust
Fund would be so treated. In addition, interest on the Offered Certificates
generally will be treated as "interest on obligations secured by mortgages on
real property" under Section 856(c)(3)(B) of the Code, to the extent that the
Offered Certificates are treated as "real estate assets" under Section
856(c)(4)(A) of the Code. See "Federal Income Tax
Consequences--REMICs--Characterization of Investments in REMIC Securities" in
the Prospectus. If more than 95% of the regular interests and income qualify for
these treatments, the regular interests generally will qualify for such
treatments in their entirety. However, no portion of an Class A-1A
Certificateholder's basis or income allocable to its right to receive payments
in excess of the Pool Cap will qualify for such treatment. As a result, such
Certificates are not suitable investments for inclusion in another REMIC.
Taxation of the Interest Rate Cap Arrangements
The following discussion assumes that the right of the Class A-1A
Certificates to receive payments in excess of the Pool Cap will be treated as a
notional principal contract rather than as a partnership for federal income tax
purposes. If the rights of the Class A-1A Certificates to payments in excess of
the Pool Cap were treated as representing the beneficial interests in an entity
taxable as a partnership for federal income tax purposes with the Class X/N
Certificates in respect of each Class X/N Certificates' entitlement to interest,
there would be potentially different tax timing consequences to
Certificateholders and in withholding tax consequences on such amounts to
Certificateholders who are non-U.S. Persons. Prospective investors in the
Offered Certificates should consult their tax advisors regarding their
appropriate tax treatment.
In general, the holders of the Class A-1A Certificates must allocate
the price they pay for the Class A-1A Certificates between their REMIC regular
interest and the applicable Interest Rate Cap Arrangement based on their
relative fair market values. To the extent rights to receive payments are
determined to have a value on the Closing Date that is greater than zero, a
portion of such purchase price will be allocable to such rights, and such
portion will be treated as a cap premium (the "Cap Premium") paid by the holders
of the Offered Certificates. A holder of a Class A-1A Certificate will be
required to amortize the Cap Premium under a level payment method as if the Cap
Premium represented the present value of a series of equal payments made over
the life of the applicable Interest Rate Cap Arrangement (adjusted to take into
account decreases in notional principal amount), discounted at a rate equal to
the rate used to determine the amount of the Cap Premium (or some other
reasonable rate). For information reporting purposes, the Trustee will assume
that, with respect to any Class A-1A Certificate, the Interest Rate Arrangement
component will have only nominal value relative to the value of the regular
interest component. The IRS could, however, argue that the Interest Rate Cap
Arrangement component has significant value, and if that argument were to be
sustained, the regular interest component could be viewed as having been issued
with an additional amount of discount (which could cause the total amount of
original issue discount to exceed a statutorily defined de minimis amount). See
"Federal Income Tax Consequences - Taxation of Regular Interest Certificates" in
the Prospectus. Prospective purchasers of Class A-1A Certificates should consult
their own tax advisors regarding the appropriate method of amortizing any Cap
Premium.
Under the final regulations issued by the Internal Revenue Service
under Section 446 of the Code relating to notional principal contracts (the
"Swap Regulations") (i) all taxpayers must recognize periodic payments with
respect to a notional principal contract under the accrual method of accounting,
and (ii) any periodic payments received under the applicable Interest Rate Cap
Arrangement must be netted against payments, if any, deemed made as a result of
the Cap Premiums over the recipient's taxable year, rather than accounted for on
a gross basis. Net income or deduction with respect to net payments under a
notional principal contract for a taxable year should constitute ordinary income
or ordinary deduction. The IRS could contend the amount is capital gain or loss,
but such treatment is unlikely, at least in the absence of further regulations.
Any regulations requiring capital gain or loss treatment presumably would apply
only prospectively. Individuals may be limited in their ability to deduct any
such net deduction and should consult their tax advisors prior to investing in
the Class A-1A Certificates.
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Any amount of proceeds from the sale, redemption or retirement of a
Class A-1A Certificate that is considered to be allocated to rights under an
Interest Rate Arrangement would be considered a "termination payment" under the
Swap Regulations. It is anticipated that the Trustee will account for any
termination payments for reporting purposes in accordance with the Swap
Regulations, as described below.
Termination Payments. Any amount of sales proceeds that is considered
to be allocated to the selling beneficial owner's rights under the applicable
Interest Rate Cap Arrangement in connection with the sale or exchange of a Class
A-1A Certificate would be considered a "termination payment" under the Swap
Regulations allocable to that Offered Certificate. A holder of a Class A-1A
Certificate will have gain or loss from such a termination of an Interest Rate
Cap Arrangement equal to (i) any termination payment it received or is deemed to
have received minus (ii) the unamortized portion of any Cap Premium paid (or
deemed paid) by the beneficial owner upon entering into or acquiring its
interest in an Interest Rate Cap Arrangement.
Gain or loss realized upon the termination of an Interest Rate Cap
Arrangement will generally be treated as capital gain or loss. Moreover, in the
case of a bank or thrift institution, Code Section 582(c) would likely not apply
to treat such gain or loss as ordinary. For further information regarding the
federal income tax consequences of investing in the Offered Certificates, see
"Federal Income Tax Consequences--REMICs" in the Prospectus.
Backup Withholding. A beneficial owner of a Certificate may be subject
to a information reporting and backup withholding at a current rate of 31%
(which rate is scheduled to be reduced periodically through 2006 pursuant to a
provision contained in the Economic Growth and Tax Relief Act of 2001) unless
such beneficial owner provides proof of any applicable exemption or a correct
taxpayer identification number and otherwise complies with the applicable
requirement of the backup withholding rules.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement, between the Depositor and Deutsche Banc Alex. Brown Inc. ("Deutsche
Banc"), an affiliate of the Depositor, as representative (in such capacity, the
"Representative") of Deutsche Banc and First Union Securities, Inc. (together
with Deutsche Banc, the "Underwriters"), the Underwriters have severally agreed
to purchase and the Depositor has agreed to sell to the Underwriters the Offered
Certificates set forth opposite their names in the tables below:
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Principal Amount of:
Class A-1F Class A-2F Class A-3F
Underwriter Certificates Certificates Certificates
- ----------------------------------------- ------------ ------------ ------------
Deutsche Banc Alex.
Brown, Inc....................... $31,011,000 $12,576,000 $18,595,500
First Union Securities, Inc...... $10,337,000 $4,192,000 $6,198,500
Principal (or Notional) Amount of:
Class A-1A Class A-IO Class M-1
Underwriter Certificates Certificates Certificates
- ----------------------------------------- ------------ ------------ ------------
Deutsche Banc Alex.
Brown, Inc....................... $62,497,500 $37,500,000 $4,930,500
First Union Securities, Inc...... $20,832,500 $12,500,000 $1,643,500
Principal Amount of:
Class M-2 Class B-1
Underwriter Certificates Certificates
- ----------------------------------------- ------------ ------------
Deutsche Banc Alex.
Brown, Inc....................... $3,663,000 $2,817,750
First Union Securities, Inc...... $1,221,000 $939,250
In the event of a default by an Underwriter, the Underwriting Agreement
provides that, in certain circumstances, purchase commitments of the
non-defaulting Underwriter may be increased or the Underwriting Agreement may be
terminated.
Distribution of the Offered Certificates will be made from time to time
in negotiated transactions or otherwise at varying prices to be determined at
the time of sale. Proceeds to the Depositor from the sale of the Offered
Certificates, before deducting expenses payable by the Depositor, will be
100.47% of the aggregate initial Certificate Principal Balance of the Offered
Certificates plus accrued interest. In connection with the purchase and sale of
the Offered Certificates, the Underwriters may be deemed to have received
compensation from the Depositor in the form of underwriting discounts.
The Offered Certificates are offered subject to receipt and acceptance
by the Underwriters, to prior sale and to the Underwriters' right to reject any
order in whole or in part and to withdraw, cancel or modify the offer without
notice. It is expected that delivery of the Offered Certificates will be made
through the facilities of DTC, Clearstream and the Euroclear System on or about
the Closing Date.
The Underwriting Agreement provides that the Depositor will indemnify
the Underwriters against those civil liabilities set forth in the Underwriting
Agreement, including liabilities under the Securities Act of 1933, as amended,
or will contribute to payments the Underwriters may be required to make in
respect of these liabilities.
SECONDARY MARKET
There is currently no secondary market for the Offered Certificates and
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 Underwriters
intend to establish a market in the Offered Certificates purchased by them but
they are not obligated to do so. There can be no assurance that any additional
information regarding the Offered Certificates will be available through any
other source. In addition, the Depositor is not aware of any source through
which price information about the Offered Certificates will be available on an
ongoing basis. The limited nature of the information regarding the Offered
Certificates may adversely affect the liquidity of the Offered Certificates,
even if a secondary market for the Offered Certificates becomes available. The
primary source of information available to investors concerning the Offered
Certificates will be the monthly statements discussed in herein under
"Description of the Certificates--Reports to Certificateholders" which will
include information as to the outstanding principal balance or notional amount
of the Offered Certificates and the status of the applicable form of credit
enhancement.
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LEGAL OPINIONS
Legal matters relating to the Offered Certificates will be passed upon
for the Depositor by Sidley Austin Brown & Wood LLP, New York, New York and for
the Underwriters by Cadwalader, Wickersham & Taft, New York, New York.
RATINGS
It is a condition to the issuance of the Offered Certificates that the
Certificates receive the following ratings from S&P, Moody's and Fitch:
Class S&P Moody's Fitch
----- --- ------- -----
A-IO AAA Aaa AAA
A-1F AAA Aaa AAA
A-2F AAA Aaa AAA
A-3F AAA Aaa AAA
A-1A AAA Aaa AAA
M-1 AA Aa2 AA
M-2 A A2 A
B-1 BBB Baa2 BBB
The ratings assigned to mortgage pass-through certificates address the
likelihood of the receipt by certificateholders of all distributions to which
the certificateholders are entitled. The rating process addresses structural and
legal aspects associated with the certificates, including the nature of the
underlying mortgage loans. The ratings assigned to mortgage pass-through
certificates do not represent any assessment of the likelihood that principal
prepayments will be made by the mortgagors or the degree to which such
prepayments will differ from that originally anticipated. The ratings do not
address the possibility that certificateholders might suffer a lower than
anticipated yield due to non-credit events. In addition, the ratings on the
Class A-1A Certificates do not address the likelihood of receipt by the holders
of such certificates of any amounts in respect of LIBOR Carryover Amounts.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating. In the event that the ratings
initially assigned to the Offered Certificates are subsequently lowered for any
reason, no person or entity is obligated to provide any additional credit
support or credit enhancement with respect to the Offered Certificates.
The Depositor has not requested that any rating agency rate the Offered
Certificates other than as stated above. 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 any other rating agency. A rating on the
Offered Certificates by another rating agency, if assigned at all, may be lower
than the ratings assigned to the Offered Certificates as stated in this section.
LEGAL INVESTMENT
The Class 1-A1 Certificates will constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") so long as they are rated in one of the two highest rating
categories by at least one nationally recognized statistical rating organization
and, as such, are legal investments for certain entities to the extent provided
for in SMMEA. The other Offered Certificates will not constitute "mortgage
related securities" for the purposes of SMMEA because Loan Group 1 includes
second and third lien mortgage loans and Owner-financed Mortgage Loans that were
originated by individuals and not by financial institutions or mortgagees
approved by the Secretary of Housing and Urban Development.
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There may be restrictions on the ability of certain investors,
including depository institutions, either to purchase the Offered Certificates
or to purchase Offered Certificates representing more than a specified
percentage of the investor's assets. Investors should consult their own legal
advisors in determining whether and to what extent the Offered Certificates
constitute legal investments for such investors. See "Legal Investment" in the
Prospectus.
CONSIDERATIONS FOR BENEFIT PLAN INVESTORS
A fiduciary of any employee benefit plan or other plan or arrangement
subject to ERISA or Section 4975 of the Code (a "Plan"), or any insurance
company, whether through its general or separate accounts, or any other person
investing plan assets of a Plan, should carefully review with its legal advisors
whether the purchase or holding of Offered Certificates could give rise to a
transaction prohibited or not otherwise permissible under ERISA or Section 4975
of the Code. The purchase or holding of the Class A Certificates by or on behalf
of, or with plan assets of, a Plan may qualify for exemptive relief under an
administrative exemption, as currently in effect and as described under "ERISA
Considerations" in the prospectus. The administrative exemptions relevant to the
Class A Certificates were granted by the Department of Labor to Deutsche Banc
Alex. Brown Inc. in Final Authorization Number 97-03E (December 9, 1996) and in
Prohibited Transaction Exemption ("PTE") 94-84 at 59 F.R. 65400 and to First
Union Securities, Inc. by PTE 96-22 at 61 F.R. 14828, both of which were amended
by PTE 97-34 at 62 F.R. 39021, and by PTE 2000-58 at 65 F.R. 67765
(collectively, the "Underwriters' Exemption"). However, the Underwriters'
Exemption contains a number of conditions which must be met for the exemption to
apply, including the requirements that the Class A Certificates be rated at
least "AA-" (or its equivalent) by Fitch, Moody's or S&P at the time of the
Plan's purchase and may not be subordinated to other certificates issued and
that 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. A fiduciary of a
Plan contemplating purchasing a Class A Certificate must make its own
determination that the conditions set forth in the Underwriters' Exemption will
be satisfied with respect to the those certificates.
Each beneficial owner of an Offered Certificate that is a Class A
Certificate or any interest therein shall be deemed to have represented, by
virtue of its acquisition or holding of that certificate or interest therein,
that either (i) it is not a plan investor, (ii) it has acquired and is holding
such Class A Certificates in reliance on the Underwriters' Exemption, and that
it understands that there are certain conditions to the availability of the
Underwriters' Exemption, including that the Class A Certificates must be rated,
at the time of purchase, not lower than "AA-" (or its equivalent) by Fitch,
Moody's or S&P or (iii) (1) it is an insurance company, (2) the source of funds
used to acquire or hold the certificate or interest therein is an "insurance
company general account," as such term is defined in PTCE 95-60, and (3) the
conditions in Sections I and III of PTCE 95-60 have been satisfied.
Because the Subordinated Certificates represent interests to which
losses are allocated prior to any such allocation to the Senior Certificates and
in some cases have ratings below the lowest rating permitted under the
Underwriter's Exemption, the Subordinated Certificates do not satisfy the
requirements of the Underwriter's Exemption. Consequently, transfers of the
Subordinated Certificates will not be registered by the Trustee unless the
Trustee receives the following:
o a representation from the transferee of the Subordinated Certificate,
acceptable to and in form and substance satisfactory to the Trustee, to
the effect that the transferee is not a Plan, nor a person acting on
behalf of a Plan or using a Plan's assets to effect the transfer;
o a representation from the transferee of the Subordinated Certificate,
acceptable to and in form and substance satisfactory to the Trustee, to
the effect that the transferee is an insurance company that is acquiring
the Subordinated Certificate with assets of an "insurance company
general account" (as defined in Section V(e) of Prohibited Transaction
Class Exemption ("PTCE") 95-60, and that the acquisition and holding of
the Subordinated Certificate satisfy the requirements of Sections I and
III of PTCE 95-60; or
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o an opinion of counsel satisfactory to the Trustee that the purchase and
holding of the certificate by a Plan, or any person acting on behalf of
a Plan or using a Plan's assets, will not result in a prohibited
transaction under Section 406 of ERISA or Section 4975 of the Code, will
not result in the assets of the Trust being deemed to be "plan assets"
and subject to the prohibited transaction requirements of ERISA and the
Code and will not subject the Trustee or the Servicer to any obligation
in addition to those undertaken in the Pooling and Servicing agreement.
If any Offered Certificates or any interest therein is acquired or held
in violation of the conditions described in the preceding paragraphs, the next
preceding permitted beneficial owner will be treated as the beneficial owner of
that Offered Certificate, retroactive to the date of transfer to the purported
beneficial owner. Any purported beneficial owner whose acquisition or holding of
any such certificate or interest therein was effected in violation of the
conditions described in the preceding paragraph shall indemnify and hold
harmless the Depositor, the Trustee, the Servicer, any subservicer, and the
trust fund from and against any and all liabilities, claims, costs or expenses
incurred by those parties as a result of that acquisition or holding.
Any fiduciary or other investor of Plan assets that proposes to acquire
or hold the Offered Certificates on behalf of or with Plan assets of any Plan
should consult with its counsel with respect to: (i) whether, with respect to
the Class A Certificates, the specific and general conditions and the other
requirements in the Underwriters' Exemption would be satisfied and (ii) the
potential applicability of the general fiduciary responsibility provisions of
ERISA and the prohibited transaction provisions of ERISA and Section 4975 of the
Internal Revenue Code to the proposed investment. See "ERISA Considerations" in
the prospectus.
The sale of any of the Offered Certificates to a Plan is in no respect
a representation by the Depositor or the related underwriter that an investment
in the Offered Certificates meets all relevant legal requirements relating to
investments by Plans generally or any particular Plan, or that an investment in
the Offered Certificates is appropriate for Plans generally or any particular
Plan.
S-88
INDEX OF DEFINED TERMS
PAGE
----
60+ Day Delinquent Loan........................................................................................S-69
Accrued Certificate Interest...................................................................................S-65
Actuarial Mortgage Loans.......................................................................................S-44
Adjustment Date................................................................................................S-29
Advance........................................................................................................S-75
Alternative Documentation......................................................................................S-46
Applied Realized Loss Amount...................................................................................S-70
Arrearage......................................................................................................S-21
Assignment Program.............................................................................................S-43
Available Funds................................................................................................S-64
Balloon Loan...................................................................................................S-22
Balloon Payment................................................................................................S-22
Bankruptcy Code................................................................................................S-21
Bankruptcy Plan Mortgage Loan..................................................................................S-21
beneficial owner...............................................................................................S-61
Book-Entry Certificates........................................................................................S-60
C-BASS..........................................................................................................S-2
Certificate Owners.............................................................................................S-60
Certificate Principal Balance..................................................................................S-67
Certificateholder..............................................................................................S-61
Certificates...................................................................................................S-60
Class A Certificates...........................................................................................S-60
Class A Interest Carry Forward Amount..........................................................................S-65
Class A Principal Distribution Amount..........................................................................S-67
Class A-1A Cap.................................................................................................S-74
Class A-1A Certificate Margin..................................................................................S-73
Class B-1 Applied Realized Loss Amount.........................................................................S-72
Class B-1 Principal Distribution Amount........................................................................S-68
Class B-1 Realized Loss Amortization Amount....................................................................S-72
Class B-2 Applied Realized Loss Amount.........................................................................S-72
Class B-2 Principal Distribution Amount........................................................................S-68
Class B-2 Realized Loss Amortization Amount....................................................................S-73
Class M-1 Applied Realized Loss Amount.........................................................................S-72
Class M-1 Principal Distribution Amount........................................................................S-67
Class M-1 Realized Loss Amortization Amount....................................................................S-72
Class M-2 Applied Realized Loss Amount.........................................................................S-72
Class M-2 Principal Distribution Amount........................................................................S-67
Class M-2 Realized Loss Amortization Amount....................................................................S-72
Class X/N Certificates....................................................................................S-3, S-60
Clearstream....................................................................................................S-60
Clearstream Participants.......................................................................................S-62
Code...........................................................................................................S-11
Collection Account.............................................................................................S-78
Collection Period..............................................................................................S-64
Combined Loan-to-Value Ratio...................................................................................S-22
Commission.....................................................................................................S-76
Constant Prepayment Rate.......................................................................................S-49
Cooperative....................................................................................................S-62
CPR............................................................................................................S-49
Cut-off Date...................................................................................................S-19
Cut-off Date Principal Balance.................................................................................S-19
Definitive Certificate.........................................................................................S-61
S-89
Delayed First Adjustment Mortgage Loans........................................................................S-48
Delinquent.....................................................................................................S-21
Deutsche Banc..................................................................................................S-84
Distribution Account...........................................................................................S-78
Distribution Date..............................................................................................S-60
DTC............................................................................................................S-60
DTC Participants...............................................................................................S-61
Due Date.......................................................................................................S-22
EFSG...........................................................................................................S-76
Euroclear......................................................................................................S-60
Euroclear Operator.............................................................................................S-62
Euroclear Participants.........................................................................................S-62
European Depositaries..........................................................................................S-61
Extra Principal Distribution Amount............................................................................S-68
FHA............................................................................................................S-42
FHA Mortgage Loans.............................................................................................S-42
FHAUN Mortgage Loans...........................................................................................S-42
Financial Intermediary.........................................................................................S-61
Fitch..........................................................................................................S-78
Forbearance Plan Mortgage Loan.................................................................................S-20
Full Documentation.............................................................................................S-45
Global Securities...............................................................................................I-1
Gross Margin...................................................................................................S-29
Group 1 Loan Balance...........................................................................................S-20
Group 1 Mortgage Loans.........................................................................................S-20
Group 1 Principal Percentage...................................................................................S-66
Group 2 Loan Balance...........................................................................................S-20
Group 2 Mortgage Loans.........................................................................................S-20
Group 2 Net WAC................................................................................................S-74
Group 2 Principal Percentage...................................................................................S-66
Homeownership Act..............................................................................................S-77
HUD............................................................................................................S-42
IML............................................................................................................S-62
Index..........................................................................................................S-29
Initial Periodic Rate Cap......................................................................................S-29
insurance company general account..............................................................................S-87
Interest Accrual Period........................................................................................S-65
Interest Carry Forward Amount..................................................................................S-65
Interest Percentage............................................................................................S-65
Interest Remittance Amount.....................................................................................S-65
LIBOR..........................................................................................................S-74
LIBOR Carryover Amount.........................................................................................S-74
LIBOR Determination Date.......................................................................................S-74
Limited Documentation..........................................................................................S-46
Liquidated Mortgage Loan.......................................................................................S-70
Loan Group.....................................................................................................S-20
Loan Group 1...................................................................................................S-20
Loan Group 2...................................................................................................S-20
MGIC...........................................................................................................S-76
Minimum Mortgage Interest Rate.................................................................................S-29
Modified Scheduled Payments....................................................................................S-20
Monthly Excess Cashflow Allocation.............................................................................S-71
Monthly Excess Cashflow Amount.................................................................................S-71
Monthly Excess Interest Amount.................................................................................S-71
Monthly Payment................................................................................................S-21
Moody's........................................................................................................S-79
S-90
Mortgage.......................................................................................................S-21
Mortgage Interest Rate.........................................................................................S-22
Mortgage Loan Purchase Agreement...............................................................................S-19
Mortgage Loan Schedule.........................................................................................S-76
Mortgage Loans.................................................................................................S-19
Mortgage Pool..................................................................................................S-19
mortgage related securities..............................................................................S-10, S-86
Mortgaged Property.............................................................................................S-21
National Housing Act...........................................................................................S-42
Net Mortgage Interest Rate.....................................................................................S-71
No Documentation...............................................................................................S-46
no-bid.........................................................................................................S-44
Notional Amount................................................................................................S-67
Offered Certificates...........................................................................................S-60
One Year CMT...................................................................................................S-41
Overcollateralization Amount...................................................................................S-68
Overcollateralization Deficiency...............................................................................S-68
Overcollateralization Release Amount...........................................................................S-68
Overcollateralization Release Amounts..........................................................................S-71
Owner-financed Mortgage Loans..................................................................................S-46
Pass-Through Rate..............................................................................................S-73
Performing Mortgage Loan.......................................................................................S-20
Periodic Rate Cap..............................................................................................S-29
Plan...........................................................................................................S-87
PMI Mortgage Loans.............................................................................................S-45
PMI Policy.....................................................................................................S-45
PMI Premium....................................................................................................S-45
Pool Balance...................................................................................................S-19
Pool Cap.......................................................................................................S-73
Pooling and Servicing Agreement................................................................................S-76
PPV............................................................................................................S-49
Prepayment Models..............................................................................................S-49
Prepayment Period..............................................................................................S-64
Prepayment Vector..............................................................................................S-49
Principal Balance..............................................................................................S-19
Principal Distribution Amount..................................................................................S-68
Principal Remittance Amount....................................................................................S-68
PTE............................................................................................................S-87
Purchase Price.................................................................................................S-77
Qualified Substitute Mortgage Loan.............................................................................S-77
Radian.........................................................................................................S-76
Rating Agencies................................................................................................S-79
Realized Loss..................................................................................................S-70
Realized Loss Amortization Amount..............................................................................S-73
Record Date....................................................................................................S-60
Reference Bank Rate............................................................................................S-74
Regular Scheduled Payments.....................................................................................S-20
Related Documents..............................................................................................S-76
Relief Act.....................................................................................................S-75
Re-Performance Test............................................................................................S-21
Re-Performing 60+ Day Delinquent Loan..........................................................................S-69
Re-Performing Mortgage Loan....................................................................................S-21
Representative.................................................................................................S-84
Residual Certificates..........................................................................................S-60
Rules..........................................................................................................S-61
S&P............................................................................................................S-79
S-91
SEC............................................................................................................S-76
Senior Certificates............................................................................................S-60
Senior Enhancement Percentage..................................................................................S-69
Senior Specified Enhancement Percentage........................................................................S-69
Servicer Modification..........................................................................................S-70
Servicing Fee..................................................................................................S-80
Servicing Fee Rate.............................................................................................S-80
Simple Interest Mortgage Loans.................................................................................S-44
Six Month LIBOR................................................................................................S-41
SMMEA..........................................................................................................S-86
Stated Documentation...........................................................................................S-46
Stepdown Date..................................................................................................S-69
Structuring Assumptions........................................................................................S-50
Subordinated Certificates......................................................................................S-60
Sub-Performing Mortgage Loan...................................................................................S-20
Substitution Shortfall Amount..................................................................................S-77
Swap Regulations...............................................................................................S-83
Targeted Overcollateralization Amount..........................................................................S-69
Telerate Page 3750.............................................................................................S-74
Terms and Conditions...........................................................................................S-62
Trigger Event..................................................................................................S-69
Trust Fund.....................................................................................................S-19
Trustee Fee....................................................................................................S-80
Underwriters...................................................................................................S-84
Underwriters' Exemption........................................................................................S-87
United States Housing Act......................................................................................S-42
Unpaid Realized Loss Amount....................................................................................S-73
VA S-43
VA Mortgage Loans..............................................................................................S-42
VANG Mortgage Loans............................................................................................S-42
S-92
ANNEX I
GLOBAL CLEARANCE AND SETTLEMENT AND DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the Offered Certificates will
be offered globally (the "Global Securities") and will be available only in
book-entry form. Investors in the Global Securities may hold such Global
Securities through any of DTC, Clearstream or Euroclear. The Global Securities
will be tradable as home market instruments in both the European and U.S.
domestic markets. Initial settlement and all secondary trades will settle in
same-day funds.
Secondary market trading between investors holding Global Securities
through Clearstream and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between Clearstream or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Clearstream and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, Clearstream and
Euroclear will hold positions on behalf of their participants through their
respective Depositaries, which in turn will hold such positions in accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to conventional eurobonds, except
that there will be no temporary global security and no "lock-up" or restricted
period. Investor securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Clearstream
or Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset-backed certificates issues in same-day funds.
Trading between Clearstream and/or Euroclear Participants. Secondary
market trading between Clearstream Participants or Euroclear Participants will
be settled using the procedures applicable to conventional eurobonds in same-day
funds.
Trading between DTC seller and Clearstream or Euroclear purchaser. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a Clearstream Participant or a Euroclear Participant, the
purchaser will send instructions to Clearstream or Euroclear through a
Clearstream Participant or Euroclear Participant at least one business day prior
to settlement. Clearstream or Euroclear will instruct the respective Depositary,
as the case may be, to receive the Global Securities against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment date to and excluding the settlement date, on the basis of
the actual number of days in such accrual period and a year assumed to consist
of 360 days. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
Payment will then be made by the respective Depositary of the DTC Participant's
account against delivery of the Global Securities. After settlement has been
completed, the Global Securities will be credited to the respective clearing
system and by the clearing system, in accordance with its usual procedures, to
the Clearstream Participant's or Euroclear Participant's account. The securities
credit will appear the next day (European time) and the cash debt will be
back-valued to, and the interest on the Global Securities will accrue from, the
value date (which would be the preceding day when settlement occurred in New
York). If settlement is not completed on the intended value date (i.e., the
trade fails), the Clearstream or Euroclear cash debt will be valued instead as
of the actual settlement date.
I-1
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 the actual number of days in such accrual period and a year
assumed to consist of 360 days. For transactions settling on the 31st of the
month, payment will include interest accrued to and excluding the first day of
the following month. The payment will then be reflected in the account of the
Clearstream Participant or Euroclear Participant the following day, and receipt
of the cash proceeds in the Clearstream Participant's or Euroclear Participant's
account would be back-valued to the value date (which would be the preceding
day, when settlement occurred in New York). Should the Clearstream Participant
or Euroclear Participant have a line of credit with its respective clearing
system and elect to be in debt in anticipation of receipt of the sale proceeds
in its account, the back-valuation will extinguish any overdraft incurred over
that one-day period. If settlement is not completed on the intended value date
(i.e., the trade fails), receipt of the cash proceeds in the Clearstream
Participant's or Euroclear Participant's account would instead be valued as of
the actual settlement date.
Finally, day traders that use Clearstream or Euroclear and that
purchase Global Securities from DTC Participants for delivery to Clearstream
Participants or Euroclear Participants should note that these trades would
automatically fail on the sale side unless affirmative action were taken. At
least three techniques should be readily available to eliminate this potential
problem:
I-2
(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 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 Certificate Owners residing
in a country that has a tax treaty with the United States can obtain an
exemption or reduced tax rate (depending on the treaty terms) by filing Form
W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States Tax
Withholding). Form W-8BEN may be filed by the Certificate Owners or his agent.
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 files by submitting the appropriate form to the person through
whom it holds (the clearing agency, in the case of persons holding directly on
the books of the clearing agency). Form W-8BEN and Form W-8ECI are effective
until the third succeeding calendar year from the date such form is signed.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity treated as a corporation
or partnership for United States federal income tax purposes organized in or
under the laws of the United States or any state thereof or the District of
Columbia (unless, in the case of a partnership, Treasury regulations provide
otherwise) or (iii) an estate the income of which is includible in gross income
for United States tax purposes, regardless of its source, or (iv) a trust if a
court within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have authority
to control all substantial decisions of the trust. Notwithstanding the preceding
sentence, to the extent provided in Treasury regulations, certain trusts in
existence on August 20, 1996, and treated as United States persons prior to such
date, that elect to continue to be treated as United States persons will also be
a U.S. Person. This summary does not deal with all aspects of U.S. Federal
income tax withholding that may be relevant to foreign holders of the Global
Securities. Investors are advised to consult their own tax advisors for specific
tax advice concerning their holding and disposing of the Global Securities.
I-3
$181,455,000 (Approximate)
ACE Securities Corp.
Depositor
C-BASS Mortgage Loan
Asset-Backed Certificates, Series 2001-CB2
Prospectus Supplement
Dated June 8, 2001
Litton Loan Servicing LP
Servicer
Deutsche Banc Alex. Brown
First Union Securities, Inc.
Underwriters
You should rely only on the information contained or incorporated by reference
in this prospectus supplement and the accompanying prospectus. We have not
authorized anyone to provide you with different information.
We are not offering the certificates offered by this prospectus supplement in
any state where the offer is not permitted.
Dealers will be required to deliver a prospectus supplement and prospectus when
acting as underwriters of the certificates offered by this prospectus supplement
and with respect to their unsold allotments or subscriptions. In addition, all
dealers selling the Offered Certificates, whether or not participating in this
offering, may be required to deliver a prospectus supplement and prospectus for
90 days following the date of this prospectus supplement.
PROSPECTUS
Asset Backed Certificates
Asset Backed Notes
(Issuable in Series)
ACE Securities Corp.,
Depositor
The Trust Funds:
Each trust fund will be established to hold assets transferred to
it by ACE Securities Corp. The assets in each trust fund
will generally consist of one or more of the following:
o mortgage loans secured by one- to four-family residential
properties;
o unsecured home improvement loans;
o manufactured housing installment sale contracts;
o mortgage pass-through securities issued or guaranteed by
Ginnie Mae, Fannie Mae, or Freddie Mac; or
o previously issued asset-backed or mortgage-backed securities
backed by mortgage loans secured by residential properties or
participations in those types of loans.
The assets in your trust fund are specified in the prospectus
supplement for that particular trust fund, while the types of assets that may be
included in a trust fund, whether or not in your trust fund, are described in
greater detail in this prospectus.
The Securities:
ACE Securities Corp. will sell the securities pursuant to a prospectus
supplement. The securities will be grouped into one or more series, each having
is own distinct designation. Each series will be issued in one or more classes
and will evidence beneficial ownership of, or be secured by, the assets in the
trust fund that the series relates to. A prospectus supplement for a series will
specify all of the terms of the series and of each of the classes in the series.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is May 4, 2001.
TABLE OF CONTENTS
Description of the Trust Funds................................................3
Use of Proceeds..............................................................15
Yield Considerations.........................................................16
The Depositor................................................................21
Description of the Securities................................................21
Description of the Agreements................................................35
Description of Credit Support................................................56
Certain Legal Aspects of Mortgage Loans......................................59
Certain Legal Aspects of the Contracts.......................................71
Material Federal Income Tax Considerations...................................74
State and Other Tax Considerations..........................................111
Legal Investment............................................................118
Methods of Distribution.....................................................120
Additional Information......................................................121
Incorporation of Certain Documents by Reference.............................121
Legal Matters...............................................................122
Financial Information.......................................................122
Rating......................................................................122
Index of Defined Terms......................................................123
-2-
Description of the Trust Funds
Assets
The primary assets of each trust fund (the "Assets") will include some
or all of the following types of assets:
o mortgage loans on residential properties, which may
include Home Equity Loans, home improvement contracts and Land
Sale Contracts (each as defined in this prospectus);
o home improvement installment sales contracts or
installment loans that are unsecured called unsecured home
improvement Loans;
o manufactured housing installment sale contracts or
installment loan agreements referred to as contracts;
o any combination of "fully modified pass-through"
mortgage-backed certificates guaranteed by the Government
National Mortgage Association ("Ginnie Mae"), guaranteed
mortgage pass-through securities issued by Fannie Mae ("Fannie
Mae") and mortgage participation certificates issued by the
Federal Home Loan Mortgage Corporation ("Freddie Mac")
(collectively, "Agency Securities");
o previously issued asset-backed certificates,
collateralized mortgage obligations or participation
certificates (each, and collectively, "Mortgage Securities")
evidencing interests in, or collateralized by, mortgage loans
or Agency Securities; or
o a combination of mortgage loans, unsecured home
improvement loans, contracts, Agency Securities and/or
Mortgage Securities.
The mortgage loans will not be guaranteed or insured by ACE Securities
Corp. 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 prospectus supplement. The depositor will
select each Asset to include in a trust fund from among those it has purchased,
either directly or indirectly, from a prior holder (an "Asset Seller"), which
may be an affiliate of the depositor and which prior holder may or may not be
the originator of that mortgage loan.
The Assets included in the trust fund for your series may be subject to
various types of payment provisions:
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 of a fixed margin and an index;
o "Buy Down Assets," which are Assets for which funds
have been provided by someone other than the related
borrowers to reduce the borrowers' monthly payments during
the early period after origination of those Assets;
o "Increasing Payment Assets," as described below;
o "Interest Reduction Assets," which provide for the
one-time reduction of the interest rate payable on these
Assets;
-3-
o "GEM Assets," which provide for (1) monthly payments
during the first year after origination that are at least
sufficient to pay interest due on these Assets, and (2) an
increase in those monthly payments in later years at a
predetermined rate resulting in full repayment over a
shorter term than the initial amortization terms of those
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 their unpaid principal balances,
and this unpaid interest will be added to the principal
balances of those Assets and will be paid, together with
interest on the unpaid interest, in later years;
o "Step-up Rate Assets" which provide for interest
rates that increase over time;
o "Balloon Payment Assets;"
o "Convertible Assets" which are Adjustable Rate Assets
subject to provisions pursuant to which, subject to
limitations, the related borrowers may exercise an option to
convert the adjustable interest rate to a fixed interest rate;
and
o "Bi-weekly Assets," which provide for payments to be
made by borrowers 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 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 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 for 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 borrower's
monthly payments referred to in the preceding sentence and (2) payments made by
the respective servicers pursuant to buy-down or subsidy agreements. The
borrower'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 some number of percentage points below the
Asset Rate of that Increasing Payment Asset. The borrower's monthly payments on
each Increasing Payment Asset, together with any payments made on the Increasing
Payment Asset by the related servicers pursuant to buy-down or subsidy
agreements, will in all cases be sufficient to allow payment of accrued interest
on the Increasing Payment Asset at the related interest rate, without negative
amortization. A borrower's monthly payments on an Increasing Payment Asset may,
however, not be sufficient to result in any reduction of the principal balance
of that Asset until after the period when those payments may be increased.
The Notes or Certificates, as applicable, will be entitled to payment
only from the assets of the related trust fund and will not be entitled to
payments from the assets of any other trust fund established by the depositor.
The assets of a trust fund may consist of certificates representing beneficial
ownership interests in, or indebtedness of, another trust fund that contains the
Assets, if specified in the prospectus supplement.
Mortgage Loans
General
Each mortgage loan will generally be secured by a lien on (1) a one- to
four-family residential property (including a manufactured home) or a security
interest in shares issued by a cooperative housing corporation (a "Single Family
Property") or (2) a primarily residential property that consists of five or more
residential dwelling units, referred to as a multifamily property, which may
include limited retail, office or other commercial space ("Multi Family
Property" and together with Single Family Property, "Mortgaged Properties"). 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.
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The Mortgaged Properties may also include:
o Apartment buildings owned by cooperative housing corporations
("Cooperatives"); and
o Leasehold interests in properties, the title to which is held
by third party lessors. The term of these leaseholds will
exceed the term of the related mortgage note by at least five
years or some other time period specified in the prospectus
supplement.
The principal balance of mortgage loans secured by Mortgaged Property
consisting of Multi Family Property or apartment buildings owned by
Cooperatives shall not exceed 5% of the principal balance of all
mortgage loans conveyed to the trust fund.
The mortgage loans may include:
o Closed-end and/or revolving home equity loans or balances of
these home equity loans ("Home Equity Loans");
o Secured home improvement installment sales contracts and
secured installment loan agreements, known as home improvement
contracts; and
o Mortgage loans evidenced by contracts ("Land Sale Contracts")
for the sale of properties pursuant to which the borrower
promises to pay the amount due on the mortgage loans to the
holder of the Land Sale Contract with fee title to the related
property held by that holder until the borrower has made all
of the payments required pursuant to that Land Sale Contract,
at which time fee title is conveyed to the borrower.
The originator of each mortgage loan will have been a person other than
the depositor. The prospectus supplement will indicate if any originator is an
affiliate of the depositor. The mortgage loans will be evidenced by mortgage
notes secured by mortgages, deeds of trust or other security instruments (the
"Mortgages") creating a lien on the Mortgaged Properties. The Mortgaged
Properties will be located in any one of the fifty states, the District of
Columbia, Guam, Puerto Rico or any other territory of the United States. If
provided in the prospectus supplement, the mortgage loans may include loans
insured by the Federal Housing Administration (the "FHA") or partially
guaranteed by the Veteran's Administration (the "VA"). See "--FHA Loans and VA
Loans" below.
Loan-to-Value Ratio
The "Loan-to-Value Ratio" of a mortgage loan at any particular 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 for Refinance Loans, is generally the lesser
of (a) the appraised value determined in an appraisal obtained by the originator
at origination of that loan and (b) the sales price for that property.
"Refinance Loans" are loans made to refinance existing loans. Unless otherwise
specified in the prospectus supplement, the Value of the Mortgaged Property
securing a Refinance Loan is the appraised value of the Mortgaged Property
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 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 the Prospectus Supplements
Your prospectus supplement will contain information, as of the dates
specified in that prospectus supplement and to the extent then applicable and
specifically known to the depositor, with respect to the mortgage loans,
including:
o the total outstanding principal balance and the
largest, smallest and average outstanding principal balance
of the mortgage loans as of, unless otherwise specified in
that prospectus supplement, the close of business on the
first day of the month of formation of the related trust
fund (the "Cut-off Date");
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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 range of maturity dates 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 regarding the prepayment provisions, if
any, of the mortgage loans;
o for 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 the
maximum mortgage rate or monthly payment variation at the time
of any adjustment of and over the life of the ARM Loan;
o information regarding the payment characteristics of
the mortgage loans, including 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 those
mortgage loans are delinquent; and
o the material underwriting standards used for the
mortgage loans.
If specific information respecting the mortgage loans is unknown to the
depositor at the time the Notes or Certificates, as applicable, 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 that will be available to purchasers of the related Notes or
Certificates, as applicable, at or before the initial issuance of that Security
and will be filed as part of a Current Report on Form 8-K with the Securities
and Exchange Commission (the "Commission") within fifteen days after that
initial issuance. The characteristics of the mortgage loans included in a trust
fund will not vary by more than five percent (by total principal balance as of
the Cut-off Date) from the characteristics of the mortgage loans that are
described in the prospectus supplement.
The prospectus supplement will specify whether the mortgage loans
include (1) Home Equity Loans, which may be secured by Mortgages that are junior
to other liens on the related Mortgaged Property and/or (2) 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 prospectus supplement will
specify whether the home improvement contracts are FHA loans and, if so, the
limitations on any FHA insurance. In addition, the prospectus supplement will
specify whether the mortgage loans contain some 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 some other interval as is specified in the prospectus supplement or for
payments in another manner described in the prospectus supplement. Each mortgage
loan may provide for no accrual of interest or for accrual of interest on the
mortgage loan at 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 in the related mortgage note, in each case as described in
the 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 particular events or that
adjust on the basis of other methodologies, and may provide for negative
amortization or accelerated amortization, in each case as described in the
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 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 prospectus supplement. If the holders of any class or classes of Offered
Notes or Offered Certificates, as applicable, are entitled to all or a portion
of any Prepayment Premiums collected from the mortgage loans, the prospectus
supplement will specify the method or methods by which any of these amounts will
be allocated. See "--Assets" above.
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Revolving Credit Line Loans
As more fully described in the prospectus supplement, the mortgage
loans may consist, in whole or in part, of revolving Home Equity Loans or
balances of these Home Equity Loans ("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 that loan. From time to time
before the expiration of the related draw period specified in a Revolving Credit
Line Loan, principal amounts on that Revolving Credit Line Loan may be drawn
down (up to a maximum amount as set forth in the prospectus supplement) or
repaid. If specified in the prospectus supplement, new draws by borrowers under
the Revolving Credit Line Loans will automatically become part of the trust fund
described in the prospectus supplement. As a result, the total 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
those balances and those amounts will usually differ each day, as more
specifically described in the prospectus supplement. Under some 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 that 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, unsecured installment loans and unsecured home
improvement loans that are FHA loans. Except as otherwise described in the
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 the prospectus supplement and to the extent then applicable and
specifically known to the depositor, with respect to any unsecured home
improvement loans, including:
o the total 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;
-7-
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 regarding the prepayment provisions, if
any, of the unsecured home improvement loans;
o with respect to the unsecured home improvement loans
with adjustable interest rates, called ARM unsecured home
improvement loans, the index, the frequency of the
adjustment dates, the rage 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 loans;
o the number of unsecured home improvement loans that
are delinquent and the number of days or ranges of the
number of days that 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 unknown to the depositor at the time Notes or Certificates, as applicable,
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 that will be available to purchasers of the related Notes
or Certificates, as applicable, at or before the initial issuance thereof and
will be filed as part of a Current Report on Form 8-K with the Commission within
fifteen days after the related initial issuance. The characteristics of the
unsecured home improvement loans included in a trust fund will not vary by more
than five percent, by total principal balance as of the cut-off date, from the
characteristics thereof that are described in the prospectus supplement.
Contracts
General
To the extent provided in the prospectus supplement, each contract will
be secured by a security interest in a new or used manufactured home, called a
Manufactured Home. The contracts may include contracts that are FHA loans. The
method of computing the Loan-to-Value Ratio of a contract will be described in
the prospectus supplement.
Contract Information in Prospectus Supplements
Each prospectus supplement relating to a trust fund whose assets
include a substantial proportion of contracts will contain certain information,
as of the dates specified in that prospectus supplement and to the extent then
applicable and specifically known to the depositor, with respect to any
contracts, including:
o the total 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;
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o the weighted average, by principal balance, of the
original and remaining terms to maturity of the contracts;
o the range of maturity dates of the contracts;
o the range of the Loan-to-Value Ratios at origination
of the contracts;
o the annual percentage rate on each contract, called a
contract rate, 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 regarding the prepayment provisions, if
any, of the contracts;
o for contracts with adjustable contract rates,
referred to as 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 those
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 unknown to the
depositor at the time the Notes or Certificates, as applicable, are initially
offered, more general information of the nature described above will be provided
i the prospectus supplement, and specific information will be set forth in a
report that will be available to purchasers of the related Notes or
Certificates, as applicable, at or before the initial issuance thereof and will
be filed as part of a Current Report on Form 8-K with the Commission within
fifteen days after the related initial issuance. The characteristics of the
contracts included in a trust fund will not vary by more than five percent (by
total principal balance as of the cut-off date) from the characteristics thereof
that are described in the prospectus supplement.
The information described above regarding the contracts in a trust fund
may be presented in the prospectus supplement in combination with similar
information regarding the mortgage loans in the trust fund.
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 some other interval as is
specified in the prospectus supplement or form 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 a contract rate that is fixed
over its term or that adjusts from time to time, or as otherwise specified in
the 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 prospectus supplement.
Agency Securities
The Agency Securities will consist of any combination of Ginnie Mae
certificates, Fannie Mae certificates and Freddie Mac certificates, which may
include Stripped Agency Securities, as described below.
Ginnie Mae
Ginnie Mae is a wholly-owned corporate instrumentality of the United
States within the Department of Housing and Urban Development. Section 306(g) of
Title III of the Housing Act authorizes Ginnie Mae to guarantee the timely
payment of the principal of and interest on certificates that are based on and
backed by a pool of FHA loans, VA loans or by pools of other eligible
residential loans.
-9-
Section 306(g) of the Housing Act provides that "the full faith and
credit of the United States is pledged to the payment of all amounts that may be
required to be paid under any guaranty under this subsection." To meet its
obligations under that guaranty, Ginnie Mae is authorized, under Section 306(d)
of the National Housing Act of 1934 (the "Housing Act"), to borrow from the
United States Treasury with no limitations as to amount, to perform its
obligations under its guarantee.
Ginnie Mae Certificates
Each Ginnie Mae certificate will be a "fully modified pass-through"
mortgage-backed certificate issued and serviced by an issuer approved by Ginnie
Mae or Fannie Mae as a seller-servicer of FHA loans or VA loans, except as
described below regarding Stripped Agency Securities (as defined below). The
loans underlying Ginnie Mae certificates may consist of FHA loans, VA loans and
other loans eligible for inclusion in loan pools underlying Ginnie Mae
certificates. Ginnie Mae certificates may be issued under either or both of the
Ginnie Mae I program and the Ginnie Mae II program, as described in the
prospectus supplement. If the trust fund includes Ginnie Mae certificates, your
prospectus supplement will include any material additional information regarding
the Ginnie Mae guaranty program, the characteristics of the pool underlying
those Ginnie Mae certificates, the servicing of the related pool, the payment of
principal and interest on Ginnie Mae certificates and other relevant matters
regarding the Ginnie Mae certificates.
Except as otherwise specified in the prospectus supplement or as
described below with respect to Stripped Agency Securities, each Ginnie Mae
certificate will provide for the payment, by or on behalf of the issuer, to the
registered holder of that Ginnie Mae certificate of monthly payments of
principal and interest equal to the holder's proportionate interest in the total
amount of the monthly principal and interest payments on each related FHA loan
or VA loan, minus servicing and guaranty fees totaling the excess of the
interest on that FHA loan or VA loan over the Ginnie Mae certificates' interest
rate. In addition, each payment to a holder of a Ginnie Mae certificate will
include proportionate pass-through payments to that holder of any prepayments of
principal of the FHA loans or VA loans underlying the Ginnie Mae certificate and
the holder's proportionate interest in the remaining principal balance in the
event of a foreclosure or other disposition of any related FHA loan or VA loan.
The Ginnie Mae certificates do not constitute a liability of, or
evidence any recourse against, the issuer of the Ginnie Mae certificates, the
depositor or any affiliates of the depositor, and the only recourse of a
registered holder (for example, the trustee) is to enforce the guaranty of
Ginnie Mae.
Ginnie Mae will have approved the issuance of each of the Ginnie Mae
certificates included in a trust fund in accordance with a guaranty agreement or
contract between Ginnie Mae and the issuer of the Ginnie Mae certificates.
Pursuant to that agreement, that issuer, in its capacity as servicer, is
required to perform customary functions of a servicer of FHA loans and VA loans,
including collecting payments from borrowers and remitting those collections to
the registered holder, maintaining escrow and impoundment accounts of borrowers
for payments of taxes, insurance and other items required to be paid by the
borrower, maintaining primary hazard insurance, and advancing from its own funds
to make timely payments of all amounts due on the Ginnie Mae certificate, even
if the payments received by that issuer on the loans backing the Ginnie Mae
certificate are less than the amounts due. If the issuer is unable to make
payments on a Ginnie Mae certificate as they become due, it must promptly notify
Ginnie Mae and request Ginnie Mae to make that payment. Upon that notification
and request, Ginnie Mae will make those payments directly to the registered
holder of the Ginnie Mae certificate. In the event no payment is made by the
issuer and the issuer fails to notify and request Ginnie Mae to make that
payment, the registered holder of the Ginnie Mae certificate has recourse
against only Ginnie Mae to obtain that payment. The trustee or its nominee, as
registered holder of the Ginnie Mae certificates included in a trust fund, is
entitled to proceed directly against Ginnie Mae under the terms of the guaranty
agreement or contract relating to the Ginnie Mae certificates for any amounts
that are unpaid when due under each Ginnie Mae certificate.
The Ginnie Mae certificates included in a trust fund may have other
characteristics and terms, different from those described above so long as the
Ginnie Mae certificates and underlying residential loans meet the criteria of
the rating agency or agencies. The Ginnie Mae certificates and underlying
residential loans will be described in the prospectus supplement.
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Fannie Mae
Fannie Mae is a federally chartered and stockholder-owned corporation
organized and existing under the Federal National Mortgage Association Charter
Act, as amended (the "Charter Act"). Fannie Mae was originally established in
1938 as a United States government agency to provide supplemental liquidity to
the mortgage market and was transformed into a stockholder-owned and privately
managed corporation by legislation enacted in 1968.
Fannie Mae provides funds to the mortgage market by purchasing mortgage
loans from lenders. Fannie Mae acquires funds to purchase loans from many
capital market investors, thus expanding the total amount of funds available for
housing. Operating nationwide, Fannie Mae helps to redistribute mortgage funds
from capital-surplus to capital-short areas. In addition, Fannie Mae issues
mortgage-backed securities primarily in exchange for pools of mortgage loans
from lenders. Fannie Mae receives fees for its guaranty of timely payment of
principal and interest on its mortgage-backed securities.
Fannie Mae Certificates
Fannie Mae certificates are Guaranteed Mortgage Pass-Through
Certificates typically issued pursuant to a prospectus that is periodically
revised by Fannie Mae. Fannie Mae certificates represent fractional undivided
interests in a pool of mortgage loans formed by Fannie Mae. Each mortgage loan
must meet the applicable standards of the Fannie Mae purchase program. Mortgage
loans comprising a pool are either provided by Fannie Mae from its own portfolio
or purchased pursuant to the criteria of the Fannie Mae purchase program.
Mortgage loans underlying Fannie Mae certificates included in a trust fund will
consist of conventional mortgage loans, FHA loans or VA loans. If the trust fund
includes Fannie Mae certificates, your prospectus supplement will include any
material additional information regarding the Fannie Mae program, the
characteristics of the pool underlying the Fannie Mae certificates, the
servicing of the related pool, payment of principal and interest on the Fannie
Mae certificates and other relevant matters about the Fannie Mae certificates.
Except as described below with respect to Stripped Agency Securities,
Fannie Mae guarantees to each registered holder of a Fannie Mae certificate that
it will distribute amounts representing that holder's proportionate share of
scheduled principal and interest at the applicable interest rate provided for by
that Fannie Mae certificate on the underlying mortgage loans, whether or not
received, and that holder's proportionate share of the full principal amount of
any prepayment or foreclosed or other finally liquidated mortgage loan, whether
or not the related principal amount is actually recovered.
The obligations of Fannie Mae under its guarantees are obligations
solely of Fannie Mae and are not backed by, nor entitled to, the full faith and
credit of the United States. If Fannie Mae were unable to satisfy those
obligations, distributions to the holders of Fannie Mae certificates would
consist solely of payments and other recoveries on the underlying loans and,
accordingly, monthly distributions to the holders of Fannie Mae certificates
would be affected by delinquent payments and defaults on those loans.
Fannie Mae certificates evidencing interests in pools of mortgage loans
formed on or after May 1, 1985 (other than Fannie Mae certificates backed by
pools containing graduated payment mortgage loans or multifamily loans) are
available in book-entry form only. For a Fannie Mae certificate issued in
book-entry form, distributions on the Fannie Mae certificate will be made by
wire, and for a fully registered Fannie Mae certificate, distributions will be
made by check.
The Fannie Mae certificates included in a trust fund may have other
characteristics and terms, different from those described above, as long as the
Fannie Mae certificates and underlying mortgage loans meet the criteria of the
rating agency or agencies rating the Certificates. The Fannie Mae certificates
and underlying mortgage loans will be described in the prospectus supplement.
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Freddie Mac
Freddie Mac is a corporate instrumentality of the United States created
pursuant to Title III of the Emergency Home Finance Act of 1970, as amended (the
"Freddie Mac Act"). Freddie Mac was established primarily for the purpose of
increasing the availability of mortgage credit for the financing of needed
housing. It seeks to provide an enhanced degree of liquidity for residential
mortgage investments primarily by assisting in the development of secondary
markets for conventional mortgages. The principal activity of Freddie Mac
currently consists of the purchase of first lien, conventional residential
mortgage loans or participation interests in those mortgage loans and the resale
of the mortgage loans so purchased in the form of mortgage securities, primarily
Freddie Mac certificates. Freddie Mac is confined to purchasing, so far as
practicable, mortgage loans and participation interests in mortgage loans which
it deems to be of the quality, type and class as to meet generally the purchase
standards imposed by private institutional mortgage investors.
Freddie Mac Certificates
Each Freddie Mac certificate represents an undivided interest in a pool
of residential loans that may consist of first lien conventional residential
loans, FHA loans or VA loans (the "Freddie Mac Certificate Group"). Each of
these mortgage loans must meet the applicable standards set forth in the Freddie
Mac Act. A Freddie Mac Certificate Group may include whole loans, participation
interests in whole loans and undivided interests in whole loans and/or
participations comprising another Freddie Mac Certificate Group. If the trust
fund includes Freddie Mac certificates, your prospectus supplement will include
any material additional information regarding the Freddie Mac guaranty program,
the characteristics of the pool underlying that Freddie Mac certificate, the
servicing of the related pool, payment of principal and interest on the Freddie
Mac certificate and any other relevant matters about the Freddie Mac
certificates.
Except as described below with respect to Stripped Agency Securities,
Freddie Mac guarantees to each registered holder of a Freddie Mac certificate
the timely payment of interest on the underlying mortgage loans to the extent of
the applicable interest rate on the registered holder's pro rata share of the
unpaid principal balance outstanding on the underlying mortgage loans in the
Freddie Mac Certificate Group represented by that Freddie Mac certificate,
whether or not received. Freddie Mac also guarantees to each registered holder
of a Freddie Mac certificate collection by that holder of all principal on the
underlying mortgage loans, without any offset or deduction, to the extent of
that holder's pro rata share of the principal, but does not, except if and to
the extent specified in the prospectus supplement, guarantee the timely payment
of scheduled principal. Pursuant to its guarantees, Freddie Mac also guarantees
ultimate collection of scheduled principal payments, prepayments of principal
and the remaining principal balance in the event of a foreclosure or other
disposition of a mortgage loan. Freddie Mac may remit the amount due on account
of its guarantee of collection of principal at any time after default on an
underlying mortgage loan, but not later than 30 days following the latest of
(1) foreclosure sale;
(2) payment of the claim by any mortgage insurer; and
(3) the expiration of any right of redemption, but in any
event no later than one year after demand has been made upon the
borrower for accelerated payment of principal.
In taking actions regarding the collection of principal after default
on the mortgage loans underlying Freddie Mac certificates, including the timing
of demand for acceleration, Freddie Mac reserves the right to exercise its
servicing judgment for the mortgage loans in the same manner as for mortgage
loans that it has purchased but not sold. The length of time necessary for
Freddie Mac to determine that a mortgage loan should be accelerated varies with
the particular circumstances of each borrower, and Freddie Mac has not adopted
servicing standards that require that the demand be made within any specified
period.
Freddie Mac certificates are not guaranteed by the United States or by
any Federal Home Loan Bank and do not constitute debts or obligations of the
United States or any Federal Home Loan Bank. The obligations of Freddie Mac
under its guarantee are obligations solely of Freddie Mac and are not backed by,
nor entitled to, the full faith and credit of the United States. If Freddie Mac
were unable to satisfy those obligations, distributions to holders of Freddie
Mac certificates would consist solely of payments and other recoveries on the
underlying mortgage loans and, accordingly, monthly distributions to holders of
Freddie Mac certificates would be affected by delinquent payments and defaults
on those mortgage loans.
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The Freddie Mac certificates included in a trust fund may have other
characteristics and terms, different from those described above, so long as the
Freddie Mac certificates and underlying mortgage loans meet the criteria of the
rating agency or agencies rating the Notes or Certificates, as applicable. The
Freddie Mac certificates and underlying mortgage loans will be described in the
prospectus supplement.
Stripped Agency Securities
The Ginnie Mae certificates, Fannie Mae certificates or Freddie Mac
certificates may be issued in the form of certificates ("Stripped Agency
Securities") that represent an undivided interest in all or part of either the
principal distributions (but not the interest distributions) or the interest
distributions (but not the principal distributions), or in some specified
portion of the principal or interest distributions (but not all of those
distributions), on an underlying pool of mortgage loans or other Ginnie Mae
certificates, Fannie Mae certificates or Freddie Mac certificates. Ginnie Mae,
Fannie Mae or Freddie Mac, as applicable, will guarantee each Stripped Agency
Security to the same extent as that entity guarantees the underlying securities
backing the Stripped Agency Securities or to the extent described above for a
Stripped Agency Security backed by a pool of mortgage loans, unless otherwise
specified in the prospectus supplement. If the trust fund includes Stripped
Agency Securities, your prospectus supplement will include any material
additional information regarding the characteristics of the assets underlying
the Stripped Agency Securities, the payments of principal and interest on the
Stripped Agency Securities and other relevant matters about the Stripped Agency
Securities.
Mortgage Securities
The Mortgage Securities will represent beneficial interests in loans of
the type that would otherwise be eligible to be mortgage loans, unsecured home
improvement loans, contract or Agency Securities, or collateralized obligations
secured by mortgage loans, unsecured home improvement loans, contract or Agency
Securities. The Mortgage Securities will have been
(1) issued by an entity other than the depositor or its
affiliates;
(2) acquired in bona fide secondary market transactions
from persons other than the issuer of the Mortgage Securities or its
affiliates; and
(3) (a) offered and distributed to the public pursuant to
an effective registration statement or (b) purchased in a transaction
not involving any public offering from a person who is not an
affiliate of the issuer of those securities at the time of sale (nor
an affiliate of the issuer at any time during the preceding three
months); provided a period of two years elapsed since the later of the
date the securities were acquired from the issuer.
Although individual Underlying Loans may be insured or guaranteed by
the United States or an agency or instrumentality of the United States, they
need not be, and Mortgage Securities themselves will not be so insured or
guaranteed. Except as otherwise set forth in the prospectus supplement, Mortgage
Securities will generally be similar to Notes or Certificates, as applicable,
offered under this prospectus.
The prospectus supplement for the Notes or Certificates, as applicable,
of each series evidencing interests in a trust fund including Mortgage
Securities will include a description of the Mortgage Securities and any related
credit enhancement, and the related mortgage loans, unsecured home improvement
loans, contracts, or Agency Securities will be described together with any other
mortgage loans or Agency Securities included in the trust fund of that series.
As used in this prospectus, the terms "mortgage loans," unsecured home
improvement loans, contracts, include the mortgage loans, unsecured home
improvement loans, contracts, as applicable, underlying the Mortgage Securities
in your trust fund. References in this prospectus to advances to be made and
other actions to be taken by the master servicer in connection with the Assets
may include any advances made and other actions taken pursuant to the terms of
the applicable Mortgage Securities.
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FHA Loans and VA Loans
FHA loans will be insured by the FHA as authorized under the Housing
Act, and the United States Housing Act of 1937, as amended. One- to four-family
FHA loans will be insured under various FHA programs including the standard FHA
203-b programs to finance the acquisition of one- to four-family housing units
and the FHA 245 graduated payment mortgage program. The FHA loans generally
require a minimum down payment of approximately 5% of the original principal
amount of the FHA loan. No FHA loan may have an interest rate or original
principal balance exceeding the applicable FHA limits at the time of origination
of that FHA loan.
Mortgage loans, unsecured home improvement loans, contracts, that are
FHA loans are insured by the FHA (as described in the prospectus supplement, up
to an amount equal to 90% of the sum of the unpaid principal of the FHA loan, a
portion of the unpaid interest and other liquidation costs) pursuant to Title I
of the Housing Act.
There are two primary FHA insurance programs that are available for
multifamily loans. Sections 221(d)(3) and (d)(4) of the Housing Act allow HUD to
insure multifamily loans that are secured by newly constructed and substantially
rehabilitated multifamily rental projects. Section 244 of the Housing Act
provides for co-insurance of those loans made under Sections 221(d)(3) and
(d)(4) by HUD/FHA and a HUD-approved co-insurer. Generally the term of this type
of multifamily loan may be up to 40 years and the ratio of the loan amount to
property replacement cost can be up to 90%.
Section 223(f) of the Housing Act allows HUD to insure multifamily
loans made for the purchase or refinancing of existing apartment projects that
are at least three years old. Section 244 also provides for co-insurance of
mortgage loans made under Section 223(f). Under Section 223(f), the loan
proceeds cannot be used for substantial rehabilitation work, but repairs may be
made for up to, in general, the greater of 15% of the value of the project and a
dollar amount per apartment unit established from time to time by HUD. In
general the loan term may not exceed 35 years and a loan-to-value ratio
refinancing of a project.
VA loans will be partially guaranteed by the VA under the Servicemen's
Readjustment Act of 1944, as amended (the "Servicemen's Readjustment Act"). The
Servicemen's Readjustment Act permits a veteran (or in some instances the spouse
of a veteran) to obtain a mortgage loan guarantee by the VA covering mortgage
financing of the purchase of a one- to four-family dwelling unit at interest
rates permitted by the VA. The program has no mortgage loan limits, requires no
down payment from the purchasers and permits the guarantee of mortgage loans of
up to 30 years' duration. However, no VA loan will have an original principal
amount greater than five times the partial VA guarantee for that VA loan. The
maximum guarantee that may be issued by the VA under this program will be set
forth in the prospectus supplement.
Pre-Funding Accounts
To the extent provided in a prospectus supplement, a portion of the
proceeds of the issuance of Notes or Certificates, as applicable, may be
deposited into an account maintained with the trustee (a "Pre-Funding Account").
In that case, the depositor will be obligated to sell at a predetermined price -
and the trust fund for the related series of Notes or Certificates, as
applicable, will be obligated to purchase - additional Assets (the "Subsequent
Assets") from time to time, and as frequently as daily, within the period (not
to exceed three months) specified in the prospectus supplement (the "Pre-Funding
Period") after the issuance of the Notes or Certificates, as applicable, having
a total principal balance approximately equal to the amount on deposit in the
Pre-Funding Account (the "Pre-Funded Amount") for that series on the date of its
issuance. The Pre-Funded Amount for a series will be specified in the prospectus
supplement, and will not in any case exceed 50% of the total initial Security
Balance of the related Notes or Certificates, as applicable. Any Subsequent
Assets will be required to satisfy specific eligibility criteria more fully set
forth in the prospectus supplement, which criteria will be consistent with the
eligibility criteria of the Assets initially included in the trust fund, subject
to those exceptions that are expressly stated in the prospectus supplement. In
addition, specific conditions must be satisfied before the Subsequent Assets are
transferred into the trust fund, for example, the delivery to the rating
agencies and to the trustee of any required opinions of counsel. See "ERISA
Considerations--Pre-Funding Accounts" for additional information regarding
Pre-Funding Accounts.
-14-
Except as set forth in the following sentence, the Pre-Funded Amount
will be used only to purchase Subsequent Assets. 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 Notes or Certificates, as
applicable, in the amounts and in the manner specified in the prospectus
supplement. In addition, if specified in the 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 on the Notes or Certificates, as
applicable, during the Pre-Funding Period. Any amount remaining in the
Capitalized Interest Account at the end of the Pre-Funding Period will be
remitted as specified in the prospectus supplement.
Amounts deposited in the Pre-Funding and Capitalized Interest Accounts
will be permitted to be invested, pending application, only in eligible
investments authorized by each applicable rating agency.
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 prospectus supplement will, to the extent described in this
prospectus and in the prospectus supplement deposit all payments and collections
received or advanced with respect to the Assets and other assets in the trust
fund. This type of account may be maintained as an interest bearing or a
non-interest bearing account, and funds held in that account may be held as cash
or invested in some short-term, investment grade obligations, in each case as
described in the 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 prospectus supplement, partial or full protection
against some defaults and losses on the Assets in the related trust fund may be
provided to one or more classes of Notes or Certificates, as applicable, in the
related series in the form of subordination of one or more other classes of
Notes or Certificates, as applicable, in that series or by one or more other
types of credit support, for example, a letter of credit, insurance policy,
guarantee, reserve fund or another type of credit support, or a combination of
these (any of these types of coverage for the Notes or Certificates, as
applicable, of any series, is referred to generally as "credit support"). The
amount and types of coverage, the identification of the entity providing the
coverage (if applicable) and related information for each type of credit
support, if any, will be described in the prospectus supplement for a series of
Notes or Certificates, as applicable. See "Description of Credit Support."
Cash Flow Agreements
If so provided in the 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 other agreements, for example, interest
rate swap agreements, interest rate cap or floor agreements, currency swap
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 Notes or Certificates, as applicable. (Currency swap agreements might be
included in the trust fund if some or all of the Assets were denominated in a
non-United States currency.) The principal terms of any related guaranteed
investment contract or other agreement (any of these types of agreement, a "Cash
Flow Agreement"), including provisions relating to the timing, manner and amount
of payments under these documents and provisions relating to the termination of
these documents, will be described in the prospectus supplement for the related
series. In addition, the prospectus supplement will provide information with
respect to the borrower under any Cash Flow Agreement.
Use of Proceeds
The net proceeds to be received from the sale of the Notes or
Certificates, as applicable, will be applied by the depositor to the purchase of
Assets, or the repayment of the financing incurred in that purchase, and to pay
for some of the expenses incurred in connection with that purchase of Assets and
sale of Notes or Certificates, as applicable. The depositor expects to sell the
Notes or Certificates, as applicable, from time to time, but the timing and
amount of offerings of Notes or Certificates, as applicable, 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.
-15-
Yield Considerations
General
The yield on any Offered Security will depend on the price paid by the
securityholder, the Interest 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).
Interest Rate
Notes or Certificates, as applicable, of any class within a series may
have fixed, variable or adjustable 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 for any series will specify the Interest Rate for each
class of Notes or Certificates, as applicable, or, in the case of a variable or
adjustable Interest Rate, the method of determining the Interest Rate; the
effect, if any, of the prepayment of any Asset on the Interest Rate of one or
more classes of Notes or Certificates, as applicable,; and whether the
distributions of interest on the Notes or Certificates, as applicable, of any
class will be dependent, in whole or in part, on the performance of any borrower
under a Cash Flow Agreement.
If specified in the prospectus supplement, the effective yield to
maturity to each holder of Notes or Certificates, as applicable, entitled to
payments of interest will be below that otherwise produced by the applicable
Interest Rate and purchase price of that Security because, while interest may
accrue on each Asset during a period (each, an "Accrual Period"), the
distribution of that interest will be made on a day that may be several days,
weeks or months following the period of accrual.
Timing of Payment of Interest
Each payment of interest on the Notes or Certificates, as applicable,
entitled to distributions of interest (or addition to the Security Balance of a
class of Accrual Securities) will be made by or on behalf of the trustee each
month on the date specified in the related prospectus supplement (each date, a
"Distribution Date"), and will include interest accrued during the Accrual
Period for that Distribution Date. As indicated above under "--Interest Rate,"
if the Accrual Period ends on a date other than the day before a Distribution
Date for the related series, the yield realized by the holders of those Notes or
Certificates, as applicable, may be lower than the yield that would result if
the Accrual Period ended on the day before the Distribution Date.
Payments of Principal; Prepayments
The yield to maturity on the Notes or Certificates, as applicable, will
be affected by the rate of principal payments on the Assets (or, in the case of
Mortgage Securities and Agency Securities, the underlying assets related to the
Mortgage Securities and Agency Securities), including principal prepayments
resulting from both voluntary prepayments by the borrowers and involuntary
liquidations. The rate at which principal prepayments occur will be affected by
a variety of factors, including the terms of the Assets (or, in the case of
Mortgage Securities and Agency Securities, the underlying assets related to the
Mortgage Securities and Agency Securities), 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 interest rates on the Assets in a particular trust fund (or, in the
case of Mortgage Securities and Agency Securities, the underlying assets related
to the Mortgage Securities and Agency Securities), those assets are likely to be
the subject of higher principal prepayments than if prevailing rates remain at
or above the rates borne by those assets. However, you should note that some
Assets (or, in the case of Mortgage Securities and Agency Securities, the
underlying assets related to the Mortgage Securities and Agency Securities) may
consist of loans with different interest rates. The rate of principal payment on
Mortgage Securities will also be affected by the allocation of principal
payments on the underlying assets among the Mortgage Securities or Agency
Securities and other Mortgage Securities or Agency Securities of the same
series. The rate of principal payments on the Assets in the related trust fund
(or, in the case of Mortgage Securities and Agency Securities, the underlying
assets related to the Mortgage Securities and Agency Securities) is likely to be
affected by the existence of any Lock-out Periods and Prepayment Premium
provisions of the mortgage loans underlying or comprising those Assets, and by
the extent to which the servicer of any of these mortgage loans is able to
enforce these 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 those provisions, with shorter Lock-out Periods or with
lower Prepayment Premiums.
-16-
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 small effect 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 some 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 (or, in
the case of Mortgage Securities and Agency Securities, the underlying assets
related to the Mortgage Securities and Agency Securities), 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 (or, in the case of Mortgage Securities and
Agency Securities, the underlying assets related to the Mortgage Securities and
Agency Securities), 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 Notes or Certificates, as applicable, the effect on yield on one or
more classes of the Notes or Certificates, as applicable, of that 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 those classes.
When a full prepayment is made on a mortgage loan or a contract, the
borrower is charged interest on the principal amount of the mortgage loan or a
contract so prepaid for the number of days in the month actually elapsed up to
the date of the prepayment or some other period specified in the 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 Notes or
Certificates, as applicable, entitled to payments of interest because interest
on the principal amount of any mortgage loan or a 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 a contract as of its due date in the
month in which the partial prepayment is received or some other date as is
specified in the prospectus supplement.
The timing of changes in the rate of principal payments on the Assets
(or, in the case of Mortgage Securities and Agency Securities, the underlying
assets related to the Mortgage Securities and Agency Securities) 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 that 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
particular period may not be offset by a similar decrease (or increase) in the
rate of principal payments at a later time.
The securityholder will bear the risk of not being able to reinvest
principal received from a Security at a yield at least equal to the yield on
that Security.
-17-
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 Notes
or Certificates, as applicable, may affect the ultimate maturity and the
weighted average life of each class of that 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 Notes or Certificates, as applicable, of the related
series.
If so provided in the prospectus supplement for a series of Notes or
Certificates, as applicable, one or more classes of Notes or Certificates, as
applicable, may have a final scheduled Distribution Date, which is the date on
or before which the Security Balance of the class of Notes or Certificates, as
applicable, is scheduled to be reduced to zero, calculated on the basis of the
assumptions applicable to that series. 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 that security will be repaid to the investor.
The weighted average life of a class of Notes or Certificates, as applicable, of
a series will be influenced by the rate at which principal on the Assets is paid
to that 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 Notes or Certificates, as
applicable, 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 Notes or Certificates, as applicable, of the related series, one
or more classes of these Notes or Certificates, as applicable, may be fully paid
before 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 function of the mix of mortgage rates or contract rates and
maturities of the mortgage loans or contracts comprising or underlying those
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.
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 those
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 those 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. Starting 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 for each series of Notes or Certificates, as
applicable, may contain tables, if applicable, setting forth the projected
weighted average life of each class of Offered Notes or Offered Certificates, as
applicable, of that series and the percentage of the initial Security Balance of
each class that would be outstanding on specified Distribution Dates based on
the assumptions stated in the prospectus supplement, including assumptions that
prepayments on the mortgage loans comprising or underlying the related Assets
are made at rates corresponding to various percentages of CPR, SPA or some other
standard specified in the prospectus supplement. These tables and assumptions
are intended to illustrate the sensitivity of the weighted average life of the
Notes or Certificates, as applicable, 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 Notes or Certificates, as
applicable. 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 prospectus
supplement.
-18-
Other Factors Affecting Weighted Average Life
Type of Asset
If specified in the prospectus supplement, a number of mortgage loans
may have balloon payments due at maturity (which, based on the amortization
schedule of those mortgage loans, may be a substantial amount), and because the
ability of a borrower to make a balloon payment typically will depend on 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 real estate values, the
borrower's financial situation, prevailing mortgage loan interest rates, the
borrower's equity in the related Mortgaged Property, tax laws and prevailing
general economic conditions. Neither the depositor, the servicer, the master
servicer, nor any of their affiliates will be obligated to refinance or
repurchase any mortgage loan or to sell the Mortgaged Property except to the
extent provided in the prospectus supplement. In the case of defaults, recovery
of proceeds may be delayed by, among other things, bankruptcy of the borrower or
adverse conditions in the market where the property is located. To minimize
losses on defaulted mortgage loans, the servicer may 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 Notes or
Certificates, as applicable, and may thus lengthen the period of time elapsed
from the date of issuance of a Security until it is retired.
For some mortgage loans, including ARM Loans, the mortgage rate at
origination may be below the rate that would result if the index and margin
relating to the mortgage loan were applied at origination. For some contracts,
the contract rate may be stepped up during its terms or may otherwise vary or be
adjusted. Under the applicable underwriting standards, the borrower under each
mortgage loan or contract generally will be qualified on the basis of the
mortgage rate or contract rate or contract rate in effect at origination. The
repayment of any of these mortgage loans or contracts may therefore be dependent
on the ability of the borrower to make larger level monthly payments following
the adjustment of the mortgage rate or contract rate. In addition, some mortgage
loans may be subject to temporary buydown plans ("Buydown Mortgage Loans")
pursuant to which the monthly payments made by the borrower during the early
years of the mortgage loan will be less than the scheduled monthly payments on
the mortgage loan (the "Buydown Period"). The periodic increase in the amount
paid by the borrower of a Buydown Mortgage Loan during or at the end of the
applicable Buydown Period may create a greater financial burden for the
borrower, who might not have otherwise qualified for a mortgage, and may
accordingly increase the risk of default for the related mortgage loan.
The mortgage rates on some 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 that index at
which interest accrues), the amount of interest accruing on the principal
balance of those mortgage loans may exceed the amount of the minimum scheduled
monthly payment on the mortgage loans. As a result, a portion of the accrued
interest on negatively amortizing mortgage loans may be added to the principal
balance of those mortgage loans and will bear interest at the applicable
mortgage rate. The addition of any deferred interest to the principal balance of
any related class or classes of Notes or Certificates, as applicable, will
lengthen the weighted average life of those Notes or Certificates, as
applicable, and may adversely affect yield to holders of those Notes or
Certificates, as applicable, depending on the price at which those Notes or
Certificates, as applicable, were purchased. In addition, for some ARM Loans
subject to negative amortization, during a period of declining interest rates,
it might be expected that each minimum scheduled monthly payment on this type of
mortgage loan would exceed the amount of scheduled principal and accrued
interest on the principal balance of that mortgage loan, and since that excess
will be applied to reduce the principal balance of the related class or classes
of Notes or Certificates, as applicable, the weighted average life of those
Notes or Certificates, as applicable, will be reduced and may adversely affect
yield to holders of those Notes or Certificates, as applicable, depending on the
price at which those Notes or Certificates, as applicable, were purchased.
As may be described in the prospectus supplement, the related 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 Revolving Credit Line Loans during a specified period
(rather than used to fund payments of principal to securityholders during that
period) with the result that the related Notes or Certificates, as applicable,
possess an interest-only period, also commonly referred to as a revolving
period, which will be followed by an amortization period. Any of these
interest-only or revolving periods may, upon the occurrence of particular events
to be described in the prospectus supplement, terminate before the end of the
specified period and result in the earlier than expected amortization of the
related Notes or Certificates, as applicable.
-19-
In addition, and as may be described in the prospectus supplement, the
related Agreement may provide that all or some of this collected principal may
be retained by the trustee (and held in specific temporary investments,
including mortgage loans) for a specified period before being used to fund
payments of principal to securityholders.
The result of the retention and temporary investment by the trustee of
this principal would be to slow the amortization rate of the related Notes or
Certificates, as applicable, relative to the amortization rate of the related
mortgage loans, or to attempt to match the amortization rate of the related
Notes or Certificates, as applicable, to an amortization schedule established at
the time the Notes or Certificates, as applicable, are issued. Any similar
feature applicable to any Notes or Certificates, as applicable, may end on the
occurrence of events to be described in the prospectus supplement, resulting in
the current funding of principal payments to the related securityholders and an
acceleration of the amortization of these Notes or Certificates, as applicable.
Termination
If specified in the prospectus supplement, a series of Notes or
Certificates, as applicable, may be subject to optional early termination
through the repurchase of the Assets in the related trust fund by the party
specified in the prospectus supplement, on any date on which the total Security
Balance of the Notes or Certificates, as applicable, of that series declines to
a percentage specified in the prospectus supplement (generally not to exceed
10%) of the Initial Security Balance, under the circumstances and in the manner
set forth therein. In addition, if so provided in the prospectus supplement,
some classes of Notes or Certificates, as applicable, 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 Notes
or Certificates, as applicable. 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 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. Furthermore, the rate and timing
of prepayments, defaults and liquidations on the mortgage loans or 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.
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 Notes or
Certificates, as applicable.
Refinancing
At the request of a borrower, the servicer may allow the refinancing of
a mortgage loan or contract in any trust fund by accepting prepayments on the
mortgage loan and permitting a new loan secured by a mortgage on the same
property. In the event of that refinancing, the new loan would not be included
in the related trust fund and, therefore, that 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. These programs may include 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 those mortgage loans or
contracts.
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Due-on-Sale Clauses
Acceleration of mortgage payments as a result of 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, other than FHA loans and VA loans, 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.
For any mortgage loans, except as set forth in the 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 that 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 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 some cases, the transfer may be made by a delinquent
borrower 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 related contract, the servicer's ability to do so will depend on
the enforceability under state law of the due-on-sale clause.
The Depositor
ACE Securities Corp., the depositor, is a special purpose corporation
incorporated in the State of Delaware on June 3, 1998. The principal executive
offices of the depositor are located at 6525 Morrison Boulevard, Suite 318,
Charlotte, North Carolina 28211. Its telephone number is (704) 365-0569. The
depositor does not have, nor is it expected in the future to have, any
significant assets.
The limited purposes of the depositor are, in general, to acquire, own
and sell mortgage loans and financial assets; to issue, acquire, own, hold and
sell securities and notes secured by or representing ownership interests in
mortgage loans and other financial assets, collections on the mortgage loans and
related assets; and to engage in any acts that are incidental to, or necessary,
suitable or convenient to accomplish, these purposes.
All of the shares of capital stock of the depositor are held by
Altamont Holdings Corp., a Delaware corporation.
Description of the Securities
General
The Asset-backed certificates (the "Certificates") of each series
(including any class of Certificates not offered by this prospectus) will
represent the entire beneficial ownership interest in the trust fund created
pursuant to the related Agreement. The Asset-backed notes (the "Notes," and
together with the Certificates, the "Securities"), will represent indebtedness
of the related trust fund and will be issued and secured pursuant to an
indenture. Each series of Notes or Certificates, as applicable, will consist of
one or more classes of Notes or Certificates, as applicable, that may:
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o provide for the accrual of interest on the series of Notes or
Certificates, as applicable, based on fixed, variable or
adjustable rates;
o be senior ("Senior Notes" or "Senior Certificates," and
collectively, "Senior Securities") or subordinate
("Subordinate Notes" or "Subordinate Certificates," and
collectively, "Subordinate Securities") to one or more other
classes of Notes or Certificates, as applicable, in respect of
distributions on the Notes or Certificates, as applicable,;
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 on the series of
Notes or Certificates, as applicable, which begin only
following the occurrence of specific events, that as the
retirement of one or more other classes of Notes or
Certificates, as applicable, of that series (collectively,
"Accrual Securities");
o provide for payments of principal as described in the
prospectus supplement, from all or only a portion of the
Assets in that trust fund, to the extent of available funds,
in each case as described in the prospectus supplement; and/or
o provide for distributions based on a combination of two or
more components of the Notes or Certificates, as applicable,
with one or more of the characteristics described in this
paragraph including a Strip Security component.
If specified in the prospectus supplement, distributions on one or more
classes of a series of Notes or Certificates, as applicable, may be limited to
collections from a designated portion of the Assets in the related trust fund
(each portion of the Assets, an "Asset Group"). Any of these classes may include
classes of Offered Notes or Offered Certificates, as applicable.
Each class of Notes or Certificates, as applicable, offered by this
prospectus and the related prospectus supplement (the "Offered Notes" and the
"Offered Certificates," respectively, and together, the "Offered Securities")
will be issued in minimum denominations corresponding to the Security Balances
or, in the case of some classes of Strip Securities, notional amounts or
percentage interests specified in the prospectus supplement. The transfer of any
Offered Notes or Offered Certificates, as applicable, may be registered and
those Notes or Certificates, as applicable, may be exchanged without the payment
of any service charge payable in connection with that registration of transfer
or exchange, but the depositor or the trustee or any agent of the depositor or
the trustee may require payment of a sum sufficient to cover any tax or other
governmental charge. One or more classes of Notes or Certificates, as
applicable, of a series may be issued in fully registered, certificated form
("Definitive Notes" or "Definitive Certificates," and collectively, "Definitive
Securities") or in book-entry form ("Book-Entry Notes" or "Book-Entry
Certificates," and collectively, "Book-Entry Securities"), as provided in the
prospectus supplement. See "Description of the Securities--Book-Entry
Registration and Definitive Securities." Definitive Notes or Definitive
Certificates, as applicable, will be exchangeable for other Notes or
Certificates, as applicable, of the same class and series of a similar total
Security Balance, notional amount or percentage interest but of different
authorized denominations.
Distributions
Distributions on the Notes or Certificates, as applicable, of each
series will be made by or on behalf of the trustee on each Distribution Date as
specified in the prospectus supplement from the Available Distribution Amount
for that series and that Distribution Date. Distributions (other than the final
distribution) will be made to the persons in whose names the Notes or
Certificates, as applicable, are registered at the close of business on, unless
a different date is specified in the 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 prospectus supplement (the
"Determination Date"). All distributions for each class of Notes or
Certificates, as applicable, on each Distribution Date will be allocated pro
rata among the outstanding securityholders in that class or by random selection
or as described in the 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 for these payments, if
that securityholder has so notified the trustee or other person required to make
those payments no later than the date specified in the prospectus supplement
(and, if so provided in the prospectus supplement, holds Notes or Certificates,
as applicable, in the requisite amount specified in the prospectus supplement),
or by check mailed to the address of the person entitled to the payment as it
appears on the Security Register; provided, however, that the final distribution
in retirement of the Notes or Certificates, as applicable, will be made only
upon presentation and surrender of the Notes or Certificates, as applicable, at
the location specified in the notice to securityholders of that final
distribution.
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Available Distribution Amount
All distributions on the Notes or Certificates, as applicable, of each
series on each Distribution Date will be made from the Available Distribution
Amount described below, subject to the terms described in the prospectus
supplement. Generally, the "Available Distribution Amount" for each Distribution
Date equals the sum of the following amounts:
(1) the total amount of all cash on deposit in the
related Collection Account as of the corresponding
Determination Date, exclusive, unless otherwise specified in
the prospectus supplement, of:
(a) all scheduled payments of principal and interest
collected but due on a date after the related Due Period
(unless a different period is specified in the prospectus
supplement, a "Due Period " for any Distribution Date will
begin on the second day of the month in which the immediately
preceding Distribution Date occurs, or 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),
(b) all prepayments, together with related payments
of the interest thereon and related Prepayment Premiums, all
proceeds of any FHA insurance, VA Guaranty Policy or insurance
policies to be maintained for each Asset (to the extent that
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 after the related Due Period, or other period
specified in the prospectus supplement,
(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 prospectus supplement or that are payable in
respect of particular 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 after the related Due
Period, or other period specified in the prospectus
supplement;
(2) if the 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;
(3) all advances made by a servicer or the master
servicer or any other entity as specified in the prospectus supplement
for that Distribution Date;
(4) if and to the extent the prospectus supplement so
provides, amounts paid by a servicer or any other entity as specified
in the prospectus supplement with respect to interest shortfalls
resulting from prepayments during the related Prepayment Period; and
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(5) 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 for
that Distribution Date.
As described below, unless otherwise specified in the prospectus
supplement, the entire Available Distribution Amount will be distributed among
the related Notes or Certificates, as applicable, (including any Notes or
Certificates, as applicable, not offered by this prospectus) on each
Distribution Date, and accordingly will be released from the trust fund and will
not be available for any future distributions.
The prospectus supplement for a series of Notes or Certificates, as
applicable, will describe any variation in the calculation or distribution of
the Available Distribution Amount for that series.
Distributions of Interest on the Securities
Each class of Notes or Certificates, as applicable, (other than classes
of Strip Securities which have no Interest Rate) may have a different Interest
Rate, which will be a fixed, variable or adjustable rate at which interest will
accrue on that class or a component of that class (the "Interest Rate" in the
case of Certificates). The prospectus supplement will specify the Interest Rate
for each class or component or, in the case of a variable or adjustable Interest
Rate, the method for determining the Interest Rate. Interest on the Notes or
Certificates, as applicable, will be calculated on the basis of a 360-day year
consisting of twelve 30-day months unless the prospectus supplement specifies a
different basis.
Distributions of interest on the Notes or Certificates, as applicable,
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
starting only on the Distribution Date, or under the circumstances, specified in
the prospectus supplement, and any class of Strip Securities that are not
entitled to any distributions of interest) based on the Accrued Security
Interest for that class and that Distribution Date, subject to the sufficiency
of the portion of the Available Distribution Amount allocable to that class on
that Distribution Date. Before any interest is distributed on any class of
Accrual Securities, the amount of Accrued Security Interest otherwise
distributable on that class will instead be added to the Security Balance of
that class on each Distribution Date.
For each class of Notes or Certificates, as applicable, and each
Distribution Date (other than some classes of Strip Securities), "Accrued
Security Interest" will be equal to interest accrued during the related Accrual
Period on the outstanding Security Balance of the class of Notes or
Certificates, as applicable, immediately before the Distribution Date, at the
applicable Interest Rate, reduced as described below. Accrued Security Interest
on some classes of Strip Securities will be equal to interest accrued during the
related Accrual Period on the outstanding notional amount of the Strip Security
immediately before each Distribution Date, at the applicable Interest Rate,
reduced as described below, or interest accrual in the manner described in the
prospectus supplement. The method of determining the notional amount for a
particular class of Strip Securities will be described in the prospectus
supplement. Reference to notional amount is solely for convenience in some of
the calculations and does not represent the right to receive any distributions
of principal. Unless otherwise provided in the prospectus supplement, the
Accrued Security Interest on a series of Notes or Certificates, as applicable,
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 before the due date in that accrual period on the mortgage loans or
contracts comprising or underlying the Assets in the trust fund for that series.
The particular manner in which these shortfalls are to be allocated among some
or all of the classes of Notes or Certificates, as applicable, of that series
will be specified in the prospectus supplement. The 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 Notes or
Offered Certificates, as applicable, may be reduced as a result of any other
contingencies, including delinquencies, losses and deferred interest on the
mortgage loans or contracts comprising or underlying the Assets in the related
trust fund. Unless otherwise provided in the prospectus supplement, any
reduction in the amount of Accrued Security Interest otherwise distributable on
a class of Notes or Certificates, as applicable, by reason of the allocation to
that 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 that class. See
"Yield Considerations."
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Distributions of Principal of the Securities
The Notes or Certificates, as applicable, of each series, other than
some classes of Strip Securities, will have a "Security Balance" which, at any
time, will equal the then maximum amount that the holder will be entitled to
receive on 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:
o to the extent of distributions of principal on that Security
from time to time and
o if and to the extent provided in the prospectus supplement,
by the amount of losses incurred on the related Assets.
The outstanding Security Balance of a Security:
o may be increased in respect of deferred interest on the
related mortgage loans, to the extent provided in the
prospectus supplement and
o in the case of Accrual Securities, will be increased by any
related Accrued Security Interest up until the Distribution
Date on which distributions of interest are required to begin.
If specified in the prospectus supplement, the initial total Security
Balance of all classes of Notes or Certificates, as applicable, of a series will
be greater than the outstanding total principal balance of the related Assets as
of the applicable Cut-off Date. The initial total Security Balance of a series
and each class of the series will be specified in the prospectus supplement.
Distributions of principal will be made on each Distribution Date to the class
or classes of Notes or Certificates, as applicable, in the amounts and in
accordance with the priorities specified in the prospectus supplement. Some
classes of Strip Securities with no Security Balance are not entitled to any
distributions of principal.
If specified in the related prospectus supplement, the trust fund may
issue notes or certificates, as applicable, from time to time and use proceeds
of this issuance to make principal payments with respect to a series.
Revolving Period
The applicable prospectus supplement may provide that all or a portion
of the principal collections may be applied by the trustee to the acquisition of
subsequent Revolving Credit Line Loans during a specified period rather than
used to distribute payments of principal to securityholders during that period.
These notes or certificates, as applicable, would then possess an interest only
period, also commonly referred to as a "Revolving Period", which will be
followed by an "Amortization Period", during which principal will be paid. Any
interest only revolving period may terminate prior to the end of the specified
period and result in the earlier than expected principal repayment of the notes
or certificates, as applicable.
Components
To the extent specified in the prospectus supplement, distribution on a
class of Notes or Certificates, as applicable, may be based on a combination of
two or more different components as described under "--General" above. To that
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 the component class of Notes or Certificates, as
applicable. References in those sections to Security Balance may refer to the
principal balance, if any, of these components and reference to the Interest
Rate may refer to the Interest Rate, if any, on these components.
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Distributions on the Securities of Prepayment Premiums
If so provided in the 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 Notes or
Certificates, as applicable, entitled to the distribution as described in the
prospectus supplement.
Allocation of Losses and Shortfalls
If so provided in the prospectus supplement for a series of Notes or
Certificates, as applicable, consisting of one or more classes of Subordinate
Notes or Subordinate Certificates, as applicable, on any Distribution Date in
respect of which losses or shortfalls in collections on the Assets have been
incurred, the amount of those losses or shortfalls will be borne first by a
class of Subordinate Notes or Subordinate Certificates, as applicable, in the
priority and manner and subject to the limitations specified in the 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 that trust fund. The prospectus supplement for a series of
Notes or Certificates, as applicable, will describe the entitlement, if any, of
a class of Notes or Certificates, as applicable, whose Security Balance has been
reduced to zero as a result of distributions or the allocation of losses on the
related Assets to recover any losses previously allocated to that class from
amounts received on the Assets. However, if the Security Balance of a class of
Notes or Certificates, as applicable, has been reduced to zero as the result of
principal distributions, the allocation of losses on the Assets, an optional
termination or an optional purchase or redemption, that class will no longer be
entitled to receive principal distributions from amounts received on the assets
of the related trust fund, including distributions in respect of principal
losses previously allocated to that class.
Advances in Respect of Delinquencies
If so provided in the prospectus supplement, the servicer or another
entity described in the prospectus supplement 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 related Collection Account that are not included
in the Available Distribution Amount for that Distribution Date, in an amount
equal to the total of payments of (1) principal (other than any balloon
payments) and (2) interest (net of related servicing fees and Retained Interest)
that were due on the Assets in that trust fund during the related Due Period and
were delinquent on the related Determination Date, subject to a good faith
determination that the advances will be reimbursable from Related Proceeds (as
defined below). In the case of a series of Notes or Certificates, as applicable,
that includes one or more classes of Subordinate Notes or Subordinate
Certificates, as applicable, and if so provided in the prospectus supplement,
the servicer's (or another entity's) advance obligation may be limited only to
the portion of those delinquencies necessary to make the required distributions
on one or more classes of Senior Notes or Senior Certificates, as applicable,
and/or may be subject to a good faith determination that advances will be
reimbursable not only from Related Proceeds but also from collections on other
Assets otherwise distributable on one or more classes of those Subordinate Notes
or Subordinate Certificates, as applicable. See "Description of Credit Support."
Advances are intended to maintain a regular flow of scheduled interest
and principal payments to holders of the class or classes of Notes or
Certificates, as applicable, entitled to the payments, 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 those
advances were made (as to any Assets, "Related Proceeds") and from any other
amounts specified in the prospectus supplement, including out of any amounts
otherwise distributable on one or more classes of Subordinate Notes or
Subordinate Certificates, as applicable, of that series; provided, however, that
any advance will be reimbursable from any amounts in the related Collection
Account before any distributions being made on the Notes or Certificates, as
applicable, to the extent that the servicer (or some other entity) determines in
good faith that that advance (a "Nonrecoverable Advance") is not ultimately
recoverable from Related Proceeds or, if applicable, from collections on other
Assets otherwise distributable on the Subordinate Notes or Subordinate
Certificates, as applicable. If advances have been made by the servicer from
excess funds in the related Collection Account, the servicer is required to
replace these funds in that Collection Account on any future Distribution Date
to the extent that funds in that Collection Account on that Distribution Date
are less than payments required to be made to securityholders on that date. If
specified in the 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
borrower on any surety bond will be set forth in the prospectus supplement.
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If and to the extent so provided in the prospectus supplement, the
servicer (or another entity) will be entitled to receive interest at the rate
specified in the prospectus supplement on its outstanding advances and will be
entitled to pay itself this interest periodically from general collections on
the Assets before any payment to securityholders or as otherwise provided in the
related Agreement and described in the prospectus supplement.
If specified in the prospectus supplement, the master servicer or the
trustee will be required to make advances, subject to specific 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 Notes or
Certificates, as applicable, of a series, the servicer, the master servicer or
the trustee, as provided in the prospectus supplement, will forward or cause to
be forwarded to each holder, to the depositor and to any other parties as may be
specified in the related Agreement, a statement containing the information
specified in the prospectus supplement, or if no information is specified in the
prospectus supplement, generally setting forth, in each case to the extent
applicable and available:
(1) the amount of that distribution to holders of Notes
or Certificates, as applicable, of that class applied to reduce the
Security Balance of the Notes or Certificates, as applicable,;
(2) the amount of that distribution to holders of Notes
or Certificates, as applicable, of that class allocable to Accrued
Security Interest;
(3) the amount of that distribution allocable to
Prepayment Premiums;
(4) the amount of related servicing compensation and any
other customary information as is required to enable securityholders
to prepare their tax returns;
(5) the total amount of advances included in that
distribution, and the total amount of unreimbursed advances at the
close of business on that Distribution Date;
(6) the total principal balance of the Assets at the
close of business on that Distribution Date;
(7) the number and total principal balance of mortgage
loans 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 begun;
(8) for any mortgage loan or contract liquidated during
the related Due Period, (a) the portion of the related liquidation
proceeds payable or reimbursable to a servicer (or any other entity)
in respect of that mortgage loan and (b) the amount of any loss to
securityholders;
(9) with respect to collateral acquired by the trust fund
through foreclosure or otherwise (an "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 date of acquisition;
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(10) for each REO Property relating to a mortgage loan or
contract and included in the trust fund as of the end of the related
Due Period,
(a) the book value,
(b) the principal balance of the related mortgage
loan or contract immediately following that
Distribution Date (calculated as if that
mortgage loan or contract were still outstanding
taking into account limited modifications to the
terms of the mortgage loan specified in the
Agreement),
(c) the total amount of unreimbursed servicing
expenses and unreimbursed advances in respect of
the REO Property and
(d) if applicable, the total amount of interest
accrued and payable on related servicing
expenses and related advances;
(11) for any REO Property sold during the related Due
Period
(a) the total amount of sale proceeds,
(b) the portion of those sales proceeds payable or
reimbursable to the master servicer in respect
of that 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;
(12) the total Security Balance or notional amount, as the
case may be, of each class of Notes or Certificates, as applicable,
(including any class of Notes or Certificates, as applicable, not
offered by this prospectus) at the close of business on that
Distribution Date, separately identifying any reduction in that
Security Balance due to the allocation of any loss and increase in the
Security Balance of a class of Accrual Securities if any Accrued
Security Interest has been added to that balance;
(13) the total amount of principal prepayments made during
the related Due Period;
(14) the amount deposited in the reserve fund, if any, on
that Distribution Date;
(15) the amount remaining in the reserve fund, if any, as
of the close of business on that Distribution Date;
(16) the total unpaid Accrued Security Interest, if any,
on each class of Notes or Certificates, as applicable, at the close of
business on that Distribution Date;
(17) in the case of Notes or Certificates, as applicable,
with a variable Interest Rate, the Interest Rate applicable to that
Distribution Date, and, if available, the immediately succeeding
Distribution Date, as calculated in accordance with the method
specified in the prospectus supplement;
(18) in the case of Notes or Certificates, as applicable,
with an adjustable Interest Rate, for statements to be distributed in
any month in which an adjustment date occurs, the adjustable Interest
Rate applicable to that Distribution Date, if available, and the
immediately succeeding Distribution Date as calculated in accordance
with the method specified in the prospectus supplement;
(19) as to any series that includes credit support, the
amount of coverage of each instrument of credit support included as of
the close of business on that Distribution Date;
(20) during the Pre-Funding Period, the remaining Pre-
Funded Amount and the portion of the Pre-Funding Amount used to
acquire Subsequent Assets since the preceding Distribution Date;
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(21) during the Pre-Funding Period, the amount remaining
in the Capitalized Interest Account; and
(22) the total amount of payments by the borrowers 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 prospectus
supplement, will furnish to each securityholder of record at any time during the
calendar year the information required by the Code and applicable regulations
under the Code to enable securityholders to prepare their tax returns. See
"Description of the Securities--Book-Entry Registration and Definitive
Securities."
Termination
The obligations created by the related Agreement for each series of
Notes or Certificates, as applicable, will terminate upon the payment to
securityholders of that series of all amounts held in the Collection Accounts or
by a servicer, the master servicer, if any, or the trustee and required to be
paid to them pursuant to that Agreement following the earlier of (1) the final
payment or other liquidation of the last Asset subject to the related Agreement
or the disposition of all property acquired upon foreclosure of any mortgage
loan or contract subject to the Agreement and (2) the purchase of all of the
assets of the trust fund by the party entitled to effect that termination, under
the circumstances and in the manner set forth in the prospectus supplement. In
no event, however, will the trust fund continue beyond the date specified in the
prospectus supplement. Written notice of termination of the Agreement will be
given to each securityholder, and the final distribution will be made only upon
presentation and surrender of the Notes or Certificates, as applicable, at the
location to be specified in the notice of termination.
If specified in the prospectus supplement, a series of Notes or
Certificates, as applicable, may be subject to optional early termination
through the purchase of the Assets in the related trust fund by the party
specified in the prospectus supplement, under the circumstances and in the
manner set forth in the prospectus supplement. If so provided in the prospectus
supplement, upon the reduction of the Security Balance of a specified class or
classes of Notes or Certificates, as applicable, by a specified percentage, the
party specified in the prospectus supplement will solicit bids for the purchase
of all assets of the trust fund, or of a sufficient portion of those assets to
retire that class or classes or purchase that class or classes at a price set
forth in the prospectus supplement, in each case, under the circumstances and in
the manner set forth in the prospectus supplement. That price will at least
equal the outstanding Security Balances and any accrued and unpaid interest on
the Security Balances (including any unpaid interest shortfalls for prior
Distribution Dates). Any sale of the Assets of the trust fund will be without
recourse to the trust fund or the securityholders. Any purchase or solicitation
of bids may be made only when the total Security Balance of that class or
classes declines to a percentage of the Initial Security Balance of those Notes
or Certificates, as applicable, (not to exceed 10%) specified in the prospectus
supplement. In addition, if so provided in the prospectus supplement, some
classes of Notes or Certificates, as applicable, may be purchased or redeemed in
the manner set forth in the prospectus supplement at a price at least equal to
the outstanding Security Balance of each class so purchased or redeemed and any
accrued and unpaid interest on the Security Balance (including any unpaid
interest shortfalls for prior Distribution Dates).
Optional Purchases
Subject to the provisions of the applicable Agreement, the depositor,
the servicer or any other party specified in the prospectus supplement may, at
that party's option, repurchase any mortgage loan that is in default or as to
which default is reasonably foreseeable if, in the depositor's, the servicer's
or any other party's judgment, the related default is not likely to be cured by
the borrower or default is not likely to be averted, at a price equal to the
unpaid principal balance of the mortgage loan plus accrued interest on the
mortgage loan and under the conditions set forth in the prospectus supplement.
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Book-Entry Registration and Definitive Securities
General
If provided for in the prospectus supplement, one or more classes of
the Offered Notes or Offered Certificates, as applicable, of any series will be
issued as Book-Entry Notes or Book-Entry Certificates, as applicable, and each
of these classes will be represented by one or more single Notes or
Certificates, as applicable, registered in the name of a nominee for the
depository, The Depository Trust Company ("DTC") and, if provided in the
prospectus supplement, additionally through Clearstream Luxembourg, societe
anonyme ("Clearstream Luxembourg") or the Euroclear System ("Euroclear"). Each
class of Book-Entry Notes or Book-Entry Certificates, as applicable, will be
issued in one or more certificates or notes, as the case may be, that equal the
initial principal amount of the related class of Offered Notes or Offered
Certificates, as applicable, and will initially be registered in the name of
Cede & Co.
No person acquiring an interest in a Book-Entry Security (each, a
"Beneficial Owner") will be entitled to receive a Definitive Security, except as
set forth below under "--Definitive Securities." Unless and until Definitive
Notes or Definitive Certificates, as applicable, are issued for the Book-Entry
Notes or Book-Entry Certificates, as applicable, under the limited circumstances
described in the applicable prospectus supplement or this prospectus, all
references to actions by securityholders with respect to the Book-Entry Notes or
Book-Entry Certificates, as applicable, will refer to actions taken by DTC,
Clearstream Luxembourg or Euroclear upon instructions from their Participants
(as defined below), and all references in this prospectus to distributions,
notices, reports and statements to securityholders with respect to the
Book-Entry Notes or Book-Entry Certificates, as applicable, will refer to
distributions, notices, reports and statements to DTC, Clearstream Luxembourg or
Euroclear, as applicable, for distribution to Beneficial Owners by DTC in
accordance with the procedures of DTC and if applicable, Clearstream Luxembourg
and Euroclear.
Beneficial Owners will hold their Book-Entry Notes or Book-Entry
Certificates, as applicable, through DTC in the United States, or, if the
Offered Notes or Offered Certificates, as applicable, are offered for sale
globally, through Clearstream Luxembourg or Euroclear in Europe if they are
participating organizations ("Participants") of those systems. Participants
include securities brokers and dealers, banks, trust companies and clearing
corporations and may include some other organizations. Indirect access to the
DTC, Clearstream Luxembourg and Euroclear systems 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").
DTC
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code ("UCC") and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). DTC was
created to hold securities for its Participants, some of which (and/or their
representatives) own DTC, and facilitate the clearance and settlement of
securities transactions between its Participants through electronic book-entry
changes in their accounts, thus eliminating the need for physical movement of
securities. In accordance with its normal procedures, DTC is expected to record
the positions held by each of its Participants in the Book-Entry Notes or
Book-Entry Certificates, as applicable, whether held for its own account or as a
nominee for another person. In general, beneficial ownership of Book-Entry Notes
or Book-Entry Certificates, as applicable, will be subject to the rules,
regulations and procedures governing DTC and its Participants as in effect from
time to time.
Clearstream Luxembourg
Clearstream Banking, societe anonyme, 67 Bd Grande-Duchesse Charlotte,
L-2967 Luxembourg ("Clearstream, Luxembourg"), was incorporated in 1970 as
"Cedel S.A.", a company with limited liability under Luxembourg law (a societe
anonyme). Cedel S.A. subsequently changed its name to Cedelbank. On January 10,
2000, Cedelbank's parent company, Cedel International, societe anonyme ("CI")
merged its clearing, settlement and custody business with that of Deutsche Borse
Clearing AG ("DBC"). The merger involved the transfer by CI of substantially all
of its assets and liabilities (including its shares in CB) to a new Luxembourg
company, New Cedel International, societe anonyme ("New CI"), which is 50% owned
by CI and 50% owned by DBC's parent company Deutsche Borse AG. The shareholders
of these two entities are banks, securities dealers and financial institutions.
Cedel International currently has 92 shareholders, including U.S. financial
institutions or their subsidiaries. No single entity may own more than 5 percent
of Cedel International's stock.
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Further to the merger, the Board of Directors of New Cedel
International decided to rename the companies in the group in order to give them
a cohesive brand name. The new brand name that was chosen is "Clearstream". With
effect from January 14, 2000 New CI has been renamed "Clearstream International,
societe anonyme". On January 18, 2000, Cedelbank was renamed "Clearstream
Banking, societe anonyme", and Cedel Global Services was renamed "Clearstream
Services, societe anonyme".
On January 17, 2000 DBC was renamed "Clearstream Banking AG". This
means that there are now two entities in the corporate group headed by
Clearstream International which share the name "Clearstream Banking", the entity
previously named "Cedelbank" and the entity previously named "Deutsche Brse
Clearing AG".
Clearstream, Luxembourg holds securities for its customers
("Clearstream, Luxembourg Participants") and facilitates the clearance and
settlement of securities transactions between Clearstream, Luxembourg customers
through electronic book-entry changes in accounts of Clearstream, Luxembourg
customers, thereby eliminating the need for physical movement of certificates.
Transactions may be settled by Clearstream, Luxembourg in any of 36 currencies,
including United States Dollars. Clearstream, Luxembourg provides to its
customers, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Clearstream, Luxembourg also deals with domestic
securities markets in over 30 countries through established depository and
custodial relationships. Clearstream, Luxembourg is registered as a bank in
Luxembourg, and as such is subject to regulation by the Commission de
Surveillance du Secteur Financier, "CSSF", which supervises Luxembourg banks.
Clearstream, Luxembourg's customers are world-wide financial institutions
including underwriters, securities brokers and dealers, banks, trust companies
and clearing corporations. Clearstream, Luxembourg's U.S. customers are limited
to securities brokers and dealers, and banks. Currently, Clearstream, Luxembourg
has approximately 2,000 customers located in over 80 countries, including all
major European countries, Canada, and the United States. Indirect access to
Clearstream, Luxembourg is available to other institutions that clear through or
maintain a custodial relationship with an account holder of Clearstream,
Luxembourg. Clearstream, Luxembourg has established an electronic bridge with
Morgan Guaranty Trust Company of New York as the Operator of the Euroclear
System (MGT/EOC) in Brussels to facilitate settlement of trades between
Clearstream, Luxembourg and MGT/EOC.
Euroclear
Euroclear was created in 1968 to hold securities for its Participants
and to clear and settle transactions between its Participants through
simultaneous electronic book-entry delivery against payment, thus eliminating
the need for physical movement of securities and any risk from lack of
simultaneous transfers of securities and cash. Transactions may be settled in
any of 32 currencies, including United States dollars. Euroclear includes
various other services, including securities lending and borrowing, and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. Euroclear is
operated by the Brussels, Belgium office of Morgan Guaranty Trust Company of New
York (the "Euroclear Operator"), under contract with Euroclear Clearance Systems
S.C., a Belgian cooperative corporation (the "Cooperative Corporation"). All
operations are conducted by the Euroclear Operator, and all Euroclear securities
clearance accounts and Euroclear cash accounts are accounts with the Euroclear
Operator, not the Cooperative Corporation. The Cooperative Corporation
establishes policy for Euroclear on behalf of its 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 Participant of Euroclear, either directly or
indirectly.
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The Euroclear Operator is the Belgian branch of a New York banking
corporation that is a member bank of the Federal Reserve System, and is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific securities to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of its
Participants, and has no record of or relationship with persons holding through
Participants of Euroclear.
Clearstream Luxembourg and Euroclear will hold omnibus positions on
behalf of their Participants through customers' securities accounts in
Clearstream Luxembourg's and Euroclear's names on the books of their respective
depositaries which in turn will hold positions in customers' securities accounts
in the depositaries names on the books of DTC. Citibank will act as depositary
for Clearstream Luxembourg and The Chase Manhattan Bank will act as depositary
for Euroclear (individually the "Relevant Depositary" and collectively, the
"European Depositaries").
Beneficial Ownership of Book-Entry Securities
Except as described below, no Beneficial Owner will be entitled to
receive a physical certificate representing a Certificate, or note representing
a Note. Unless and until Definitive Notes or Definitive Certificates, as
applicable, are issued, it is anticipated that the only "securityholder" of the
Offered Notes or Offered Certificates, as applicable, will be Cede & Co., as
nominee of DTC. Beneficial Owners will not be "Certificateholders" as that term
is used in any Agreement, nor "Noteholders" as that term is used in any
indenture. Beneficial Owners are only permitted to exercise their rights
indirectly through Participants, DTC, Clearstream Luxembourg or Euroclear, as
applicable.
The Beneficial Owner's ownership of a Book-Entry Security 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 that purpose. In turn, the Financial
Intermediary's ownership of a Book-Entry Security will be recorded on the
records of DTC (or of a Participant that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the Beneficial Owner's Financial Intermediary is not a Participant of DTC and on
the records of Clearstream Luxembourg or Euroclear, as appropriate).
Beneficial Owners will receive all distributions of principal of, and
interest on, the Offered Notes or Offered Certificates, as applicable, from the
trustee through DTC and its Participants. While the Offered Notes or Offered
Certificates, as applicable, 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 Offered Notes or Offered Certificates, as applicable, and is required to
receive and transmit distributions of principal of, and interest on, the Offered
Notes or Offered Certificates, as applicable. Participants and Indirect
Participants with whom Beneficial Owners have accounts with respect to Offered
Notes or Offered Certificates, as applicable, are similarly required to make
book-entry transfers and receive and transmit distributions on behalf of their
respective Beneficial Owners. Accordingly, although Beneficial Owners will not
possess certificates or notes, the Rules provide a mechanism by which Beneficial
Owners will receive distributions and will be able to transfer their interest.
Beneficial Owners will not receive or be entitled to receive
certificates or notes representing their respective interests in the Offered
Notes or Offered Certificates, as applicable, except under the limited
circumstances described below. Unless and until Definitive Notes or Definitive
Certificates, as applicable, are issued, Beneficial Owners who are not
Participants may transfer ownership of Offered Notes or Offered Certificates, as
applicable, only through Participants and Indirect Participants by instructing
the Participants and Indirect Participants to transfer Offered Notes or Offered
Certificates, as applicable, by book-entry transfer, through DTC for the account
of the purchasers of the Offered Notes or Offered Certificates, as applicable,
which account is maintained with their respective Participants. Under the Rules
and in accordance with DTC's normal procedures, transfer of ownership of
Book-Entry Notes or Book-Entry Certificates, as applicable, will be executed
through DTC and the accounts of the respective Participants at DTC will be
debited and credited. Similarly, the Participants and Indirect Participants will
make debits or credits, as the case may be, on their records on behalf of the
selling and purchasing Beneficial Owners.
-32-
Because of time zone differences, any credits of securities received in
Clearstream Luxembourg or Euroclear as a result of a transaction with a
Participant will be made during subsequent securities settlement processing and
dated the business day following the DTC settlement date. These credits or any
transactions in securities settled during this processing will be reported to
the relevant Participants of Clearstream Luxembourg or Euroclear on that
business day. Cash received in Clearstream Luxembourg or Euroclear as a result
of sales of securities by or through a Participant of Clearstream Luxembourg or
Euroclear to a Participant of DTC will be received with value on the DTC
settlement date but will be available in the relevant Clearstream Luxembourg or
Euroclear cash account only as of the business day following settlement in DTC.
For information with respect to tax documentation procedures relating to the
Notes or Certificates, as applicable, see "Material Federal Income Tax
Considerations -- Tax Treatment of Foreign Investors" in this prospectus and, if
the Book-Entry Notes or Book-Entry Certificates, as applicable, are globally
offered and the prospectus supplement so provides, see "Global Clearance,
Settlement and Tax Documentation Procedures -- Certain U.S. Federal Income Tax
Documentation Requirements" in Annex I to the prospectus supplement.
Transfers between Participants of DTC will occur in accordance with DTC
Rules. Transfers between Participants of Clearstream Luxembourg or Euroclear
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 Participants of
Clearstream Luxembourg or Euroclear, on the other, will be effected in DTC in
accordance with the DTC Rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, cross-market transactions
will require delivery of instructions to the relevant European international
clearing system by the counterparty in that system in accordance with its rules
and procedures and within its established deadlines (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. Participants of
Clearstream Luxembourg or Euroclear may not deliver instructions directly to the
European Depositaries.
Distributions on the Book-Entry Notes or Book-Entry Certificates, as
applicable, will be made on each Distribution Date by the Trustee to DTC. DTC
will be responsible for crediting the amount of each distribution to the
accounts of the applicable Participants of DTC in accordance with DTC's normal
procedures. Each Participant of DTC will be responsible for disbursing the
distribution to the Beneficial Owners of the Book-Entry Notes or Book-Entry
Certificates, as applicable, that it represents and to each Financial
Intermediary for which it acts as agent. Each Financial Intermediary will be
responsible for disbursing funds to the Beneficial Owners of the Book-Entry
Notes or Book-Entry Certificates, as applicable, that it represents.
Under a book-entry format, Beneficial Owners of the Book-Entry Notes or
Book-Entry Certificates, as applicable, may experience some delay in their
receipt of payments, because the distributions will be forwarded by the Trustee
to Cede & Co. Any distributions on Notes or Certificates, as applicable, held
through Clearstream Luxembourg or Euroclear will be credited to the cash
accounts of Participants of Clearstream Luxembourg or Euroclear in accordance
with the relevant system's rules and procedures, to the extent received by the
Relevant Depositary. These distributions will be subject to tax reporting in
accordance with relevant United States tax laws and regulations. See "Material
Federal Income Tax Considerations -- REMICs -- Taxation of Certain Foreign
Investors" in this prospectus. Because DTC can only act on behalf of Financial
Intermediaries, the ability of a Beneficial Owner to pledge Book-Entry Notes or
Book-Entry Certificates, as applicable, to persons or entities that do not
participate in the depository system, or otherwise take actions in respect of
Book-Entry Notes or Book-Entry Certificates, as applicable, may be limited due
to the lack of physical securities for the Book-Entry Notes or Book-Entry
Certificates, as applicable. In addition, issuance of the Book-Entry Notes or
Book-Entry Certificates, as applicable, in book-entry form may reduce the
liquidity of the securities in the secondary market since potential investors
may be unwilling to purchase Notes or Certificates, as applicable, for which
they cannot obtain physical securities.
-33-
Monthly and annual reports will be provided to Cede & Co., as nominee
of DTC, and may be made available by Cede & Co. to Beneficial Owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Notes or Book-Entry Certificates, as applicable, of
Beneficial Owners are credited.
Generally, DTC will advise the applicable trustee that unless and until
Definitive Notes or Definitive Certificates, as applicable, are issued, DTC will
take any action permitted to be taken by the holders of the Book-Entry Notes or
Book-Entry Certificates, as applicable, under the Agreement or indenture, as
applicable, only at the direction of one or more Financial Intermediaries to
whose DTC accounts the Book-Entry Notes or Book-Entry Certificates, as
applicable, are credited, to the extent that actions are taken on behalf of
Financial Intermediaries whose holdings include the Book-Entry Notes or
Book-Entry Certificates, as applicable. If the Book-Entry Notes or Book-Entry
Certificates, as applicable, are globally offered, Clearstream Luxembourg or the
Euroclear Operator, as the case may be, will take any other action permitted to
be taken by a securityholder under the Agreement or indenture, as applicable, on
behalf of a Participant of Clearstream Luxembourg or Euroclear only in
accordance with its relevant rules and procedures and subject to the ability of
the Relevant Depositary to effect those actions on its behalf through DTC. DTC
may take actions, at the direction of the related Participants, with respect to
some Offered Notes or Offered Certificates, as applicable, that conflict with
actions taken with respect to other Offered Notes or Offered Certificates, as
applicable.
Although DTC, Clearstream Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of Book-Entry Notes or
Book-Entry Certificates, as applicable, among Participants of DTC, Clearstream
Luxembourg and Euroclear, they are under no obligation to perform or continue to
perform these procedures and the procedures may be discontinued at any time.
None of the depositor, any master servicer, any servicer, the trustee,
any securities registrar or paying agent or any of their affiliates 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 or Book-Entry
Certificates, as applicable, or for maintaining, supervising or reviewing any
records relating to those beneficial ownership interests.
Definitive Securities
Notes or Certificates, as applicable, initially issued in book-entry
form will be issued as Definitive Notes or Definitive Certificates, as
applicable, to Beneficial Owners or their nominees, rather than to DTC or its
nominee only
(1) if the depositor advises the trustee in writing that DTC is no
longer willing or able to properly discharge its responsibilities
as depository for the Notes or Certificates, as applicable, and
the depositor is unable to locate a qualified successor,
(2) if the depositor, at its option, elects to end the book-entry
system through DTC or
(3) in accordance with any other provisions described in the
prospectus supplement.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Notes or Definitive Certificates, as
applicable, for the Beneficial Owners. Upon surrender by DTC of the security or
securities representing the Book-Entry Notes or Book-Entry Certificates, as
applicable, together with instructions for registration, the trustee will issue
(or cause to be issued) to the Beneficial Owners identified in those
instructions the Definitive Notes or Definitive Certificates, as applicable, to
which they are entitled, and thereafter the trustee will recognize the holders
of those Definitive Notes or Definitive Certificates, as applicable, as
securityholders under the Agreement.
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Description of the Agreements
Agreements Applicable to a Series
REMIC Securities, FASIT Securities, Grantor Trust Securities
Notes or Certificates, as applicable, representing interests in a trust
fund, or a portion of a trust fund, that the trustee will elect to have treated
as a real estate mortgage investment conduit under Sections 860A through 860G of
the Code ("REMIC Securities"), FASIT Securities (as defined in this prospectus),
or Grantor Trust Securities (as defined in this prospectus) will be issued, and
the related trust fund will be created, pursuant to a pooling and servicing
agreement or trust agreement (in either case, generally referred to in this
prospectus as the "pooling and servicing agreement") among the depositor, the
trustee and the sole servicer or master servicer, as applicable. The Assets of
that 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 that trust fund, or in the event
the Securities consist of Notes, each servicer will perform its servicing
functions pursuant to a related underlying servicing agreement.
Securities That Are Partnership Interests for Tax Purposes and Notes
Certificates, as applicable, that are intended to be treated as
partnership interests for tax purposes will be issued, and the related trust
fund will be created, pursuant to the pooling and servicing agreement or trust
agreement.
A series of Notes issued by a trust fund that is intended to be treated
as a partnership or disregarded entity for tax purposes will be issued pursuant
to an indenture between the related trust fund and an indenture trustee named in
the prospectus supplement. The trust fund will be established either as a
statutory business trust under the law of the State of Delaware or as a common
law trust under the law of the State of New York pursuant to a trust agreement
between the depositor and an owner trustee specified in the prospectus
supplement relating to that series of Notes. The Assets securing payment on the
Notes will be serviced in accordance with a sale and servicing agreement or
servicing 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, sale and servicing agreement or
servicing agreement (each an "Agreement"). The prospectus supplement for a
series of Notes or Certificates, as applicable, will describe any provision of
the Agreement relating to that series that materially differs from the
description of those provisions contained in this prospectus. The summaries do
not purport to be complete and are subject to, and are qualified by reference
to, all of the provisions of the Agreement for each trust fund and the
description of those provisions in the prospectus supplement. The provisions of
each Agreement will vary depending on the nature of the Notes or Certificates,
as applicable, to be issued under the Agreement and the nature of the related
trust fund. As used in this prospectus for any series, the term "Security"
refers to all of the Notes or Certificates, as applicable, of that series,
whether or not offered by this prospectus and by the 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 Notes or
Certificates, as applicable, without charge upon written request of a
securityholder of that series addressed to ACE Securities Corp., 6525 Morrison
Boulevard, Suite 318, Charlotte, North Carolina 28211, Attention: Elizabeth S.
Eldridge.
The servicer or master servicer and the trustee for any series of Notes
or Certificates, as applicable, will be named in the prospectus supplement. In
the event there are multiple servicers for the Assets in a trust fund, a master
servicer will perform some of the administration, calculation and reporting
functions for that trust fund and will supervise the related servicers pursuant
to a pooling and servicing agreement. For a 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 specified in the prospectus
supplement, a manager or administrator may be appointed pursuant to the pooling
and servicing agreement for any trust fund to administer that trust fund.
-35-
Assignment of Assets; Repurchases
At the time of issuance of any series of Notes or Certificates, as
applicable, 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 those
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 that assignment, deliver the Notes or Certificates, as
applicable, to the depositor in exchange for the Assets and the other assets
comprising the trust fund for that series. Each Asset will be identified in a
schedule appearing as an exhibit to the related Agreement. That schedule will
include detailed information to the extent available and relevant
(1) in respect of each mortgage loan included in the
related trust fund, including the city and state of the related
Mortgaged Property and type of that 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
(2) in respect of each Contract included in the related
trust fund, including the outstanding principal amount and the
Contract Rate; and
(3) in respect of each Mortgage Security and Agency
Security, the original and outstanding principal amount, if any, and
the interest rate on the Mortgage Security or Agency Security.
For each mortgage loan, except as otherwise specified in the prospectus
supplement, the depositor will deliver or cause to be delivered to the trustee
(or to the custodian hereinafter referred to) particular 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
of the original Mortgage) with evidence of recording indicated on the original
Mortgage and an assignment of the Mortgage to the trustee in recordable form.
However, a trust fund may include mortgage loans where the original mortgage
note is not delivered to 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 of the mortgage note has been lost or
destroyed. For those 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 prospectus supplement will be required to agree
to repurchase, or substitute for, each of these mortgage loans 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
related Agreement will generally require the depositor or another party
specified in the prospectus supplement to promptly cause each of these
assignments of Mortgage to be recorded in the appropriate public office for real
property records, except in the State of California or in other states where, in
the opinion of counsel acceptable to the trustee, recording is not required to
protect the trustee's interest in the related mortgage loan against the claim of
any subsequent transferee or any successor to or creditor of the depositor, the
servicer, the relevant Asset Seller or any other prior holder of the mortgage
loan.
The trustee (or a custodian) will review the mortgage loan documents
within a specified period of days after receipt of the mortgage loan documents,
and the trustee (or a custodian) will hold those documents in trust for the
benefit of the securityholders. If any of these documents are found to be
missing or defective in any material respect, the trustee (or that custodian)
will immediately notify the servicer and the depositor, and the servicer will
immediately notify the relevant Asset Seller or other entity specified in the
prospectus supplement. If the Asset Seller cannot cure the omission or defect
within a specified number of days after receipt of that notice, then the Asset
Seller or other entity specified in the prospectus supplement will be obligated,
within a specified number of days of receipt of that notice, to either (1)
repurchase the related mortgage loan from the trustee at a price equal to the
sum of the unpaid principal balance of the mortgage loan, plus unpaid accrued
interest at the interest rate for that 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 servicing expenses that are payable to the servicer, or
another price as specified in the prospectus supplement (the "Purchase Price")
or (2) substitute a new 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 that mortgage loan if the Asset Seller or other
named entity defaults on its obligation.
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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 prospectus
supplement, in lieu of curing any omission or defect in the Asset or
repurchasing or substituting for that Asset, the Asset Seller or other named
entity may agree to cover any losses suffered by the trust fund as a result of
that breach or defect.
Notwithstanding the preceding three paragraphs, the documents for Home
Equity Loans, home improvement contracts and unsecured home improvements loans
will be delivered to the trustee (or a custodian) only to the extent specified
in the prospectus supplement. Generally these 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 prospectus supplement.
For 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. 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 executed 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 depositor to the trust fund only to the extent specified in the prospectus
supplement. Therefore, if, through negligence, fraud or otherwise, a subsequent
purchaser were able to take physical possession of the contracts without notice
of that assignment, the interest of the trustee in the contracts could be
defeated.
While the contract documents will not be reviewed by the trustee or the
servicer, if the servicer finds that any 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
prospectus supplement. If the asset seller or some other entity cannot cure the
omission or defect within a specified number of days after receipt of this
notice, then the asset seller or that other entity will be obligated, within a
specified number of days of receipt of this notice, to repurchase the related
contract from the trustee at the purchase price or substitute for that contract.
There can be no assurance that an asset seller or any other entity will fulfill
this repurchase or substitution obligation, and neither the servicer nor the
depositor will be obligated to repurchase or substitute for that contract if the
asset seller or any 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 prospectus supplement, in
lieu of curing any omission or defect in the asset or repurchasing or
substituting for that asset, the asset seller may agree to cover any losses
suffered by the trust fund as a result of that breach or defect.
Mortgage Securities and Agency Securities will be registered in the
name of the trustee or its nominee on the books of the issuer or guarantor or
its agent or, in the case of Mortgage Securities and Agency Securities issued
only in book-entry form, through the depository with respect to the Mortgage
Securities and Agency Securities, in accordance with the procedures established
by the issuer or guarantor for registration of those certificates, and
distributions on those securities to which the trust fund is entitled will be
made directly to the trustee.
Representations and Warranties; Repurchases
To the extent provided in the prospectus supplement the depositor will,
for each Asset, assign representations and warranties, as of a specified date
(the person making those representations and warranties, the "Warranting Party")
covering, by way of example, the following types of matters:
o the accuracy of the information set forth for that Asset on
the schedule of Assets appearing as an exhibit to the related
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;
o 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 of the
Asset Seller or any other person acceptable to the depositor and will be
identified in the prospectus supplement.
Representations and warranties made in respect of an Asset may have
been made as of a date before the applicable Cut-off Date. A substantial period
of time may have elapsed between that date and the date of initial issuance of
the related series of Notes or Certificates, as applicable, evidencing an
interest in that Asset. In the event of a breach of any of these representations
or warranties, the Warranting Party will be obligated to reimburse the trust
fund for losses caused by that breach or either cure that 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 that representation
and warranty only if the relevant event that causes that breach occurs before
that date. That party would have no obligations if the relevant event that
causes that breach occurs after that date.
Each Agreement will provide that the servicer and/or trustee or another
entity identified in the 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 that Asset or the interests in the prospectus supplement of the
securityholders. If the Warranting Party cannot cure that breach within a
specified period following the date on which that party was notified of that
breach, then the Warranting Party will be obligated to repurchase that Asset
from the trustee within a specified period from the date on which the Warranting
Party was notified of that 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 that series of Notes
or Certificates, as applicable, to cause the removal of that 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 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 that 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.
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 the Warranting Parties will carry out those obligations with
respect to the Assets.
A servicer will make representations and warranties regarding its
authority to enter into, and its ability to perform its obligations under, the
related Agreement. A breach of any representation of the servicer that
materially and adversely affects the interests of the securityholders and which
continues unremedied for the number of days specified in the Agreement after the
discovery of the breach by the servicer or the receipt of written notice of that
breach by the servicer from the trustee, the depositor or the holders of Notes
or Certificates, as applicable, evidencing not less than 25% of the voting
rights or other percentage specified in the related Agreement, will constitute
an Event of Default under that Agreement. See "Events of Default" and "Rights
Upon Event of Default."
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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 an account or accounts
that either:
o 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 so
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 those 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
o are maintained with a bank or trust company, and in a manner
satisfactory to the rating agency or agencies rating any class
of Notes or Certificates, as applicable, of that series.
Investment of amounts in the Collection Account is limited to United
States government securities and other investment grade obligations specified in
the Agreement ("Permitted Investments"). A Collection Account may be maintained
as an interest bearing or a non-interest bearing account and the funds held in
the Collection Account may be invested pending each succeeding Distribution Date
in short-term Permitted Investments. Any interest or other income earned on
funds in the Collection Account will, unless otherwise specified in the
prospectus supplement, 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
that 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 any other period provided in the related Agreement, the following
payments and collections received, or advances made, by the servicer or the
trustee or on its behalf after the Cut-off Date (other than payments due on or
before the Cut-off Date, and exclusive of any amounts representing a Retained
Interest), except as otherwise provided in the Agreement:
(1) all payments on account of principal, including
principal prepayments, on the Assets;
(2) all payments on account of interest on the Assets,
including any default interest collected, in each case net of any
portion retained by a servicer as its servicing compensation and net of
any Retained Interest;
(3) 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;
(4) any amounts paid under any instrument or drawn from
any fund that constitutes credit support for the related series of
Notes or Certificates, as applicable, as described under "Description
of Credit Support;"
(5) any advances made as described under "Description of
the Securities--Advances in Respect of Delinquencies;"
(6) any amounts paid under any Cash Flow Agreement, as
described under "Description of the Trust Funds--Cash Flow Agreements;"
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(7) all proceeds of any Asset or, with respect to a
mortgage loan, property acquired in respect of the mortgage loan
purchased by the depositor, any Asset Seller or any other specified
person as described above under "--Assignment of Assets; Repurchases"
and "--Representations and Warranties; Repurchases," all proceeds of
any defaulted mortgage loan purchased as described below under
"--Realization Upon Defaulted Assets," and all proceeds of any Asset
purchased as described under "Description of the
Securities--Termination;"
(8) any amounts paid by a servicer to cover interest
shortfalls arising out of the prepayment of Assets in the trust fund as
described below under "--Retained Interest; Servicing Compensation and
Payment of Expenses;"
(9) to the extent that any of these items do 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;
(10) all payments required to be deposited in the
Collection Account with respect to any deductible clause in any
blanket insurance policy described below under "--Hazard Insurance
Policies;"
(11) 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
(12) any other amounts required to be deposited in the
Collection Account as provided in the related Agreement and described
in the prospectus supplement.
Withdrawals. A servicer or the trustee may, from time to time as
provided in the related Agreement, make withdrawals from the Collection Account
for each trust fund for any of the following purposes, except as otherwise
provided in the Agreement:
(1) to make distributions to the securityholders on each
Distribution Date;
(2) to reimburse a servicer for unreimbursed amounts
advanced as described under "Description of the Securities--Advances
in Respect of Delinquencies," which reimbursement is to be made out of
amounts received that 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 for which
the advances were made or out of amounts drawn under any form of
credit support with respect to those Assets;
(3) to reimburse a servicer for unpaid servicing fees
earned and unreimbursed servicing expenses incurred with respect to
Assets and properties acquired in respect of the Assets, which
reimbursement is 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,
which fees were earned or expenses were incurred or out of amounts
drawn under any form of credit support for those Assets and
properties;
(4) to reimburse a servicer for any advances described in
clause (2) above and any servicing expenses described in clause (3)
above which, in the servicer's good faith judgment, will not be
recoverable from the amounts described in those clauses, which
reimbursement is to be made from amounts collected on other Assets or,
if and to the extent so provided by the related Agreement and described
in the prospectus supplement, just from that portion of amounts
collected on other Assets that is otherwise distributable on one or
more classes of Subordinate Notes or Subordinate Certificates, as
applicable, if any, remain outstanding, and otherwise any outstanding
class of Notes or Certificates, as applicable, of the related series;
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(5) if and to the extent described in the prospectus
supplement, to pay a servicer interest accrued on the advances
described in clause (2) above and the servicing expenses described in
clause (3) above while those advances and servicing expenses remain
outstanding and unreimbursed;
(6) to reimburse a servicer, the depositor, or any of
their respective directors, officers, employees and agents, as the
case may be, for expenses, costs and liabilities incurred by these
parties, as and to the extent described below under "--Certain Matters
Regarding Servicers, the Master Servicer and the Depositor;"
(7) if and to the extent described in the prospectus
supplement, to pay (or to transfer to a separate account for purposes
of escrowing for the payment of) the trustee's fees;
(8) to reimburse the trustee or any of its directors,
officers, employees and agents, as the case may be, for expenses, costs
and liabilities incurred by these parties, as and to the extent
described below under "--Certain Matters Regarding the Trustee;"
(9) to pay a servicer, as additional servicing
compensation, interest and investment income earned in respect of
amounts held in the Collection Account;
(10) to pay the person so entitled any amounts deposited
in the Collection Account that were identified and applied by the
servicer as recoveries of Retained Interest;
(11) 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, which payments are to be made out
of income received on that property;
(12) if one or more elections have been made to treat the
trust fund or designated portions of the trust fund as a REMIC, 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 "Material
Federal Income Tax Considerations--REMICs--Taxes That May Be Imposed on
the REMIC Pool" or in the prospectus supplement, respectively;
(13) 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
of a mortgage loan in connection with the liquidation of that mortgage
loan or property;
(14) to pay for the cost of various opinions of counsel
obtained pursuant to the related Agreement for the benefit of
securityholders;
(15) to pay for the costs of recording the related
Agreement if that recordation materially and beneficially affects the
interests of securityholders, provided that the 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
Agreement;
(16) to pay the person so entitled 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 above under "--Assignment of
Assets; Repurchase" and "--Representations and Warranties; Repurchases"
or otherwise;
(17) to make any other withdrawals permitted by the
related Agreement; and
(18) to clear and terminate the Collection Account at the
termination of the trust fund.
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Other Collection Accounts. If specified in the prospectus supplement,
the Agreement for any series of Notes or Certificates, as applicable, may
provide for the establishment and maintenance of a separate collection account
into which the servicer will deposit on a daily basis, or any other period as
provided in the related Agreement, the amounts described under "--Deposits"
above for one or more series of Notes or Certificates, as applicable. Any
amounts on deposit in any of these collection accounts will be withdrawn from
these collection accounts and deposited into the appropriate Collection Account
by a time specified in the prospectus supplement. To the extent specified in the
prospectus supplement, any amounts that could be withdrawn from the Collection
Account as described under "--Withdrawals" above may also be withdrawn from any
of these collection accounts. The prospectus supplement will set forth any
restrictions for any of these collection accounts, including investment
restrictions and any restrictions for financial institutions with which any of
these collection accounts may be maintained.
The servicer will establish and maintain with the indenture trustee an
account, in the name of the indenture trustee on behalf of the holders of Notes,
into which amounts released from the Collection Account for distribution to the
holders of Notes will be deposited and from which all distributions to the
holders of Notes will be made.
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 those collection procedures that it would
follow with respect to assets that are comparable to the Assets and held for its
own account, provided that those procedures are consistent with
(1) the terms of the related Agreement and any related hazard insurance
policy or instrument of credit support, if any, included in the
related trust fund described in this prospectus or under
"Description of Credit Support,"
(2) applicable law and
(3) the general servicing standard specified in the prospectus
supplement or, if no standard is so specified, its normal
servicing practices (in either case, the "Servicing Standard").
In connection, 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 in this prospectus and in any prospectus
supplement, and filing and settling claims under these policies; maintaining, to
the extent required by the Agreement, escrow or impoundment accounts of
borrowers for payment of taxes, insurance and other items required to be paid by
any borrower 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 some circumstances; and maintaining accounting records
relating to the Assets. The servicer or any other entity specified in the
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 (1) affect the amount or timing of any scheduled
payments of principal or interest on the Asset or (2) in its judgment,
materially impair the security for the Asset or reduce the likelihood of timely
payment of amounts due on the Asset. 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 (1) in its judgment, a material default on
the Asset has occurred or a payment default is reasonably foreseeable and (2) in
its judgment, that 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. In the event of any modification, waiver or amendment of
any Asset, the servicer will furnish a copy of that modification, waiver or
amendment to the trustee (or its custodian).
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In the case of multifamily loans, a borrower'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 borrower under a multifamily
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 be corrected over a reasonable period without significant impairment
of the value of related Mortgaged Property, initiate corrective action in
cooperation with the borrower if cure is likely, inspect the related Multifamily
Property and take those other actions as are consistent with the related
Agreement. A significant period of time may elapse before the servicer is able
to assess the success of 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 loan, the
Multifamily Property, the borrower, the presence of an acceptable party to
assume the multifamily 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 Asset that is in
default, initiate corrective action in cooperation with the borrower if cure is
likely, inspect the Asset and take any 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 that 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 some classes
of Notes or Certificates, as applicable, a right of first refusal to purchase
from the trust fund at a predetermined purchase price any mortgage loan or
contract as to which a specified number of scheduled payments under the
Agreement are delinquent. Any right of first refusal granted to the holder of an
Offered Security will be described in the prospectus supplement. The prospectus
supplement will also describe any similar right granted to any person if the
predetermined purchase price is less than the Purchase Price described above
under "--Representations and Warranties; Repurchases."
If specified in the 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 to that defaulted mortgage loan or contract, if and when
the servicer determines, consistent with the Servicing Standard, so that a sale
would produce a greater recovery on a present value basis than would liquidation
through foreclosure, repossession or similar proceedings. The related Agreement
will provide that any 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 that defaulted mortgage loan
or contract. If there is no bid that is determined to be fair, the servicer will
proceed with respect to that defaulted mortgage loan or contract as described
below. Any bid in an amount at least equal to the Purchase Price described above
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 that action is
consistent with the Servicing Standard and a default on that 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 within three years from the
close of the calendar year of acquisition, unless (1) the Internal Revenue
Service grants an extension of time to sell that property or (2) the trustee
receives an opinion of independent counsel to the effect that the holding of the
property by the trust fund longer than three years after the close of the
calendar year of 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 Notes or Certificates, as applicable, are outstanding.
Subject to the foregoing, the servicer will be required to (A) solicit bids for
any Mortgaged Property so acquired in that manner as will be reasonably likely
to realize a fair price for that property and (B) accept the first (and, if
multiple bids are contemporaneously received, the highest) cash bid received
from any person that constitutes a fair price.
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The limitations imposed by the related Agreement and the REMIC
provisions of the Code (if a REMIC election has been made for 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 those 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 on
the defaulted Asset at the applicable interest rate, plus the total amount of
expenses incurred by the servicer in connection with those proceedings and which
are reimbursable under the Agreement, the trust fund will realize a loss in the
amount of that 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, before the distribution of those 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 (1) that restoration will increase the proceeds to securityholders on
liquidation of the Asset after reimbursement of the servicer for its expenses
and (2) that its expenses will be recoverable by it from related Insurance
Proceeds or Liquidation Proceeds.
The pooling and servicing agreement will require the trustee, if it has
not received a distribution for any Mortgage Security or Agency Security by the
fifth business day after the date on which that distribution was due and payable
pursuant to the terms of that Agency Security, to request the issuer or
guarantor, if any, of that Mortgage Security or Agency Security to make that
payment as promptly as possible and legally permitted to take legal action
against that issuer or guarantor as the trustee deems appropriate under the
circumstances, including the prosecution of any claims in connection therewith.
The reasonable legal fees and expenses incurred by the trustee in connection
with the prosecution of this legal action will be reimbursable to the trustee
out of the proceeds of that action and will be retained by the trustee before
the deposit of any remaining proceeds in the Collection Account pending
distribution of the Collection Account to securityholders of the related series.
If the proceeds of any legal action are insufficient to reimburse the trustee
for its legal fees and expenses, the trustee will be entitled to withdraw from
the Collection Account an amount equal to its expenses, and the trust fund may
realize a loss in that amount.
As servicer of the Assets, a servicer, on behalf of itself, the trustee
and the securityholders, will present claims to the borrower under each
instrument of credit support, and will take those reasonable steps as are
necessary to receive payment or to permit recovery under these instruments for
defaulted Assets.
If a servicer or its designee recovers payments under any instrument of
credit support for any defaulted Assets, the servicer will be entitled to
withdraw or cause to be withdrawn from the Collection Account out of those
proceeds, before distribution of the Collection Account to securityholders,
amounts representing its normal servicing compensation on that Asset,
unreimbursed servicing expenses incurred for 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 composed of
mortgage loans will require the servicer to cause the borrower on each mortgage
loan to maintain a hazard insurance policy (including flood insurance coverage,
if obtainable, to the extent the property is located in a federally designated
flood area, in an amount as is required under applicable guidelines) providing
for the level of coverage that is required under the related Mortgage or, if any
Mortgage permits its holder to dictate to the borrower the insurance coverage to
be maintained on the related Mortgaged Property, then the level of coverage that
is consistent with the Servicing Standard. That coverage will be in general in
an amount equal to the lesser of the principal balance owing on that 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 any other amount specified in
the 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 borrowers. All amounts collected by
the servicer under any of these policies (except for amounts to be applied to
the restoration or repair of the Mortgaged Property or released to the borrower
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 in accordance with the related Agreement.
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The Agreement may provide that the servicer may satisfy its obligation
to cause each borrower to maintain a hazard insurance policy by the servicer's
maintaining a blanket policy insuring against hazard losses on the mortgage
loans. If the blanket policy contains a deductible clause, the servicer will be
required to deposit in the Collection Account from its own funds all sums that
would have been deposited in the Collection Account but for that 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 of the policies are dictated by respective state
laws, and most of these 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 other kinds of uninsured
risks.
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 to recover the full amount of any partial loss. If
the insured's coverage falls below this specified percentage, the coinsurance
clause generally provides that the insurer's liability in the event of partial
loss does not exceed the lesser of (1) the replacement cost of the improvements
less physical depreciation and (2) that proportion of the loss as the amount of
insurance carried bears to the specified percentage of the full replacement cost
of those improvements.
Each Agreement for a trust fund composed of mortgage loans will require
the servicer to cause the borrower on each mortgage loan to maintain all other
insurance coverage for 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 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 that cost will
not be taken into account for purposes of calculating the distribution to be
made to securityholders. Those costs may be recovered by the servicer from the
Collection Account, with interest, as provided by the Agreement.
Under the terms of the mortgage loans, borrowers 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 those claims is dependent upon the
extent to which information in this regard is furnished to the servicer by
borrowers.
Contracts. Generally, the terms of the agreement for a trust fund
composed of contracts will require the servicer to maintain for each contract
one or more hazard insurance policies that 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
those policies in the state in which the manufactured home is located, and in an
amount that is not less than the maximum insurable value of that manufactured
home or the principal balance due from the borrower on the related contract,
whichever is less; provided, however, that the amount of coverage provided by
each hazard insurance policy must 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 must cause flood insurance to
be maintained, which coverage must be at least equal to the minimum amount
specified in the preceding sentence or any lesser amount as may be available
under the federal flood insurance program. Each hazard insurance policy caused
to be maintained by the servicer must contain a standard loss payee clause in
favor of the servicer and its successors and assigns. If any borrower is in
default in the payment of premiums on its hazard insurance policy or policies,
the servicer must pay those premiums out of its own funds, and may add
separately the premiums to the borrower's obligation as provided by the
contract, but may not add the premiums to the remaining principal balance of the
contract.
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The servicer may maintain, in lieu of causing individual hazard
insurance policies to be maintained for each manufactured home, and must
maintain, to the extent that the related contract does not require the borrower
to maintain a hazard insurance policy for the related manufactured home, one or
more blanket insurance policies covering losses on the borrower's interest in
the contracts resulting from the absence or insufficiency of individual hazard
insurance policies. The servicer must pay the premium for that blanket policy on
the basis described therein and must pay any deductible amount for claims under
that policy relating to the contracts.
FHA Insurance and VA Guarantees
FHA loans will be insured by the FHA as authorized under the Housing
Act. Some FHA loans will be insured under various FHA programs including the
standard FHA 203(b) program to finance the acquisition of one- to four-family
housing units, the FHA 245 graduated payment mortgage program and the FHA Title
I Program. These programs generally limit the principal amount and interest
rates of the mortgage loans insured. The prospectus supplement for Notes or
Certificates, as applicable, of each series evidencing interests in a trust fund
including FHA loans will set forth additional information regarding the
regulations governing the applicable FHA insurance programs. Except as otherwise
specified in the prospectus supplement, the following describes FHA insurance
programs and regulations as generally in effect for FHA loans.
The insurance premiums for FHA loans are collected by lenders approved
by the Department of Housing and Urban Development ("HUD") or by the servicer
and are paid to the FHA. The regulations governing FHA single-family mortgage
insurance programs provide that insurance benefits are payable either upon
foreclosure (or other acquisition of possession) and conveyance of the mortgaged
premises to the United States of America or upon assignment of the defaulted
loan to the United States of America. For a defaulted FHA loan, the servicer is
limited in its ability to initiate foreclosure proceedings. When it is
determined, either by the servicer or HUD, that default was caused by
circumstances beyond the borrower's control, the servicer is expected to make an
effort to avoid foreclosure by entering, if feasible, into one of a number of
available forms of forbearance plans with the borrower. Those plans may involve
the reduction or suspension of regular mortgage payments for a specified period,
with those payments to be made on or before the maturity date of the mortgage,
or the recasting of payments due under the mortgage up to or, other than FHA
loans originated under the FHA Title I Program, beyond the maturity date. In
addition, when a default caused by those circumstances is accompanied by other
criteria, HUD may provide relief by making payments to the servicer in partial
or full satisfaction of amounts due under the FHA loan (which payments are to be
repaid by the borrower to HUD) or by accepting assignment of the loan from the
servicer. With some exceptions, at least three full monthly installments must be
due and unpaid under the FHA loan, and HUD must have rejected any request for
relief from the borrower before the servicer may initiate foreclosure
proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or
in debentures issued by HUD. Currently, claims are being paid in cash, and
claims have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debentures interest rate. To the extent specified in the prospectus supplement,
the servicer of each single family FHA loan will be obligated to purchase any
debenture issued in satisfaction of that FHA loan upon default for an amount
equal to the principal amount of that debenture.
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Other than in relation to the FHA Title I Program, the amount of
insurance benefits generally paid by the FHA is equal to the entire unpaid
principal amount of the defaulted FHA loan adjusted to reimburse the servicer
for some of its costs and expenses and to deduct amounts received or retained by
the servicer after default. When entitlement to insurance benefits results from
foreclosure (or other acquisition of possession) and conveyance to HUD, the
servicer is compensated for no more than two-thirds of its foreclosure costs,
and is compensated for interest accrued and unpaid before that date but in
general only to the extent it was allowed pursuant to a forbearance plan
approved by HUD. When entitlement to insurance benefits results from assignment
of the FHA loan to HUD, the insurance payment includes full compensation for
interest accrued and unpaid to the assignment date. The insurance payment
itself, upon foreclosure of an FHA loan, bears interest from a date 30 days
after the borrower's first uncorrected failure to perform any obligation to make
any payment due under the mortgage and, upon assignment, from the date of
assignment to the date of payment of the claim, in each case at the same
interest rate as the applicable HUD debenture interest rate as described above.
VA loans will be partially guaranteed by the VA under the Serviceman's
Readjustment Act (a "VA Guaranty Policy"). For a defaulted VA loan, the servicer
is, absent exceptional circumstances, authorized to announce its intention to
foreclose only when the default has continued for three months. Generally, a
claim for the guarantee is submitted after liquidation of the Mortgaged
Property.
The amount payable under the guarantee will be the percentage of the VA
loan originally guaranteed applied to indebtedness outstanding as of the
applicable date of computation specified in the VA regulations. Payments under
the guarantee will be equal to the unpaid principal amount of that VA loan,
interest accrued on the unpaid balance of that VA loan to the appropriate date
of computation and limited expenses of the mortgagee, but in each case only to
the extent that those amounts have not been recovered through liquidation of the
Mortgaged Property. The amount payable under the guarantee may in no event
exceed the amount of the original guarantee.
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 of these insuring against loss occasioned
by fraud, theft or other intentional misconduct of the officers, employees and
agents of the servicer. The related 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 the criteria set forth in the
Agreement are met.
Due-on-Sale Clauses
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 clause that would:
o adversely affect or jeopardize coverage under any applicable
insurance policy or
o materially increase the risk of default or delinquency on, or
materially impair the security for, that mortgage loan.
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 clauses requiring the consent of the
mortgagee to any sale or other transfer of the related mortgaged property, or
due-on-sale clauses. The servicer will generally permit that transfer so long as
the transferee satisfies the servicer's then applicable underwriting standards.
The purpose of those transfers is often to avoid a default by the transferring
borrower.
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Retained Interest; Servicing Compensation and Payment of Expenses
The prospectus supplement for a series of Notes or Certificates, as
applicable, will specify whether there will be any Retained Interest in the
Assets, and, if so, the initial owner of this Retained Interest. If so, the
Retained Interest will be established on a loan-by-loan basis and will be
specified on an exhibit to the related Agreement. A "Retained Interest" in an
Asset represents a specified portion of the interest payable on the Asset. The
Retained Interest will be deducted from borrower payments as received and will
not be part of the related trust fund.
The servicer's primary servicing compensation for a series of Notes or
Certificates, as applicable, will come from the periodic payment to it of a
portion of the interest payment on each Asset or any other amount specified in
the prospectus supplement. Since any Retained Interest and a servicer's primary
compensation are percentages of the principal balance of each Asset, those
amounts will decrease in accordance with the amortization of the Assets. The
prospectus supplement for a series of Notes or Certificates, as applicable,
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 borrowers and any interest or other income
that may be earned on funds held in the Collection Account or any account
established by a servicer pursuant to the Agreement.
The servicer may, to the extent provided in the prospectus supplement,
pay from its servicing compensation expenses incurred in connection with its
servicing and managing of the Assets, including 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 prospectus supplement. Some other
expenses, including expenses relating to defaults and liquidations on the Assets
and, to the extent so provided in the prospectus supplement, interest on these
expenses at the rate specified in the prospectus supplement may be borne by the
trust fund.
If and to the extent provided in the 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 interest shortfalls
resulting from the voluntary prepayment of any Assets in the related trust fund
during that period before their due dates.
Evidence as to Compliance
Each Agreement relating to Assets that include mortgage loans or
contracts, unless otherwise provided in the prospectus supplement, will provide
that on or before a specified date in each year, beginning with the first of
these dates 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 that 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 any 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 related Agreement) was conducted in compliance with the terms of
those agreements or that 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 any other program, requires it to
report.
Each Agreement will also provide for delivery to the trustee, on or
before a specified date in each year, of an officer's certificate of the
servicer to the effect that the servicer has fulfilled its obligations under the
Agreement throughout the preceding calendar year or other specified twelve-month
period.
Certain Matters Regarding Servicers, the Master Servicer and the
Depositor
The servicer or master servicer under each Agreement will be named in
the 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. If applicable,
reference in this prospectus to the servicer will also be deemed to be to the
master servicer. Each Agreement will provide, in general, that:
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o The servicer may resign from its obligations and duties under
the Agreement only upon a determination that its duties under
the 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 that conflict being of a type and
nature carried on by the servicer at the date of the
Agreement. No resignation will become effective until the
trustee or a successor servicer has assumed the servicer's
obligations and duties under the Agreement.
o 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
Agreement; provided, however, that neither a servicer, the
depositor nor any other person will be protected against any
breach of a representation, warranty or covenant made in the
related Agreement, or against any liability specifically
imposed by the Agreement, or against any liability that would
otherwise be imposed by reason of willful misfeasance, bad
faith or gross negligence in the performance of obligations or
duties under the Agreement or by reason of reckless disregard
of obligations and duties under the Agreement.
o 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
Agreement or the Notes or Certificates, as applicable;
provided, however, that that indemnification will not extend
to any loss, liability or expense
(1) specifically imposed by that Agreement or otherwise
incidental to the performance of obligations and
duties under the Agreement, 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 loss,
liability or expense will be otherwise reimbursable
pursuant to that Agreement);
(2) incurred in connection with any breach of a
representation, warranty or covenant made in that
Agreement;
(3) incurred by reason of misfeasance, bad faith or gross
negligence in the performance of obligations or duties
under the Agreement, or by reason of reckless disregard
of those obligations or duties;
(4) incurred in connection with any violation of any state or
federal securities law; or
(5) imposed by any taxing authority if that loss, liability
or expense is not specifically reimbursable pursuant to
the terms of the related Agreement.
o Neither any servicer nor the depositor will be under any
obligation to appear in, prosecute or defend any legal action
that is not incidental to its respective responsibilities
under the Agreement and which in its opinion may involve it in
any expense or liability. Any servicer or the depositor may,
however, in its discretion undertake any action which it may
deem necessary or desirable with respect to the Agreement and
the rights and duties of the parties to the Agreement and the
interests of the securityholders under the Agreement. In that
event, the legal expenses and costs of that action and any
liability resulting 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, may be the successor of the servicer
or the depositor, as the case may be, under the terms of the related Agreement.
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Special Servicers
If and to the extent specified in the prospectus supplement, a special
servicer (a "Special servicer") may be a party to the related Agreement or may
be appointed by the servicer or another specified party to perform specified
duties in respect of servicing the related mortgage loans that would otherwise
be performed by the servicer (for example, the workout and/or foreclosure of
defaulted mortgage loans). The rights and obligations of any Special servicer
will be specified in the prospectus supplement, and the servicer will be liable
for the performance of a Special servicer only if, and to the extent, set forth
in the prospectus supplement.
Events of Default under the Agreement
Events of default under the related 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 Agreement that continues unremedied for 30 days
after written notice of that 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 for that series;
o any breach of a representation or warranty made by the
servicer under the Agreement that materially and adversely
affects the interests of securityholders and which continues
unremedied for 30 days after written notice of that breach has
been given to the servicer by the trustee or the depositor, or
to the servicer, the depositor and the trustee by the holders
of Notes or Certificates, as applicable, evidencing not less
than 25% of the voting rights for that series; and
o some events of insolvency, readjustment of debt, marshaling of
assets and liabilities or similar proceedings and 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
prospectus supplement. The trustee will, not later than the later of 60 days or
any other period specified in the prospectus supplement after the occurrence of
any event that constitutes or, with notice or lapse of time or both, would
constitute an event of default and five days after specific officers of the
trustee become aware of the occurrence of that event, transmit by mail to the
depositor and all securityholders of the applicable series notice of that
occurrence, unless that default has been cured or waived.
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 Notes or
Certificates, as applicable, evidencing not less than 51% (or any other
percentage specified in the Agreement) of the voting rights for that series, the
trustee will terminate all of the rights and obligations of the servicer under
the 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
Agreement (except that if the trustee is prohibited by law from obligating
itself to make advances regarding delinquent Assets, or if the prospectus
supplement so specifies, then the trustee will not be obligated to make those
advances) and will be entitled to similar compensation arrangements. If the
trustee is unwilling or unable so to act, it may or, at the written request of
the holders of Notes or Certificates, as applicable, entitled to at least 51%
(or any other percentage specified in the Agreement) of the voting rights for
that series, it must 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 that appointment of at least $15,000,000 (or any
other amount specified in the Agreement) to act as successor to the servicer
under the Agreement. Pending that appointment, the trustee is obligated to act
in that capacity. The trustee and any successor servicer may agree upon the
servicing compensation to be paid, which in no event may be greater than the
compensation payable to the servicer under the Agreement.
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The holders of Notes or Certificates, as applicable, representing at
least 66 2/3% (or any other percentage specified in the Agreement) of the voting
rights allocated to the respective classes of Notes or Certificates, as
applicable, affected by any event of default will be entitled to waive that
event of default; provided, however, that an Event of Default involving a
failure to distribute a required payment to securityholders described in clause
(1) under "Events of Default under the Agreements" may be waived only by all of
the securityholders. Upon any waiver of an event of default, that event of
default will cease to exist and will be deemed to have been remedied for every
purpose under the Agreement.
No securityholders will have the right under any Agreement to institute
any proceeding with respect to the Agreement unless that holder previously has
given to the trustee written notice of default and unless the holders of Notes
or Certificates, as applicable, evidencing not less than 25% (or any other
percentage specified in the Agreement) of the voting rights have made written
request upon the trustee to institute that proceeding in its own name as trustee
under the Agreement and have offered to the trustee reasonable indemnity, and
the trustee for 60 days (or any other number of days specified in the Agreement)
has neglected or refused to institute any 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 under the Agreement or
to institute, conduct or defend any litigation under the Agreement or in
relation to the Agreement at the request, order or direction of any of the
securityholders covered by that Agreement, unless those securityholders have
offered to the trustee reasonable security or indemnity against the costs,
expenses and liabilities that may be incurred.
The manner of determining the voting rights of a Security or class or
classes of Notes or Certificates, as applicable, will be specified in the
Agreement.
Amendment
In general, each Agreement may be amended by the parties to it, without
the consent of any securityholders covered by the Agreement, to
(1) cure any ambiguity or mistake;
(2) correct, modify or supplement any provision in the
Agreement that may be inconsistent with any other provision in the
Agreement or with the prospectus supplement;
(3) make any other provisions with respect to matters or
questions arising under the Agreement that are not materially
inconsistent with the provisions of the Agreement; or
(4) comply with any requirements imposed by the Code;
provided that, in the case of clause (3), that amendment will not
adversely affect in any material respect the interests of any
securityholders covered by the Agreement as evidenced either by an
opinion of counsel to that 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 Notes or Offered
Certificates, as applicable, of the related series to the effect that
that amendment or supplement will not cause that rating agency to lower
or withdraw the then current rating assigned to those Notes or
Certificates, as applicable.
In general, each Agreement may also be amended by the depositor, the
servicer, if any, and the trustee, with the consent of the securityholders
affected by the amendment evidencing not less than 51% (or any other percentage
specified in the Agreement) of the voting rights, for any purpose; provided,
however, no amendment may (1) reduce in any manner the amount of, or delay the
timing of, payments received or advanced on Assets that are required to be
distributed on any Security without the consent of the securityholder or (2)
reduce the consent percentages described in this paragraph without the consent
of all the securityholders covered by the Agreement then outstanding. However,
for any series of Notes or Certificates, as applicable, as to which a REMIC
election is to be made, the trustee will not consent to any amendment of the
Agreement unless it has first have received an opinion of counsel to the effect
that that amendment will not result in the imposition of a tax on the related
trust fund or, if applicable, cause the related trust fund to fail to qualify as
a REMIC, at any time that the related Notes or Certificates, as applicable, are
outstanding.
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The Trustee
The trustee under each Agreement will be named in the 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. To the extent consistent with its
fiduciary obligations as trustee, the trustee may delegate its duties to one or
more agents as provided in the Agreement.
Duties of the Trustee
The trustee will make no representations as to the validity or
sufficiency of any Agreement, the Notes or Certificates, as applicable, 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 Notes or Certificates, as applicable, 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 related 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 those documents and to determine
whether they conform to the requirements of the Agreement.
Certain Matters Regarding the Trustee
The trustee and any director, officer, employee or agent of the trustee
will 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
(1) enforcing its rights and remedies and protecting the interests of
the securityholders during the continuance of an Event of Default,
(2) defending or prosecuting any legal action in respect of the related
Agreement or series of Notes or Certificates, as applicable,
(3) being the mortgagee of record for the mortgage loans in a trust
fund and the owner of record for any Mortgaged Property acquired
in respect thereof for the benefit of securityholders, or
(4) acting or refraining from acting in good faith at the direction of
the holders of the related series of Notes or Certificates, as
applicable, entitled to not less than 25% (or any other percentage
as is specified in the related Agreement for any particular
matter) of the voting rights for that series;
provided, however, that this indemnification will not extend to any loss,
liability or expense that constitutes a specific liability of the trustee
pursuant to the related 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 under the Agreement, or
by reason of its reckless disregard of those obligations or duties, or as may
arise from a breach of any representation, warranty or covenant of the trustee
made in the Agreement.
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 of its resignation to the depositor,
the servicer, if any, each rating agency, and all securityholders. Upon
receiving that notice of resignation, the depositor is required promptly to
appoint a successor trustee acceptable to the servicer, if any. If no successor
trustee has been so appointed and has accepted appointment within 30 days after
the giving of that notice of resignation, the resigning trustee may petition any
court of competent jurisdiction for the appointment of a successor trustee.
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If at any time the trustee ceases to be eligible to continue as a
trustee under the related Agreement, or if at any time the trustee becomes
incapable of acting, or is adjudged bankrupt or insolvent, or a receiver of the
trustee or of its property is appointed, or any public officer takes 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 Notes or Certificates, as applicable, then the
depositor and/or a party specified in the related Agreement may remove the
trustee and appoint a successor trustee acceptable to the master servicer, if
any, according to the terms of the related Agreement. Securityholders of any
series entitled to at least 51% (or any other percentage specified in the
prospectus supplement) of the voting rights for that 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 will 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 that series that materially differs
from the description of that provision contained in this prospectus. The
summaries do not purport to be complete and are subject to, and are qualified 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 that series addressed to ACE Securities
Corp., 6525 Morrison Boulevard, Suite 318, Charlotte, North Carolina 28211,
Attention: Elizabeth S. Eldridge.
Events of Default
Events of default under the indenture for each series of Notes will
generally include:
o a default for thirty days (or any other number of days
specified in the prospectus supplement) or more in the payment
of any principal of or interest on a Note of that series, to
the extent specified in the prospectus supplement;
o failure to perform any other covenant of the depositor or the
trust fund in the indenture that continues for a period of
sixty days (or any other number of days specified in the
prospectus supplement or the indenture) after notice of the
failure is given in accordance with the procedures described
in the prospectus supplement;
o any representation or warranty made by the depositor or the
trust fund in the indenture or in any certificate or other
writing delivered pursuant to the indenture or in connection
with the indenture with respect to or affecting that series
having been incorrect in a material respect as of the time
made, and that breach is not cured within sixty days (or any
other number of days specified in the prospectus supplement)
after notice of the breach is given in accordance with the
procedures described in the prospectus supplement;
o specified events of bankruptcy, insolvency, receivership or
liquidation of the trust fund; or
o any other event of default provided with respect to Notes of
that series.
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If an event of default with respect to the Notes of any series at the
time outstanding occurs and is continuing, subject to and in accordance with the
terms of the indenture, either the indenture trustee or the holders of a
majority of the then total outstanding amount of the Notes of that series may
declare the principal amount (or, if the Notes of that series are Accrual
Securities, that portion of the principal amount as may be specified in the
terms of that series, as provided in the indenture) of all the Notes of that
series to be due and payable immediately. That declaration may, under some
circumstances, be rescinded and annulled by the securityholders of a majority in
total outstanding amount of the Notes of that series.
If, following an event of default with respect to any series of Notes,
the Notes of that series have been declared to be due and payable, the indenture
trustee may, in its discretion, notwithstanding that acceleration, elect to
maintain possession of the collateral securing the Notes of that series and to
continue to apply distributions on that collateral as if there had been no
declaration of acceleration if that collateral continues to provide sufficient
funds for the payment of principal of and interest on the Notes of that series
as they would have become due if there had not been that 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 that
series for thirty days or more, unless
(1) the holders of 100% (or any other percentage
specified in the indenture) of the then total outstanding amount of the
Notes of that series consent to that sale;
(2) the proceeds of that sale or liquidation are
sufficient to pay in full the principal of and accrued interest, due
and unpaid, on the outstanding Notes of that series at the date of that
sale; or
(3) the indenture trustee determines that that collateral
would not be sufficient on an ongoing basis to make all payments on the
Notes as those payments would have become due if the Notes had not been
declared due and payable, and the indenture trustee obtains the consent
of the holders of 66 2/3% (or any other percentage specified in the
indenture) of the then total outstanding amount of the Notes of that
series.
If so specified in the prospectus supplement, only holders of
particular classes of Notes will have the right to declare the Notes of that
series to be immediately due and payable in the event of a payment default, as
described above, and to exercise the remedies described above.
If the indenture trustee liquidates the collateral in connection with
an event of default involving a default for thirty days (or any other number of
days specified in the indenture) or more in the payment of principal of or
interest on the Notes of a series, the indenture provides that the indenture
trustee will have a prior lien on the proceeds of any liquidation for unpaid
fees and expenses. As a result, upon the occurrence of that 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 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 that event of default.
To the extent provided in the prospectus supplement, in the event the
principal of the Notes of a series is declared due and payable, as described
above, the holders of any Notes issued at a discount from par may be entitled to
receive no more than an amount equal to the unpaid principal amount of the Notes
less the amount of the discount that is unamortized.
Subject to the provisions of the indenture relating to the duties of
the indenture trustee, in case an event of default occurs and continues for a
series of Notes, the indenture trustee will 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 that series, unless those holders offer to the
indenture trustee security or indemnity satisfactory to it against the costs,
expenses and liabilities that might be incurred by it in complying with that
request or direction. Subject to those provisions for indemnification and some
limitations contained in the indenture, the holders of a majority of the then
total outstanding amount of the Notes of that series will 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 that series, and the holders
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of a majority of the then total outstanding amount of the Notes of that series
may, in some cases, waive any default with respect to the Notes, except a
default in the payment of principal or interest or a default in respect of a
covenant or provision of the indenture that cannot be modified without the
waiver or consent of all the holders of the outstanding Notes of that series
affected.
Discharge of Indenture
The indenture will be discharged, subject to the provisions of the
indenture, for a series of Notes (except for continuing rights specified in the
indenture) upon the delivery to the indenture trustee for cancellation of all
the Notes of that series or, with some limitations, upon deposit with the
indenture trustee of funds sufficient for the payment in full of all of the
Notes of that series.
With some limitations, the indenture will provide that, if specified
for the Notes of any series, the related trust fund will be discharged from any
and all obligations in respect of the Notes of that series (except for
obligations specified in the indenture including obligations relating to
temporary Notes and exchange of Notes, to register the transfer of or exchange
Notes of that series, to replace stolen, lost or mutilated Notes of that 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 of the Notes 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 that series on the maturity
date for those Notes and any installment of interest on those Notes in
accordance with the terms of the indenture and the Notes of that series. In the
event of any defeasance and discharge of Notes of that series, holders of Notes
of that series would be able to look only to that money and/or those direct
obligations for payment of principal and interest, if any, on their Notes until
maturity.
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, as provided in the
indenture, 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 indebtedness owing
by that Trust to the applicable indenture trustee in its individual capacity,
the property and funds physically held by the indenture trustee in its capacity
as indenture trustee and any action taken by it that materially affects the
Notes and that has not been previously reported.
The Indenture Trustee
The indenture trustee for a series of Notes will be specified in the
prospectus supplement. The indenture trustee for any series may resign at any
time in accordance with the terms of the indenture, in which event the depositor
or the appropriate party designated in the indenture will be obligated to
appoint a successor trustee for that series. The depositor or the appropriate
party designated in the indenture may also remove any indenture trustee if that
indenture trustee ceases to be eligible to continue as the indenture trustee
under the related indenture, if that indenture trustee becomes insolvent or for
any other grounds specified in the indenture. In those circumstances the
depositor or the appropriate party designated in the indenture 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 that 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. To the
extent consistent with its fiduciary obligations as indenture trustee, the
indenture trustee may delegate its duties to one or more agents as provided in
the indenture and the Agreement.
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Description of Credit Support
General
For any series of Notes or Certificates, as applicable, credit support
may be provided for one or more classes of the series or the related Assets.
Credit support may be in the form of:
o the subordination of one or more classes of Notes or
Certificates, as applicable,;
o letters of credit;
o insurance policies;
o guarantees;
o the establishment of one or more reserve funds; or
o any other method of credit support described in the prospectus
supplement, or any combination of the foregoing.
Any form of credit support may be structured so as to be drawn upon by
more than one series to the extent described in the prospectus supplement.
The coverage provided by any credit support will be described in the
prospectus supplement. Generally, that coverage will not provide protection
against all risks of loss and will not guarantee repayment of the entire
Security Balance of the Notes or Certificates, as applicable, and interest on
the Security Balance. 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 Notes or Certificates, as
applicable, (each, a "Covered Trust"), securityholders evidencing interests in
any of those Covered Trusts will be subject to the risk that the credit support
will be exhausted by the claims of other Covered Trusts before that Covered
Trust receiving any of its intended share of that coverage.
If credit support is provided for one or more classes of Notes or
Certificates, as applicable, of a series, or the related Assets, the prospectus
supplement will include a description of
(a) the nature and amount of coverage under that credit support,
(b) any conditions to payment under the prospectus supplement not
otherwise described in this prospectus,
(c) the conditions (if any) under which the amount of coverage
under that credit support may be reduced and under which that
credit support may be terminated or replaced and
(d) the material provisions relating to that credit support.
Additionally, the prospectus supplement will set forth information with respect
to the obligor under any financial guaranty insurance policy, letter of credit,
guarantee or similar instrument of credit support, including
(1) a brief description of its principal business activities,
(2) its principal place of business, place of incorporation and
the jurisdiction under which it is chartered or licensed to do
business,
(3) if applicable, the identity of regulatory agencies that
exercise primary jurisdiction over the conduct of its business
and
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(4) its total assets, and its stockholders' or policyholders'
surplus, if applicable, as of the date specified in the
prospectus supplement.
Subordinate Securities
One or more classes of Notes or Certificates, as applicable, of a
series may be Subordinate Notes or Subordinate Certificates, as applicable, if
specified in the prospectus supplement. The rights of the holders of Subordinate
Notes or Subordinate Certificates, as applicable, to receive distributions of
principal and interest from the Collection Account on any Distribution Date will
be subordinated to those rights of the holders of Senior Notes or Senior
Certificates, as applicable. The subordination of a class may apply only in the
event of (or may be limited to) particular types of losses or shortfalls. The
prospectus supplement will set forth information concerning the amount of
subordination of a class or classes of Subordinate Notes or Subordinate
Certificates, as applicable, in a series, the circumstances in which that
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 Notes or Certificates, as applicable,
of a series, credit support may be provided by cross-support provisions
requiring that distributions be made on Senior Notes or Senior Certificates, as
applicable, evidencing interests in one group of mortgage loans before
distributions on Subordinate Notes or Subordinate Certificates, as applicable,
evidencing interests in a different group of mortgage loans within the trust
fund. The prospectus supplement for a series that includes a cross-support
provision will describe the manner and conditions for applying those provisions.
Limited Guarantee
If specified in the prospectus supplement for a series of Notes or
Certificates, as applicable, credit enhancement may be provided in the form of a
limited guarantee issued by a guarantor named in the prospectus supplement.
Financial Guaranty Insurance Policy or Surety Bond
Credit enhancement may be provided in the form of a financial guaranty
insurance policy or a surety bond issued by an insurer named in the policy or
surety bond, if specified in the prospectus supplement.
Letter of Credit
Alternative credit support for a series of Notes or Certificates, as
applicable, may be provided by the issuance of a letter of credit by the bank or
financial institution specified in the prospectus supplement. The coverage,
amount and frequency of any reduction in coverage provided by a letter of credit
issued for a series of Notes or Certificates, as applicable, will be set forth
in the prospectus supplement relating to that series.
Pool Insurance Policies
If specified in the prospectus supplement relating to a series of Notes
or Certificates, as applicable, 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 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 pool
insurance coverage will be set forth in the prospectus supplement.
Special Hazard Insurance Policies
A special hazard insurance policy may also be obtained for the related
trust fund, if specified in the prospectus supplement, in the amount set forth
in the prospectus supplement. The special hazard insurance policy will, subject
to the limitations described in the prospectus supplement, protect against loss
by reason of damage to Mortgaged Properties caused by hazards not insured
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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 special hazard insurance coverage will be set forth in the
prospectus supplement.
Borrower Bankruptcy Bond
Losses resulting from a bankruptcy proceeding relating to a borrower
affecting the mortgage loans in a trust fund for a series of Notes or
Certificates, as applicable, will, if specified in the prospectus supplement, be
covered under a borrower bankruptcy bond (or any other instrument that will not
result in a downgrading of the rating of the Notes or Certificates, as
applicable, of a series by the rating agency or agencies that rate that series).
Any borrower bankruptcy bond or any other instrument will provide for coverage
in an amount meeting the criteria of the rating agency or agencies rating the
Notes or Certificates, as applicable, of the related series, which amount will
be set forth in the prospectus supplement. The amount and principal terms of any
borrower bankruptcy coverage will be set forth in the prospectus supplement.
Reserve Funds
If so provided in the prospectus supplement for a series of Notes or
Certificates, as applicable, deficiencies in amounts otherwise payable on those
Notes or Certificates, as applicable, or specific classes of Notes or
Certificates, as applicable, will be covered by one or more reserve funds in
which cash, a letter of credit, Permitted Investments, a demand note or a
combination of these will be deposited, in the amounts so specified in the
prospectus supplement. The reserve funds for a series may also be funded over
time by depositing a specified amount of the distributions received on the
related Assets as specified in the prospectus supplement.
Amounts on deposit in any reserve fund for a series, together with the
reinvestment income on these amounts, if any, will be applied for the purposes,
in the manner, and to the extent specified in the prospectus supplement. A
reserve fund may be provided to increase the likelihood of timely distributions
of principal of and interest on the Notes or Certificates, as applicable. If
specified in the prospectus supplement, reserve funds may be established to
provide limited protection against only some types of losses and shortfalls.
Following each Distribution Date amounts in a reserve fund in excess of any
amount required to be maintained in the reserve fund may be released from the
reserve fund under the conditions and to the extent specified in the prospectus
supplement and will not be available for further application to the Notes or
Certificates, as applicable.
Money deposited in any reserve funds will be invested in Permitted
Investments, to the extent specified in the prospectus supplement. To the extent
specified in the prospectus supplement, any reinvestment income or other gain
from those investments will be credited to the related reserve fund for that
series, and any loss resulting from those investments will be charged to the
reserve fund. However, that income may be payable to any related servicer or
another service provider or other entity. To the extent specified in the
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 prospectus supplement, including the initial balance of the reserve fund,
the balance required to be maintained in the reserve fund, the manner in which
the required balance will decrease over time, the manner of funding the 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 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 Notes or Certificates, as applicable, relative to the
amortization of the related Assets. The accelerated amortization is achieved by
the application of excess interest to the payment of principal of one or more
classes of Notes or Certificates, as applicable. This acceleration feature
creates, for the Assets or groups of Assets, overcollateralization, which is the
excess of the total principal balance of the related Assets, or a group of
related Assets, over the principal balance of the related class or classes of
Notes or Certificates, as applicable. This acceleration may continue for the
life of the related Security, or may be limited. In the case of limited
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acceleration, once the required level of overcollateralization is reached, and
subject to the provisions specified in the prospectus supplement, the 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 legal aspects of loans secured by single-family or multi-family
residential properties. Because these 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. In this regard,
the following discussion does not fully reflect federal regulations for FHA
loans and VA loans. See "Description of The Trust Funds--FHA Loans and VA
Loans," "Description of the Agreements--Material Terms of the Pooling and
Servicing Agreements and Underlying Servicing Agreements--FHA Insurance and VA
Guarantees" and "Description of the Trust Funds--Assets."
General
All of the mortgage loans are 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 on
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 in this
prospectus 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 that 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 borrower (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 borrower), 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, "borrower" 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 borrower 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 the underlying debt is repaid, generally with a power of sale as
security for the indebtedness evidenced by the related mortgage note.
In case the borrower 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 borrower. At
origination of a mortgage loan involving a land trust, the borrower 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, some federal laws (including the Soldiers' and Sailors' Civil Relief
Act of 1940) 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 borrower assigns to the
lender the borrower'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 borrower defaults, the license
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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, that 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 that lease. An instrument covering an interest in real
property other than the fee estate requires special provisions in the instrument
creating that interest or in the mortgage, deed of trust, security deed or deed
to secure debt, to protect the mortgagee against termination of that 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
prospectus supplement will make representations and warranties in the Agreement
or representations and warranties will be assigned to the trustee for any
mortgage loans secured by an interest in a leasehold estate. Those
representation and warranties, if applicable, will be set forth in the
prospectus supplement.
Cooperative Loans
If specified in the prospectus supplement, 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 that it covers, the priority of which will depend on
the terms of the particular security agreement as well as the order of
recordation of the agreement in the appropriate recording office. That lien or
title interest is not prior to the lien for real estate taxes and assessments
and other charges imposed under governmental police powers.
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 in the building. 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 borrower, 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 (1)
arising under a blanket mortgage, the mortgagee holding a blanket mortgage could
foreclose on that mortgage and terminate all subordinate proprietary leases and
occupancy agreements or (2) arising under its land lease, the holder of the
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 that 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 that confer exclusive rights to occupy specific units. Generally, a
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tenant-stockholder of a Cooperative must make a monthly payment to the
Cooperative representing that 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.
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 on 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 that situation does not have to foreclose 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 those 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 particular 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 for 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
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the mortgage instrument. There are several other foreclosure procedures
available in some states that are either infrequently used or available only in
some 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. Those 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
borrower from the legal effect of mortgage defaults, to the extent that the
effect is perceived as harsh or unfair. Relying on those 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 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
and have required that lenders reinstate loans or recast payment schedules to
accommodate borrowers 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 borrower failed to
maintain the mortgaged property adequately or the borrower 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 borrower 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 borrower.
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
borrower 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, before the sale, the trustee under a deed of trust must
record a notice of default and notice of sale and send a copy to the borrower
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 borrower 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 borrower 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.
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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 that property
at the time of sale, due to, among other things, redemption rights that 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 that may be recovered by a lender. Thereafter, subject to the
borrower'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 those 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 on 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, if 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, for 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 specific governmental liens.
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 borrower is in default. Any additional
proceeds are generally payable to the borrower. 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 those holders.
Rights of Redemption
The purposes of a foreclosure action are to enable the mortgagee to
realize upon its security and to bar the borrower, and all persons who have an
interest in the property that 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 that 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 begun,
the redeeming party must pay some of the costs of that 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 that
exists before completion of the foreclosure, is not waivable by the borrower,
must be exercised before 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 borrower 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 borrower pays only a portion of the sums due. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The exercise of a right of redemption
would defeat the title of any purchaser from a foreclosure sale or sale under a
deed of trust. Consequently, the practical effect of the redemption right is to
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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 years from the close
of the calendar year of its acquisition. For a series of Notes or Certificates,
as applicable, for which an election is made to qualify the trust fund or a part
of the trust fund as a REMIC, the Agreement will permit foreclosed property to
be held for more than such three year period if the Internal Revenue Service
grants an extension of time within which to sell the property or independent
counsel renders an opinion to the effect that holding the property for that
additional period is permissible under the REMIC Provisions.
Cooperative Loans
The Cooperative shares owned by the tenant-stockholder and pledged to
the lender are, in almost all cases, subject to restrictions on transfer as set
forth in the Cooperative's certificate of incorporation and bylaws, as well as
the proprietary lease or occupancy agreement, and may be canceled by the
Cooperative for failure by the tenant-stockholder to pay rent or other
obligations or charges owed by that tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by that
tenant-stockholder. The proprietary lease or occupancy agreement generally
permit the Cooperative to terminate the lease or agreement in the event a
borrower fails to make payments or defaults in the performance of covenants
required under the proprietary lease or occupancy agreement. Typically, the
lender and the Cooperative enter into a recognition agreement that establishes
the rights and obligations of both parties in the event of a default by the
tenant-stockholder 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, if the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate that 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 that proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest on the
Cooperative Loan.
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 that 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 that apply to 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, that 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 borrower, 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" above.
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 borrower 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 these sums, these sums will
generally have priority over all sums due under the junior mortgage.
Anti-Deficiency Legislation and Other Limitations on Lenders
Statutes in some states limit the right of a beneficiary under a deed
of trust or a mortgagee under a mortgage 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 to the
difference between the net amount realized upon the public sale of the real
property and the amount due to the lender.
Some states require the lender to exhaust the security afforded under a
mortgage by foreclosure in an attempt to satisfy the full debt before bringing a
personal action against the borrower. In some other states, the lender has the
option of bringing a personal action against the borrower on the debt without
first exhausting that security; however, in some of these states, the lender,
following judgment on the personal action, may be deemed to have elected a
remedy and may be precluded from exercising remedies with respect to the
security. In some cases, a lender will be precluded from exercising any
additional rights under the note or mortgage if it has taken any prior
enforcement action. Consequently, the practical effect of the election
requirement, in those states permitting that election, is that lenders will
usually proceed against the security first rather than 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
lender 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 federal bankruptcy laws
and state laws affording relief to debtors, may interfere with or affect the
ability of a secured mortgage lender to realize upon its security. For example,
numerous statutory provisions under the United States Bankruptcy Code, 11 U.S.C.
Sections 101 et seq. (the "Bankruptcy Code"), may interfere with or affect the
ability of the secured mortgage lender to obtain payment of a mortgage loan, to
realize upon collateral and/or enforce a deficiency judgment. Under federal
bankruptcy law, virtually all actions (including foreclosure actions and
deficiency judgment proceedings) are automatically stayed upon the filing of a
bankruptcy petition, and often no interest or principal payments are made during
the course of the bankruptcy proceeding. In a case under the Bankruptcy Code,
the secured party is precluded from foreclosing without authorization from the
bankruptcy court. In addition, a court with federal bankruptcy jurisdiction may
permit a debtor through his or her Chapter 11 or Chapter 13 plan to cure a
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monetary default in respect of a mortgage loan by paying arrearages within a
reasonable time period and reinstating the original mortgage loan payment
schedule even though the lender accelerated the mortgage loan and final judgment
of foreclosure had been entered in state court (provided no foreclosure sale had
yet occurred) before the filing of the debtor's petition. Some courts with
federal bankruptcy jurisdiction have approved plans, based on the particular
facts of the case, that affected the curing of a mortgage loan default by paying
arrearages over a number of years.
If a mortgage loan is secured by property not consisting solely of the
debtor's principal residence, the Bankruptcy Code also permits that mortgage
loan to be modified. These modifications may include reducing the amount of each
monthly payment, changing the rate of interest, altering the repayment schedule,
and reducing the lender's security interest to the value of the property, thus
leaving the lender in the position of a general unsecured creditor for the
difference between the value of the property and the outstanding balance of the
mortgage loan. Some courts have permitted these modifications when the mortgage
loan is secured both by the debtor's principal residence and by personal
property.
In the case of income-producing multifamily properties, federal
bankruptcy law may also have the effect of interfering with or affecting the
ability of the secured lender to enforce the borrower's assignment of rents and
leases related to the mortgaged property. Under Section 362 of the Bankruptcy
Code, the lender will be stayed from enforcing the assignment, and the legal
proceedings necessary to resolve the issue could be time-consuming, with
resulting delays in the lender's receipt of the rents.
Some tax liens arising under the Code may in some circumstances provide
priority over the lien of a mortgage or deed of trust. In addition, substantive
requirements are imposed upon mortgage lenders in connection with the
origination and the servicing of 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 law. In some
cases this liability may affect assignees of the mortgage loans.
Generally, Article 9 of the UCC governs foreclosure on Cooperative
shares and the related proprietary lease or occupancy agreement. Some courts
have interpreted Section 9-504 of the UCC to prohibit a deficiency award unless
the creditor establishes that the sale of the collateral (which, in the case of
a Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
Environmental Considerations
A lender may be subject to unforeseen environmental risks when taking a
security interest in real or personal property. Property subject to a security
interest may be subject to federal, state, and local laws and regulations
relating to environmental protection. These 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; and/or management of electrical
or other equipment containing polychlorinated biphenyls ("PCBs"). Failure to
comply with these laws and regulations may result in significant penalties,
including civil and criminal fines. Under the laws of some 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 that property are subordinated to the environmentally-related lien and,
in some states, even prior recorded liens are subordinated to these liens
("Superliens"). In the latter states, the security interest of the trustee in a
property that is subject to a Superlien could be adversely affected.
Under the federal Comprehensive Environmental Response, Compensation
and Liability Act, as amended ("CERCLA"), and under state law in some states, a
secured party that takes a deed in lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, operates a mortgaged property or undertakes
particular types of activities that may constitute management of the mortgaged
property may become liable in some circumstances for the cleanup costs of
remedial action if hazardous wastes or hazardous substances have been released
or disposed of on the property. These cleanup costs may be substantial. CERCLA
imposes strict, as well as joint and several, liability for environmental
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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 total assets of the property owner.
Although some provisions of the Asset Conservation Act (as defined in
this prospectus) apply to trusts and fiduciaries, the law is somewhat 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 that 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 that 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 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 that 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 some 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
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 these 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 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, however, 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 under both CERCLA and RCRA. The Asset Conservation Act more explicitly
defined the kinds of "participation in management" that would trigger liability
under CERCLA and specified activities that would not constitute "participation
in management" or otherwise result in a forfeiture of the secured-creditor
exemption before foreclosure or during a workout period. The Asset Conservation
Act also clarified the extent of protection against liability under CERCLA in
the event of foreclosure and authorized specific regulatory clarifications of
the scope of the secured-creditor exemption for purposes of RCRA, similar to the
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statutory protections under CERCLA. However, since the courts have not yet had
the opportunity to interpret the new statutory provisions, the scope of the
additional protections offered by the Asset Conservation Act is not fully
defined. It also is important to note that the Asset Conservation Act does not
offer complete protection to lenders and that the risk of liability remains.
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
some 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 that 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 before the origination of the mortgage loan or
before 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 the Mortgaged
Property; the absence, presence or effect of hazardous wastes or hazardous
substances on, near or emanating from the Mortgaged Property; the impact on
securityholders of any environmental condition or presence of any substance on
or near the Mortgaged Property; or the compliance of any Mortgaged Property with
any environmental laws. In addition, no agent, person or entity otherwise
affiliated with the depositor is authorized or able to make any representation,
warranty or assumption of liability relative to any Mortgaged Property.
Due-on-Sale Clauses
The mortgage loans may contain due-on-sale clauses. These clauses
generally provide that the lender may accelerate the maturity of the loan if the
borrower 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, for some 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 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,
which preempt state law restrictions on the enforcement of those 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, some 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 some state laws, prepayment charges may not be imposed after a
certain period of time following the origination of mortgage loans secured by
liens encumbering owner-occupied residential properties, if those loans are paid
before maturity. For Mortgaged Properties that are owner-occupied, it is
anticipated that prepayment charges may not be imposed for many of the mortgage
loans. The absence of a restraint on prepayment, particularly for fixed rate
mortgage loans having higher mortgage rates, may increase the likelihood of
refinancing or other early retirement of those loans.
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Subordinate Financing
Where a borrower encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risks, such as:
o The borrower may have difficulty repaying multiple loans. In
addition, if the junior loan permits recourse to the borrower
(as junior loans often do) and the senior loan does not, a
borrower may be more likely to repay sums due on the junior
loan than those on the senior loan.
o 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
borrower 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 borrower is
additionally burdened.
o If the borrower 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 will not apply to some types of residential first mortgage
loans originated by lenders after March 31, 1980. A similar federal statute was
in effect for 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. Some states have taken action to
reimpose interest rate limits and/or to limit discount points or other charges.
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 before origination of those
mortgage loans, any limitation under that state's usury law would not apply to
those 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 that state action will be eligible
for inclusion in a trust fund unless (1) the mortgage loan provides for the
interest rate, discount points and charges as are permitted in that state or (2)
the mortgage loan provides that its terms will be construed in accordance with
the laws of another state under which the interest rate, discount points and
charges would not be usurious and the borrower's counsel has rendered an opinion
that the 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 borrower 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, thus permitting the borrower to cancel the recorded mortgage or
deed of trust without any payment or prohibiting the lender from foreclosing.
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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. Those
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, before October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of those provisions. Some states have
taken that action.
Soldiers' and Sailors' Civil Relief Act of 1940
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 the borrower's mortgage loan (including a borrower who was in
reserve status and is called to active duty after origination of the mortgage
loan) may not be charged interest (including fees and charges) above an annual
rate of 6% during the period of the borrower's active duty status, unless a
court orders otherwise upon application of the lender. The Relief Act applies to
borrowers who are members of the Army, Navy, Air Force, Marines, National Guard,
Reserves, Coast Guard and officers of the U.S. Public Health Service assigned to
duty with the military. Because the Relief Act applies to borrowers who enter
military service (including reservists who are called to active duty) after
origination of the related mortgage loan, no information can be provided as to
the number of loans that may be affected by the Relief Act.
Application of the Relief Act would adversely affect, for an
indeterminate period of time, the ability of the servicer to collect full
amounts of interest on some of the mortgage loans. Any shortfalls in interest
collections resulting from the application of the Relief Act would result in a
reduction of the amounts distributable to the holders of the related series of
Notes or Certificates, as applicable, and would not be covered by advances.
These shortfalls will be covered by the credit support provided in connection
with the Notes or Certificates, as applicable, only to the extent provided in
the prospectus supplement. In addition, the Relief Act imposes limitations that
would impair the ability of the servicer to foreclose on an affected mortgage
loan during the borrower's period of active duty status, and, under some
circumstances, during an additional three month period thereafter. Thus, if an
affected mortgage loan goes into default, there may be delays and losses
occasioned thereby.
Forfeitures in Drug and RICO Proceedings
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, those crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the "Crime
Control Act"), the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may give notice
to all parties "known to have an alleged interest in the property," including
the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (1) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (2) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
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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 these 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 borrower to repay the loan evidenced
thereby, and
(b) the grant of a security interest in the manufactured home
to secure repayment of the loan. 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 agreement, the
servicer will transfer physical possession of the contracts to 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. The contracts will be stamped or marked otherwise to reflect
their assignment from the depositor to the trustee only if provided in the
prospectus supplement. Therefore, if, through negligence, fraud or otherwise, a
subsequent purchaser were able to take physical possession of the contracts
without notice of the assignment, the trustee's interest in contracts could be
defeated.
Security Interests in the Manufactured Homes
The manufactured homes securing the contracts may be located in all 50
states, Security interests in manufactured homes may be perfected either by
notation of the secured party's lien on the certificate of title or by delivery
of the required documents and payment of a fee to the state motor vehicle
authority, depending on state law. In some nontitle states, perfection pursuant
to the provisions of the UCC is required. The asset seller may effect that
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 that notation or delivery, or files the security interest under the wrong
law, 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 some
circumstances, may become subject to real estate title and recording laws. As a
result, a security interest in a manufactured home could be rendered subordinate
to the interests of other parties claiming an interest in the home under
applicable state real estate law.
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 that is prior to the security interest originally
retained by the asset seller and transferred to the depositor. For a series of
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securities and if so described in the prospectus supplement, the servicer may be
required to perfect a security interest in the manufactured home under
applicable real estate laws. The 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 for 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 only if specified in the 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, that assignment is an effective conveyance of the security
interest without amendment of any lien noted on the related certificate of title
and the new secured party succeeds to servicer's rights as the secured party.
However, in some states, in the absence of an amendment to the 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, the assignment of the
security interest in the manufactured home may not be held effective or the
security interest in the manufactured home may not be held effective or the
security interests may not be perfected and in the absence of that 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
any other originator of the contracts, or a trustee in bankruptcy of the asset
seller, or any 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 or subsequent purchasers of a manufactured
home or subsequent lenders who take a security interest in the manufactured
home. If there are any manufactured homes as to which the security interest
assigned to the trustee is not perfected, that security interest would be
subordinate to, among others, subsequent purchasers for value of manufactured
homes and holders of perfected security interests. There also exists a risk in
not identifying the trustee as the new secured party on the certificate of title
that, through fraud or negligence, the security interest of the trustee could be
released.
If the owner of a manufactured home moves it to a state other than the
state in which the manufactured home initially is registered, under the laws of
most states the perfected security interest in the manufactured home would
continue for four months after the relocation and thereafter only if and after
the owner re-registers the manufactured home in that state. If the owner were to
relocate a manufactured home to another state and not re-register the
manufactured home in that state, and if steps are not taken to re-perfect the
trustee's security interest in that state, the security interest in the
manufactured home would cease to be perfected. A majority of states generally
require surrender of a certificate of title to re-register a manufactured home;
accordingly, the servicer must surrender possession if it holds the certificate
of title to the manufactured home or, in the case of manufactured homes
registered n states that 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 that 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 re-perfection upon receipt
of notice of re-registration or information from the borrower as to relocation.
Similarly, when a borrower 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 Agreement, the
servicer is obligated to take those 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
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agreement that it has no knowledge of any of these liens for any manufactured
home securing payment on any contract. However, these liens could arise at any
time during the term of a contract. No notice will be given to the trustee or
securityholders if a lien arises.
Enforcement of Security Interests in the Manufactured Homes
The servicer on behalf of the trustee, to the extent required by the
related 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 those defaulted contracts. So long as the
manufactured home has not become subject to the real estate law, a creditor can
repossess a manufactured home securing a contract by voluntary surrender, by
"self-help" repossession that is "peaceful" or, in the absence of voluntary
surrender and the ability to repossess without breach of the peace, by judicial
process. The holder of a contract must give the debtor a number of days' notice,
which varies from 10 to 30 days depending on that state, before beginning 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 that sale. The law in most
states also requires that the debtor be given notice of any sale before resale
of the unit so that the debtor may redeem at or before that resale. In the event
of repossession and resale of a manufactured home, the trustee would be entitled
to be paid out of the sale proceeds before the proceeds could be applied to the
payment of the claims of unsecured creditors or the holders of subsequently
perfected security interests or, thereafter, to the debtor.
Under the laws applicable in mot states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the manufactured home securing the debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments, and in many
cases the defaulting borrower would have no assets with which to pay a judgment.
Other statutory provisions, including federal and state bankruptcy and
insolvency laws and general equitable principles, may limit or delay the ability
of a lender to repossess and resell collateral or enforce a deficiency judgment.
Soldiers' and Sailors' Civil Relief Act of 1940
The terms of the Relief Act apply to a borrower on a Contract as
described for a borrower on a mortgage loan under "Certain Legal Aspects of
Mortgage Loans-Soldiers' and Sailors' Civil Act of 1940."
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 that is the seller of goods which gave rise to the transaction, and
some related lenders and assignees, to transfer the contract free of notice of
claims by the debtor thereunder. The effect of this rule is to subject the
assignee of the contract to all claims and defenses that the debtor could assert
against the seller of goods. Liability under this rule is limited to amounts
paid under a contract; however, the borrower 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 the borrower. 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 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 some cases, the transfer may be made by a
delinquent borrower to avoid a repossession proceeding for a manufactured home.
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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 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 some manufactured homes.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, as amended (Title V), provides that, subject to the
following conditions, state usury limitations will not apply to any loan that 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 before instituting any action leading to
repossession of or foreclosure on the related unit.
Title V authorized any state to re-impose limitations on interest rates
and finance charges by adopting before April 1, 1983, a law or constitutional
provision that expressly rejects application of the federal law. Fifteen states
adopted a similar law before 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.
Material Federal Income Tax Considerations
General
The following discussion represents the opinion of Stroock & Stroock &
Lavan LLP as to the material federal income tax consequences of the purchase,
ownership and disposition of the Notes or Certificates, as applicable, offered
under this prospectus. This opinion assumes compliance with all provisions of
the Agreements pursuant to which the Notes or Certificates, as applicable, are
issued. This discussion is directed solely to securityholders that hold the
Notes or Certificates, as applicable, as capital assets within the meaning of
Section 1221 of the Internal Revenue Code of 1986, as amended (the "Code"), and
does not purport to discuss all federal income tax consequences that may be
applicable to particular categories of investors, some of which (such as banks,
insurance companies and foreign investors) may be subject to special rules.
Further, the authorities on which this discussion, and the opinions referred to
below, are based are subject to change or differing interpretations, which could
apply retroactively.
In addition to the federal income tax consequences described in this
prospectus, potential investors should consider the state and local tax
consequences, if any, of the purchase, ownership and disposition of the Notes or
Certificates, as applicable. See "State and Other Tax Considerations." The
depositor recommends that securityholders consult their own tax advisors
concerning the federal, state, local or other tax consequences to them of the
purchase, ownership and disposition of the Notes or Certificates, as applicable,
offered under this prospectus.
The following discussion addresses securities of five general types:
o securities ("REMIC Securities) representing interests in a
trust fund, or a portion of a trust fund, that the trustee
will elect to have treated as a real estate mortgage
investment conduit ("REMIC") under Sections 860A through 860G
(the "REMIC Provisions") of the Code;
o securities ("FASIT Securities") representing interests in a
trust fund, or a portion of a trust fund, that the trustee
will elect to have treated as a financial asset securitization
investment trust ("FASIT") under Sections 860H through 860L
(the "FASIT Provisions") of the Code;
o securities ("Grantor Trust Securities") representing interests
in a trust fund (a "Grantor Trust Fund") as to which no
election will be made;
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o securities ("Partnership Certificates ") representing equity
interests in a trust fund (a "Partnership Trust Fund") which
is treated as a partnership for federal income tax purposes;
and
o securities ("Debt Securities") representing indebtedness of a
Partnership Trust Fund or a trust fund which is disregarded as
a separate entity for federal income tax purposes.
The prospectus supplement for each series of Notes or Certificates, as
applicable, will indicate which of the foregoing treatments will apply to that
series and, if a REMIC election (or elections) will be made for the related
trust fund, will identify all "regular interests" and "residual interests" in
the REMIC or, if a FASIT election will be made for the related trust fund, will
identify all "regular interests" and "ownership interests" in the FASIT. For
purposes of this tax discussion,
(1) references to a "securityholder" or a "holder" are to the
beneficial owner of a Security,
(2) references to "REMIC Pool" are to an entity or portion thereof
as to which a REMIC election will be made and
(3) to the extent specified in the prospectus supplement,
references to "mortgage loans" include Contracts. Except to
the extent specified in the prospectus supplement, no REMIC
election will be made for Unsecured Home Improvement Loans.
The following discussion is based in part upon the rules governing
original issue discount that are set forth in Sections 1271 through 1275 of the
Code and in the Treasury regulations promulgated thereunder (the "OID
Regulations"), in part upon the REMIC Provisions and the Treasury regulations
promulgated thereunder (the "REMIC Regulations"), and in part upon the FASIT
Provisions. Although the FASIT Provisions of the Code became effective on
September 1, 1997, the Treasury regulations issued with respect to those
provisions are still in proposed form only. Accordingly, the discussion herein
does not address the proposed FASIT regulations (which will be discussed in the
related prospectus supplement if and to the extent they are relevant) and
definitive guidance cannot be provided with respect to many aspects of the tax
treatment of the holders of FASIT Securities. In addition, the OID Regulations
do not adequately address some issues relevant to, and in some instances provide
that they are not applicable to, securities such as the Notes or Certificates,
as applicable.
Taxable Mortgage Pools
Corporate income tax can be imposed on the net income of some entities
issuing non-REMIC and non-FASIT debt obligations secured by real estate
mortgages ("Taxable Mortgage Pools"). Any entity other than a REMIC or a FASIT
(as defined in this prospectus) will be considered a Taxable Mortgage Pool if
(1) substantially all of the assets of the entity consist of debt
obligations and more than 50% of those obligations consist of
"real estate mortgages,"
(2) that entity is the borrower under debt obligations with two or
more maturities, and
(3) under the terms of the debt obligations on which the entity is
the borrower, payments on those obligations bear a
relationship to payments on the obligations held by the
entity.
Furthermore, a group of assets held by an entity can be treated as a separate
Taxable Mortgage Pool if the assets are expected to produce significant cash
flow that will support one or more of the entity's issues of debt obligations.
The depositor generally will structure offerings of non-REMIC and non-FASIT
Securities to avoid the application of the Taxable Mortgage Pool rules.
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REMICs
Classification of REMICs
For each series of REMIC Securities, assuming compliance with all
provisions of the related pooling and servicing agreement, in the opinion of
Stroock & Stroock & Lavan LLP, the related trust fund (or each applicable
portion of the trust fund) will qualify as a REMIC and the REMIC Securities
offered with respect thereto will be considered to evidence ownership of
"regular interests" ("Regular Securities") or "residual interests" ("Residual
Securities") in the REMIC within the meaning of the REMIC Provisions.
In order for the REMIC Pool to qualify as a REMIC, there must be
ongoing compliance on the part of the REMIC Pool with the requirements set forth
in the Code. The REMIC Pool must fulfill an asset test, which requires that no
more than a de minimis portion of the assets of the REMIC Pool, as of the close
of the third calendar month beginning after the "Startup Day" (which for
purposes of this discussion is the date of issuance of the REMIC Securities) and
at all times thereafter, may consist of assets other than "qualified mortgages"
and "permitted investments." The REMIC Regulations provide a safe harbor
pursuant to which the de minimis requirement will be met if at all times the
total adjusted basis of the nonqualified assets is less than 1% of the total
adjusted basis of all the REMIC Pool's assets. An entity that fails to meet the
safe harbor may nevertheless demonstrate that it holds no more than a de minimis
amount of nonqualified assets. A REMIC Pool also must provide "reasonable
arrangements" to prevent its residual interests from being held by "disqualified
organizations" or agents of "disqualified organizations" and must furnish
applicable tax information to transferors or agents that violate this
requirement. The pooling and servicing agreement for each series of REMIC
Securities will contain provisions meeting these requirements. See "--Taxation
of Owners of Residual Securities--Tax-Related Restrictions on Transfer of
Residual Securities--Disqualified Organizations" below.
A qualified mortgage is any obligation that is principally secured by
an interest in real property and that is either transferred to the REMIC Pool on
the Startup Day or is purchased by the REMIC Pool within a three-month period
thereafter pursuant to a fixed price contract in effect on the Startup Day.
Qualified mortgages include whole mortgage loans and, generally, certificates of
beneficial interest in a grantor trust that holds mortgage loans and regular
interests in another REMIC, such as lower-tier regular interests in a tiered
REMIC. The REMIC Regulations specify that loans secured by timeshare interests,
shares held by a tenant stockholder in a cooperative housing corporation, and
manufactured housing that qualifies as a "single family residence" under Code
Section 25(e)(10) can be qualified mortgages. A qualified mortgage includes a
qualified replacement mortgage, which is any property that would have been
treated as a qualified mortgage if it were transferred to the REMIC Pool on the
Startup Day and that is received either:
(1) in exchange for any qualified mortgage within a
three-month period from the Startup Day; or
(2) in exchange for a "defective obligation" within a
two-year period from the Startup Day.
A "defective obligation" includes:
(1) a mortgage in default or as to which default is
reasonably foreseeable;
(2) a mortgage as to which a customary representation or
warranty made at the time of transfer to the REMIC Pool has been
breached;
(3) a mortgage that was fraudulently procured by the
borrower; and
(4) a mortgage that was not in fact principally secured
by real property (but only if the mortgage is disposed of within 90
days of discovery).
A mortgage loan that is "defective" as described in clause (4) above that is not
sold or, if within two years of the Startup Day, exchanged, within 90 days of
discovery, ceases to be a qualified mortgage after that 90-day period.
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Permitted investments include cash flow investments, qualified reserve
assets, and foreclosure property. A cash flow investment is an investment,
earning a return in the nature of interest, of amounts received on or with
respect to qualified mortgages for a temporary period, not exceeding 13 months,
until the next scheduled distribution to holders of interests in the REMIC Pool.
A qualified reserve asset is any intangible property held for investment that is
part of any reasonably required reserve maintained by the REMIC Pool to provide
for payments of expenses of the REMIC Pool or amounts due on the regular or
residual interests in the event of defaults (including delinquencies) on the
qualified mortgages, lower than expected reinvestment returns, prepayment
interest shortfalls and other contingencies. The reserve fund will be
disqualified if more than 30% of the gross income from the assets in that fund
for the year is derived from the sale or other disposition of property held for
less than three months, unless required to prevent a default on the regular
interests caused by a default on one or more qualified mortgages. A reserve fund
must be reduced "promptly and appropriately" as payments on the mortgage loans
are received. Foreclosure property is real property acquired by the REMIC Pool
in connection with the default or imminent default of a qualified mortgage and
generally may not be held for more than three taxable years after the taxable
year of acquisition unless extensions are granted by the Secretary of the
Treasury.
In addition to the foregoing requirements, the various interests in a
REMIC Pool also must meet specific requirements. All of the interests in a REMIC
Pool must be either of the following: (1) one or more classes of regular
interests or (2) a single class of residual interests on which distributions, if
any, are made pro rata.
o A regular interest is an interest in a REMIC Pool that is
issued on the Startup Day with fixed terms, is designated as a
regular interest, and unconditionally entitles the holder to
receive a specified principal amount (or other similar
amount), and provides that interest payments (or other similar
amounts), if any, at or before maturity either are payable
based on a fixed rate or a qualified variable rate, or consist
of a specified, nonvarying portion of the interest payments on
qualified mortgages. That specified portion may consist of a
fixed number of basis points, a fixed percentage of the total
interest, or a qualified variable rate, inverse variable rate
or difference between two fixed or qualified variable rates on
some or all of the qualified mortgages. The specified
principal amount of a regular interest that provides for
interest payments consisting of a specified, nonvarying
portion of interest payments on qualified mortgages may be
zero.
o A residual interest is an interest in a REMIC Pool other than
a regular interest that is issued on the Startup Day and that
is designated as a residual interest.
An interest in a REMIC Pool may be treated as a regular interest even
if payments of principal for that interest are subordinated to payments on other
regular interests or the residual interest in the REMIC Pool, and are dependent
on the absence of defaults or delinquencies on qualified mortgages or permitted
investments, lower than reasonably expected returns on permitted investments,
unanticipated expenses incurred by the REMIC Pool or prepayment interest
shortfalls. Accordingly, in the opinion of Stroock & Stroock & Lavan LLP, the
Regular Securities of a series will constitute one or more classes of regular
interests, and the Residual Securities for that series will constitute a single
class of residual interests for each REMIC Pool.
If an entity electing to be treated as a REMIC fails to comply with one
or more of the ongoing requirements of the Code for that status during any
taxable year, the Code provides that the entity will not be treated as a REMIC
for that year and thereafter. In that event, that entity may be taxable as a
corporation under Treasury regulations, and the related REMIC Securities may not
be accorded the status or given the tax treatment described below. Although the
Code authorizes the Treasury Department to issue regulations providing relief in
the event of an inadvertent termination of REMIC status, none of these
regulations have been issued. Any relief provided, moreover, may be accompanied
by sanctions, such as the imposition of a corporate tax on all or a portion of
the trust fund's income for the period in which the requirements for that status
are not satisfied. The pooling and servicing agreement for each REMIC Pool will
include provisions designed to maintain the trust fund's status as a REMIC under
the REMIC Provisions. It is not anticipated that the status of any trust fund as
a REMIC will be terminated.
Characterization of Investments in REMIC Securities
The REMIC Securities will be treated as "real estate assets" within the
meaning of Section 856(c)(4)(A) of the Code and assets described in Section
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7701(a)(19)(C) of the Code in the same proportion that the assets of the REMIC
Pool underlying these Notes or Certificates, as applicable, would be so treated.
Moreover, if 95% or more of the assets of the REMIC Pool qualify for either of
the foregoing treatments at all times during a calendar year, the REMIC
Securities will qualify for the corresponding status in their entirety for that
calendar year.
If the assets of the REMIC Pool include Buydown Mortgage Loans, it is
possible that the percentage of those 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"). No opinion is
expressed as to the treatment of those Buydown Funds because the law is unclear
as to whether the Buydown Funds represent an account held by the lender that
reduces the lender's investment in the mortgage loan. This reduction of a
holder's investment may reduce the assets qualifying for the 60% of assets test
for meeting the definition of a "domestic building and loan association."
Interest (including original issue discount) on the Regular Securities and
income allocated to the class of Residual Securities will be interest described
in Section 856(c)(3)(B) of the Code to the extent that the Notes or
Certificates, as applicable, are treated as "real estate assets" within the
meaning of Section 856(c)(4)(A) of the Code. In addition, the Regular Securities
generally will be "qualified mortgages" within the meaning of Section 860G(a)(3)
of the Code if transferred to another REMIC on its Startup Day in exchange for
regular or residual interests in the REMIC.
The assets of the REMIC Pool will include, in addition to mortgage
loans, payments on mortgage loans held pending distribution on the REMIC
Securities and property acquired by foreclosure held pending sale, and may
include amounts in reserve accounts. It is unclear whether property acquired by
foreclosure held pending sale and amounts in reserve accounts would be
considered to be part of the mortgage loans, or whether those assets (to the
extent not invested in assets described in the foregoing sections) otherwise
would receive the same treatment as the mortgage loans for purposes of all of
the foregoing sections. The REMIC Regulations do provide, however, that payments
on mortgage loans held pending distribution are considered part of the mortgage
loans for purposes of Section 856(c)(4)(A) of the Code. Furthermore, foreclosure
property generally will qualify as "real estate assets" under Section
856(c)(4)(A) of the Code.
Tiered REMIC Structures
For some series of REMIC Securities, two or more separate elections may
be made to treat designated portions of the related trust fund as REMICs
("Tiered REMICs") for federal income tax purposes. Upon the issuance of any of
these series of REMIC Securities, Stroock & Stroock & Lavan LLP will deliver its
opinion that, assuming compliance with all provisions of the related pooling and
servicing agreement, the Tiered REMICs will each qualify as a REMIC and the
respective REMIC Securities issued by each Tiered REMIC will be considered to
evidence ownership of Regular Securities or Residual Securities in the related
REMIC within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Securities will be
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Code and
"loans secured by an interest in real property" under Section 7701(a)(19)(C) of
the Code, and whether the income on those Notes or Certificates, as applicable,
is interest described in Section 856(c)(3)(B) of the Code, the Tiered REMICs
will be treated as one REMIC.
Taxation of Owners of Regular Securities
(1) General
Except as otherwise indicated herein, the Regular Securities will be
treated for federal income tax purposes as debt instruments that are issued by
the REMIC and not as beneficial interests in the REMIC or the REMIC's assets. In
general, interest, original issue discount, and market discount on a Regular
Security will be treated as ordinary income to a holder of the Regular Security
(the "Regular Securityholder"), and principal payments on a Regular Security
will be treated as a return of capital to the extent of the Regular
Securityholder's basis in the Regular Security allocable thereto. Regular
Securityholders must use the accrual method of accounting with regard to Regular
Securities, regardless of the method of accounting otherwise used by that
Regular Securityholder.
Payments of interest on Regular Securities may be based on a fixed
rate, a variable rate as permitted by the REMIC Regulations, or may consist of a
specified portion of the interest payments on qualified mortgages where such
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portion does not vary during the period the Regular Security is outstanding. The
definition of a variable rate for purposes of the REMIC Regulations is based on
the definition of a qualified floating rate for purposes of the rules governing
original issue discount set forth in the OID Regulations, with certain
modifications and permissible variations. See "--Variable Rate Regular
Securities" below for a discussion of the definition of a qualified floating
rate for purposes of the OID Regulations. In contrast to the OID Regulations,
for purposes of the REMIC Regulations, a qualified floating rate does not
include any multiple of a qualified floating rate (also excluding multiples of
qualified floating rates that themselves would constitute qualified floating
rates under the OID Regulations), and the characterization of a variable rate
that is subject to a cap, floor or similar restriction as a qualified floating
rate for purposes of the REMIC Regulations will not depend upon the OID
Regulations relating to caps, floors, and similar restrictions. See "--Variable
Rate Regular Securities" below for discussion of the OID Regulations relating to
caps, floors and similar restrictions. A qualified floating rate, as defined
above for purposes of the REMIC Regulations (a "REMIC qualified floating rate"),
qualifies as a variable rate for purposes of the REMIC Regulations if such REMIC
qualified floating rate is set at a "current rate" as defined in the OID
Regulations. In addition, a rate equal to the highest, lowest or an average of
two or more REMIC qualified floating rates qualifies as a variable rate for
REMIC purposes. A Regular Security may also have a variable rate based on a
weighted average of the interest rates on some or all of the qualified mortgages
held by the REMIC where each qualified mortgage taken into account has a fixed
rate or a variable rate that is permissible under the REMIC Regulations.
Further, a Regular Security may have a rate that is the product of a REMIC
qualified floating rate or a weighted average rate and a fixed multiplier, is a
constant number of basis points more or less than a REMIC qualified floating
rate or a weighted average rate, or is the product, plus or minus a constant
number of basis points, of a REMIC qualified floating rate or a weighted average
rate and a fixed multiplier. An otherwise permissible variable rate for a
Regular Security, described above, will not lose its character as such because
it is subject to a floor or a cap, including a "funds available cap" as that
term is defined in the REMIC Regulations. Lastly, a Regular Security will be
considered as having a permissible variable rate if it has a fixed or otherwise
permissible variable rate during one or more payment or accrual periods and
different fixed or otherwise permissible variable rates during other payment or
accrual periods.
(2) Original Issue Discount
Accrual Securities will be, and other classes of Regular Securities may
be, issued with "original issue discount" within the meaning of Code Section
1273(a). Holders of any Class or Subclass of Regular Securities having original
issue discount generally must include original issue discount in ordinary income
for federal income tax purposes as it accrues, in accordance with a constant
yield method that takes into account the compounding of interest, in advance of
the receipt of the cash attributable to that income. The following discussion is
based in part on the "OID Regulations" and in part on the provisions of the Tax
Reform Act of 1986 (the "1986 Act"). Regular Securityholders should be aware,
however, that the OID Regulations do not adequately address some of the issues
relevant to prepayable securities, such as the Regular Securities. To the extent
that those issues are not addressed in the regulations, the Seller intends to
apply the methodology described in the Conference Committee Report to the 1986
Act. No assurance can be provided that the Internal Revenue Service will not
take a different position as to those matters not currently addressed by the OID
Regulations. Moreover, the OID Regulations include an anti-abuse rule allowing
the Internal Revenue Service to apply or depart from the OID Regulations where
necessary or appropriate to ensure a reasonable tax result because of the
applicable statutory provisions. A tax result will not be considered
unreasonable under the anti-abuse rule in the absence of a substantial effect on
the present value of a taxpayer's tax liability. Investors are advised to
consult their own tax advisors as to the discussion in the OID Regulations and
the appropriate method for reporting interest and original issue discount for
the Regular Securities.
Each Regular Security will be treated as a single installment
obligation for purposes of determining the original issue discount includible in
a Regular Securityholder's income. The total amount of original issue discount
on a Regular Security is the excess of the "stated redemption price at maturity"
of the Regular Security over its "issue price." The issue price of a Class of
Regular Securities offered pursuant to this prospectus generally is the first
price at which a substantial amount of that Class is sold to the public
(excluding bond houses, brokers and underwriters). Although unclear under the
OID Regulations, it is anticipated that the trustee will treat the issue price
of a Class as to which there is no substantial sale as of the issue date or that
is retained by the depositor as the fair market value of the Class as of the
issue date. The issue price of a Regular Security also includes any amount paid
by an initial Regular Securityholder for accrued interest that relates to a
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period before the issue date of the Regular Security, unless the Regular
Securityholder elects on its federal income tax return to exclude that amount
from the issue price and to recover it on the first Distribution Date.
The stated redemption price at maturity of a Regular Security always
includes the original principal amount of the Regular Security, but generally
will not include distributions of interest if those distributions constitute
"qualified stated interest." Under the OID Regulations, qualified stated
interest generally means interest payable at a single fixed rate or a qualified
variable rate (as described below), provided that the interest payments are
unconditionally payable at intervals of one year or less during the entire term
of the Regular Security. Because there is no penalty or default remedy in the
case of nonpayment of interest for a Regular Security, it is possible that no
interest on any Class of Regular Securities will be treated as qualified stated
interest. However, except as provided in the following three sentences or in the
prospectus supplement, because the underlying mortgage loans provide for
remedies in the event of default, it is anticipated that the trustee will treat
interest for the Regular Securities as qualified stated interest. Distributions
of interest on an Accrual Security, or on other Regular Securities for which
deferred interest will accrue, will not constitute qualified stated interest, in
which case the stated redemption price at maturity of those Regular Securities
includes all distributions of interest as well as principal on the Regular
Securities. Likewise, it is anticipated that the trustee will treat an
interest-only Class or a Class on which interest is substantially
disproportionate to its principal amount (a so-called "super-premium" Class) as
having no qualified stated interest. Where the interval between the issue date
and the first Distribution Date on a Regular Security is shorter than the
interval between subsequent Distribution Dates, the interest attributable to the
additional days will be included in the stated redemption price at maturity.
Under a de minimis rule, original issue discount on a Regular Security
will be considered to be zero if the original issue discount is less than 0.25%
of the stated redemption price at maturity of the Regular Security multiplied by
the weighted average maturity of the Regular Security. For this purpose, the
weighted average maturity of the Regular Security is computed as the sum of the
amounts determined by multiplying the number of full years (i.e., rounding down
partial years) from the issue date until each distribution in reduction of
stated redemption price at maturity is scheduled to be made by a fraction, the
numerator of which is the amount of each distribution included in the stated
redemption price at maturity of the Regular Security and the denominator of
which is the stated redemption price at maturity of the Regular Security. The
Conference Committee Report to the 1986 Act provides that the schedule of those
distributions should be determined in accordance with the assumed rate of
prepayment of the mortgage loans (the "Prepayment Assumption") and the
anticipated reinvestment rate, if any, relating to the Regular Securities. The
Prepayment Assumption for a series of Regular Securities will be set forth in
the prospectus supplement. Holders generally must report de minimis original
issue discount pro rata as principal payments are received, and that income will
generally be capital gain if the Regular Security is held as a capital asset.
Under the OID Regulations, however, Regular Securityholders may elect to accrue
all de minimis original issue discount as well as market discount and market
premium, under the constant yield method. See "-Election to Treat All Interest
Under the Constant Yield Method" below.
A Regular Securityholder generally must include in gross income for any
taxable year the sum of the "daily portions," as defined below, of the original
issue discount on the Regular Security accrued during an accrual period for each
day on which it holds the Regular Security, including the date of purchase but
excluding the date of disposition. The trustee will treat the monthly period
ending on the day before each Distribution Date as the accrual period. For each
Regular Security, a calculation will be made of the original issue discount that
accrues during each successive full accrual period (or shorter period from the
date of original issue) that ends on the day before the related Distribution
Date on the Regular Security. The Conference Committee Report to the 1986 Act
states that the rate of accrual of original issue discount is intended to be
based on the Prepayment Assumption. The original issue discount accruing in a
full accrual period would be the excess, if any, of:
(1) the sum of:
(a) the present value of all of the remaining
distributions to be made on the Regular Security as of the end
of that accrual period and
(b) the distributions made on the Regular Security
during the accrual period that are included in the Regular
Security's stated redemption price at maturity, over
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(2) the adjusted issue price of the Regular Security at
the beginning of the accrual period.
The present value of the remaining distributions referred to in the preceding
sentence is calculated based on:
(1) the yield to maturity of the Regular
Security at the issue date; and
(2) the Prepayment Assumption.
For these purposes, the adjusted issue price of a Regular Security at the
beginning of any accrual period equals the issue price of the Regular Security,
increased by the total amount of original issue discount for the Regular
Security that accrued in all prior accrual periods and reduced by the amount of
distributions included in the Regular Security's stated redemption price at
maturity that were made on the Regular Security in those prior periods. The
original issue discount accruing during any accrual period (as determined in
this paragraph) will then be divided by the number of days in the period to
determine the daily portion of original issue discount for each day in the
period. For an initial accrual period shorter than a full accrual period, the
daily portions of original issue discount must be determined according to an
appropriate allocation under any reasonable method.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Securityholder generally
will increase to take into account prepayments on the Regular Securities as a
result of prepayments on the mortgage loans that exceed the Prepayment
Assumption, and generally will decrease (but not below zero for any period) if
the prepayments are slower than the Prepayment Assumption. An increase in
prepayments on the mortgage loans for a series of Regular Securities can result
in both a change in the priority of principal payments for some Classes of
Regular Securities and either an increase or decrease in the daily portions of
original issue discount for those Regular Securities.
(3) Acquisition Premium
A purchaser of a Regular Security having original issue discount at a
price greater than its adjusted issue price but less than its stated redemption
price at maturity will be required to include in gross income the daily portions
of the original issue discount on the Regular Security reduced pro rata by a
fraction, the numerator of which is the excess of its purchase price over the
adjusted issue price and the denominator of which is the excess of the remaining
stated redemption price at maturity over the adjusted issue price.
Alternatively, a subsequent purchaser may elect to treat all that acquisition
premium under the constant yield method, as described below under the heading
"--Election to Treat All Interest Under the Constant Yield Method" below.
(4) Variable Rate Regular Securities
Regular Securities may provide for interest based on a variable rate.
Under the OID Regulations, interest is treated as payable at a qualified
variable rate if, generally, (1) the issue price does not exceed the original
principal balance by more than a specified amount, (2) it does not provide for
any principal payments that are contingent, within the meaning of the OID
Regulations, except as provided in (1), and (3) the interest compounds or is
payable at least annually at current values of
(a) one or more "qualified floating rates,"
(b) a single fixed rate and one or more qualified floating rates,
(c) a single "objective rate," or
(d) a single fixed rate and a single objective rate that is a
"qualified inverse floating rate."
A floating rate is a qualified floating rate if variations can reasonably be
expected to measure contemporaneous variations in the cost of newly borrowed
funds. A multiple of a qualified floating rate is considered a qualified
floating rate only if the rate is equal to either (a) the product of a qualified
floating rate and a fixed multiple that is greater than 0.65 but not more than
1.35 or (b) the product of a qualified floating rate and a fixed multiple that
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is greater than 0.65 but not more than 1.35, increased or decreased by a fixed
rate. That rate may also be subject to a fixed cap or floor, or a cap or floor
that is not reasonably expected as of the issue date to affect the yield of the
instrument significantly. An objective rate is any rate (other than a qualified
floating rate) that is determined using a single fixed formula and that is based
on objective financial or economic information, provided that the information is
not (1) within the control of the issuer or a related party or (2) unique to the
circumstances of the issuer or a related party. However, an objective rate does
not include a rate if it is reasonably expected that the average value of such
rate during the first half of the Regular Security's term will be either
significantly less than or significantly greater than the average value of the
rate during the final half of the Regular Security's term. A qualified inverse
floating rate is a rate equal to a fixed rate minus a qualified floating rate
that inversely reflects contemporaneous variations in the qualified floating
rate; an inverse floating rate that is not a qualified inverse floating rate may
nevertheless be an objective rate. A Class of Regular Securities may be issued
under this prospectus that does not have a qualified variable rate under the
foregoing rules, for example, a Class that bears different rates at different
times during the period it is outstanding that it is considered significantly
"front-loaded" or "back-loaded" within the meaning of the OID Regulations. It is
possible that a Class may be considered to bear "contingent interest" within the
meaning of the OID Regulations. The OID Regulations, as they relate to the
treatment of contingent interest, are by their terms not applicable to Regular
Securities. However, if final regulations dealing with contingent interest for
Regular Securities apply the same principles as the OID Regulations, those
regulations may lead to different timing of income inclusion than would be the
case under the OID Regulations. Furthermore, application of those principles
could lead to the characterization of gain on the sale of contingent interest
Regular Securities as ordinary income. Investors should consult their tax
advisors regarding the appropriate treatment of any Regular Security that does
not pay interest at a fixed rate or qualified variable rate as described in this
paragraph.
The amount of original issue discount for a Regular Security bearing a
qualified variable rate of interest will accrue in the manner described above
under "--Original Issue Discount," with the yield to maturity and future
payments on that Regular Security generally to be determined by assuming that
interest will be payable for the life of the Regular Security based on the
initial rate (or, if different, the value of the applicable variable rate as of
the pricing date) for the relevant Class, if the Class bears interest at a
qualified floating rate or qualified inverse floating rate, or based on a fixed
rate which reflects the reasonably expected yield for the relevant Class, if the
Class bears interest at an objective rate (other than a qualified inverse
floating rate). Unless required otherwise by applicable final regulations, it is
anticipated that the trustee will treat interest, other than variable interest
on an interest-only or super-premium Class, as qualified stated interest at the
qualified variable rate. However, the qualified stated interest allocable to an
accrual period will be increased (or decreased) if the interest actually paid
during the accrual period exceed (or is less than) the interest assumed to be
paid under the rate just described.
(5) Market Discount
A subsequent purchaser of a Regular Security also may be subject to the
market discount rules of Code Sections 1276 through 1278. Under these sections
and the principles applied by the OID Regulations in the context of original
issue discount, "market discount" is the amount by which the purchaser's
original basis in the Regular Security (1) is exceeded by the remaining
outstanding principal payments and interest payments other than qualified stated
interest payments due on a Regular Security, or (2) in the case of a Regular
Security having original issue discount, is exceeded by the adjusted issue price
of that Regular Security at the time of purchase. The purchaser generally will
be required to recognize ordinary income to the extent of accrued market
discount on that Regular Security as distributions includible in the stated
redemption price at maturity of the Regular Security are received, in an amount
not exceeding that distribution. The market discount would accrue in a manner to
be provided in Treasury regulations and should take into account the Prepayment
Assumption. The Conference Committee Report to the 1986 Act provides that until
these regulations are issued, the market discount would accrue either (1) on the
basis of a constant interest rate, or (2) in the ratio of stated interest
allocable to the relevant period to the sum of the interest for that period plus
the remaining interest as of the end of that period, or in the case of a Regular
Security issued with original issue discount, in the ratio of original issue
discount accrued for the relevant period to the sum of the original issue
discount accrued for that period plus the remaining original issue discount as
of the end of that period. The purchaser also generally will be required to
treat a portion of any gain on a sale or exchange of the Regular Security as
ordinary income to the extent of the market discount accrued to the date of
disposition under one of the foregoing methods, less any accrued market discount
previously reported as ordinary income as partial distributions in reduction of
the stated redemption price at maturity were received. The purchaser will be
required to defer deduction of a portion of the excess of the interest paid or
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accrued on indebtedness incurred to purchase or carry a Regular Security over
the interest distributable on the Regular Security. The deferred portion of the
interest expense in any taxable year generally will not exceed the accrued
market discount on the Regular Security for that year. Any deferred interest
expense is, in general, allowed as a deduction not later than the year in which
the related market discount income is recognized or the Regular Security is
disposed of.
As an alternative to the inclusion of market discount in income on the
foregoing basis, the Regular Securityholder may elect to include market discount
in income currently as it accrues on all market discount instruments acquired by
the Regular Securityholder in that taxable year or thereafter, in which case the
interest deferral rule will not apply. See "--Election to Treat All Interest
Under the Constant Yield Method" below regarding an alternative manner in which
that election may be deemed to be made. A person who purchases a Regular
Security at a price lower than the remaining amounts includible in the stated
redemption price at maturity of the security, but higher than its adjusted issue
price, does not acquire the Regular Security with market discount, but will be
required to report original issue discount, appropriately adjusted to reflect
the excess of the price paid over the adjusted issue price.
Market discount for a Regular Security will be considered to be zero if
the market discount is less than 0.25% of the remaining stated redemption price
at maturity of the Regular Security (or, in the case of a Regular Security
having original issue discount, the adjusted issue price of that Regular
Security) multiplied by the weighted average maturity of the Regular Security
(presumably determined as described above in the third paragraph under
"--Original Issue Discount" above) remaining after the date of purchase. It
appears that de minimis market discount would be reported in a manner similar to
de minimis original issue discount. See "--Original Issue Discount" above.
Treasury regulations implementing the market discount rules have not
yet been issued, and uncertainty exists with respect to many aspects of those
rules. Due to the substantial lack of regulatory guidance with respect to the
market discount rules, it is unclear how those rules will affect any secondary
market that develops for a particular Class of Regular Securities. Prospective
investors in Regular Securities should consult their own tax advisors regarding
the application of the market discount rules to the Regular Securities and the
elections to include market discount in income currently and to accrue market
discount on the basis of the constant yield method.
(6) Amortizable Premium
A Regular Security purchased at a cost greater than its remaining
stated redemption price at maturity generally is considered to be purchased at a
premium. If the Regular Securityholder holds that Regular Security as a "capital
asset" within the meaning of Code Section 1221, the Regular Securityholder may
elect under Code Section 171 to amortize the premium under a constant yield
method that reflects compounding based on the interval between payments on the
Regular Security. The election will apply to all taxable debt obligations
(including REMIC regular interests) acquired by the Regular Securityholder at a
premium held in that taxable year or thereafter, unless revoked with the
permission of the Internal Revenue Service. The Conference Committee Report to
the 1986 Act indicates a Congressional intent that the same rules that apply to
the accrual of market discount on installment obligations will also apply to
amortizing bond premium under Code Section 171 on installment obligations as the
Regular Securities, although it is unclear whether the alternatives to the
constant interest method described above under "Market Discount" are available.
Amortizable bond premium generally will be treated as an offset to interest
income on a Regular Security, rather than as a separate deductible item. See
"--Election to Treat All Interest Under the Constant Yield Method" below
regarding an alternative manner in which the Code Section 171 election may be
deemed to be made.
(7) Election to Treat All Interest Under the Constant Yield Method
A holder of a debt instrument such as a Regular Security may elect to
treat all interest that accrues on the instrument using the constant yield
method, with none of the interest being treated as qualified stated interest.
For purposes of applying the constant yield method to a debt instrument subject
to this election, (1) "interest" includes stated interest, original issue
discount, de minimis original issue discount, market discount and de minimis
market discount, as adjusted by any amortizable bond premium or acquisition
premium and (2) the debt instrument is treated as if the instrument were issued
on the holder's acquisition date in the amount of the holder's adjusted basis
immediately after acquisition. It is unclear whether, for this purpose, the
initial Prepayment Assumption would continue to apply or if a new prepayment
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assumption as of the date of the holder's acquisition would apply. A holder
generally may make this election on an instrument by instrument basis or for a
class or group of debt instruments. However, if the holder makes this election
for a debt instrument with amortizable bond premium, the holder is deemed to
have made elections to amortize bond premium currently as it accrues under the
constant yield method for all premium bonds held by the holder in the same
taxable year or thereafter. Alternatively, if the holder makes this election for
a debt instrument with market discount, the holder is deemed to have made
elections to report market discount income currently as it accrues under the
constant yield method for all market discount bonds acquired by the holder in
the same taxable year or thereafter. The election is made on the holder's
federal income tax return for the year in which the debt instrument is acquired
and is irrevocable except with the approval of the Internal Revenue Service.
Investors should consult their own tax advisors regarding the advisability of
making this election.
(8) Treatment of Losses
Regular Securityholders will be required to report income for Regular
Securities on the accrual method of accounting, without giving effect to delays
or reductions in distributions attributable to defaults or delinquencies on the
mortgage loans, except to the extent it can be established that the losses are
uncollectible. Accordingly, the holder of a Regular Security, particularly a
Subordinate Security, may have income, or may incur a diminution in cash flow as
a result of a default or delinquency, but may not be able to take a deduction
(subject to the discussion below) for the corresponding loss until a subsequent
taxable year. In this regard, investors are cautioned that while they may
generally cease to accrue interest income if it reasonably appears that the
interest will be uncollectible, the Internal Revenue Service may take the
position that original issue discount must continue to be accrued in spite of
its uncollectibility until the debt instrument is disposed of in a taxable
transaction or becomes worthless in accordance with the rules of Code Section
166.
To the extent the rules of Code Section 166 regarding bad debts are
applicable, it appears that Regular Securityholders that are corporations or
that otherwise hold the Regular Securities in connection with a trade or
business should in general be allowed to deduct as an ordinary loss that loss
with respect to principal sustained during the taxable year on account of any
Regular Securities becoming wholly or partially worthless, and that, in general,
Regular Securityholders that are not corporations and do not hold the Regular
Securities in connection with a trade or business should be allowed to deduct as
a short-term capital loss any loss sustained during the taxable year on account
of a portion of any Regular Securities becoming wholly worthless. Although the
matter is not free from doubt, non-corporate Regular Securityholders should be
allowed a bad debt deduction at the time the principal balance of the Regular
Securities is reduced to reflect losses resulting from any liquidated mortgage
loans. The Internal Revenue Service, however, could take the position that
non-corporate holders will be allowed a bad debt deduction to reflect those
losses only after all the mortgage loans remaining in the trust fund have been
liquidated or the applicable Class of Regular Securities has been otherwise
retired. The Internal Revenue Service could also assert that losses on the
Regular Securities are deductible based on some other method that may defer
those deductions for all holders, such as reducing future cashflow for purposes
of computing original issue discount. This may have the effect of creating
"negative" original issue discount that may be deductible only against future
positive original issue discount or otherwise upon termination of the Class.
Regular Securityholders are urged to consult their own tax advisors
regarding the appropriate timing, amount and character of any loss sustained for
their Regular Securities. While losses attributable to interest previously
reported as income should be deductible as ordinary losses by both corporate and
non-corporate holders, the Internal Revenue Service may take the position that
losses attributable to accrued original issue discount may only be deducted as
capital losses in the case of non-corporate holders who do not hold the Regular
Securities in connection with a trade or business. Special loss rules may be
applicable to banks and thrift institutions. These taxpayers are advised to
consult their tax advisors regarding the treatment of losses on Regular
Securities.
(9) Sale or Exchange of Regular Securities
If a Regular Securityholder sells or exchanges a Regular Security, the
Regular Securityholder will recognize gain or loss equal to the difference, if
any, between the amount received and its adjusted basis in the Regular Security.
The adjusted basis of a Regular Security generally will equal the original cost
of the Regular Security to the seller, increased by any original issue discount
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or market discount previously included in the seller's gross income for the
Regular Security and reduced by amounts included in the stated redemption price
at maturity of the Regular Security that were previously received by the seller,
by any amortized premium, and by any recognized losses.
Except as described above regarding market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Security realized by an investor who holds the Regular Security as a
capital asset will be capital gain or loss and will be long-term or short-term
depending on whether the Regular Security has been held for the long-term
capital gain holding period (currently, more than one year). That gain will be
treated as ordinary income
(1) if a Regular Security is held as part of a
"conversion transaction" as defined in Code Section 1258(c), up to the
amount of interest that would have accrued on the Regular
Securityholder's net investment in the conversion transaction at 120%
of the appropriate applicable federal rate in effect at the time the
taxpayer entered into the transaction minus any amount previously
treated as ordinary income for any prior disposition of property that
was held as part of that transaction;
(2) in the case of a non-corporate taxpayer, to the
extent that the taxpayer has made an election under Code Section
163(d)(4) to have net capital gains taxed as investment income at
ordinary income rates; or
(3) to the extent that the gain does not exceed the
excess, if any, of (a) the amount that would have been includible in
the gross income of the holder if its yield on that Regular Security
were 110% of the applicable federal rate as of the date of purchase,
over (b) the amount of income actually includible in the gross income
of the holder for that Regular Security (the "110% yield rule").
In addition, gain or loss recognized from the sale of a Regular
Security by some banks or thrift institutions will be treated as ordinary income
or loss pursuant to Code Section 582(c). Long-term capital gains of noncorporate
taxpayers generally are subject to a lower maximum tax rate than ordinary income
of those taxpayers for property held for more than one year, with further rate
reductions for property held for more than five years. Currently, the maximum
tax rate for corporations is the same for both ordinary income and capital
gains.
Taxation of Owners of Residual Securities
(1) Taxation of REMIC Income
Generally, the "daily portions" of REMIC taxable income or net loss
will be includible as ordinary income or loss in determining the federal taxable
income of holders of Residual Securities ("Residual Holders"), and will not be
taxed separately to the REMIC Pool. The daily portions of REMIC taxable income
or net loss of a Residual Holder are determined by allocating the REMIC Pool's
taxable income or net loss for each calendar quarter ratably to each day in that
quarter and by allocating that daily portion among the Residual Holders in
proportion to their respective holdings of Residual Securities in the REMIC Pool
on that day. REMIC taxable income is generally determined in the same manner as
the taxable income of an individual using the accrual method of accounting,
except that
(1) the limitations on deductibility of investment
interest expense and expenses for the production of income do not
apply;
(2) all bad loans will be deductible as business bad
debts; and
(3) the limitation on the deductibility of interest and
expenses related to tax-exempt income will apply.
The REMIC Pool's gross income includes interest, original issue discount income
and market discount income, if any, on the mortgage loans, reduced by
amortization of any premium on the mortgage loans, plus income from amortization
of issue premium, if any, on the Regular Securities, plus income on reinvestment
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of cash flows and reserve assets, plus any cancellation of indebtedness income
upon allocation of realized losses to the Regular Securities. The REMIC Pool's
deductions include interest and original issue discount expense on the Regular
Securities, servicing fees on the mortgage loans, other administrative expenses
of the REMIC Pool and realized losses on the mortgage loans. The requirement
that Residual Holders report their pro rata share of taxable income or net loss
of the REMIC Pool will continue until there are no Notes or Certificates, as
applicable, of any class of the related series outstanding.
The taxable income recognized by a Residual Holder in any taxable year
will be affected by, among other factors, the relationship between the timing of
recognition of interest, original issue discount or market discount income or
amortization of premium for the mortgage loans, on the one hand, and the timing
of deductions for interest (including original issue discount) or income from
amortization of issue premium on the Regular Securities, on the other hand. If
an interest in the mortgage loans is acquired by the REMIC Pool at a discount,
and one or more of these mortgage loans is prepaid, the prepayment may be used
in whole or in part to make distributions in reduction of principal on the
Regular Securities, and the discount on the mortgage loans that is includible in
income may exceed the original issue discount deductions allowed with respect to
the Regular Securities. When there is more than one Class of Regular Securities
that distribute principal sequentially, this mismatching of income and
deductions is particularly likely to occur in the early years following issuance
of the Regular Securities when distributions in reduction of principal are being
made in respect of earlier Classes of Regular Securities to the extent that
those Classes are not issued with substantial discount or are issued at a
premium. If taxable income attributable to that mismatching is realized, in
general, losses would be allowed in later years as distributions on the later
maturing Classes of Regular Securities are made.
Taxable income may also be greater in earlier years than in later years
as a result of the fact that interest expense deductions, expressed as a
percentage of the outstanding principal amount of that series of Regular
Securities, may increase over time as distributions in reduction of principal
are made on the lower yielding Classes of Regular Securities, whereas, to the
extent the REMIC Pool consists of fixed rate mortgage loans, interest income for
any particular mortgage loan will remain constant over time as a percentage of
the outstanding principal amount of that loan. Consequently, Residual Holders
must have sufficient other sources of cash to pay any federal, state, or local
income taxes due as a result of that mismatching or unrelated deductions against
which to offset that income, subject to the discussion of "excess inclusions"
below under "--Limitations on Offset or Exemption of REMIC Income." The timing
of mismatching of income and deductions described in this paragraph, if present
for a series of Notes or Certificates, as applicable, may have a significant
adverse effect upon a Residual Holder's after-tax rate of return.
A portion of the income of a Residual Holder may be treated unfavorably
in three contexts:
(1) it may not be offset by current or net operating loss
deductions;
(2) it will be considered unrelated business taxable
income to tax-exempt entities; and
(3) it is ineligible for any statutory or treaty
reduction in the 30% withholding tax otherwise available to a foreign
Residual Holder.
See "--Limitations on Offset or Exemption of REMIC Income" below. In addition, a
Residual Holder's taxable income during some periods may exceed the income
reflected by those Residual Holders for those periods in accordance with
generally accepted accounting principles. Investors should consult their own
accountants concerning the accounting treatment of their investment in Residual
Securities.
(2) Basis and Losses
The amount of any net loss of the REMIC Pool that may be taken into
account by the Residual Holder is limited to the adjusted basis of the Residual
Security as of the close of the quarter (or time of disposition of the Residual
Security if earlier), determined without taking into account the net loss for
the quarter. The initial adjusted basis of a purchaser of a Residual Security is
the amount paid for that Residual Security. The adjusted basis will be increased
by the amount of taxable income of the REMIC Pool reportable by the Residual
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Holder and will be decreased (but not below zero), first, by a cash distribution
from the REMIC Pool and, second, by the amount of loss of the REMIC Pool
reportable by the Residual Holder. Any loss that is disallowed on account of
this limitation may be carried over indefinitely with respect to the Residual
Holder as to whom the loss was disallowed and may be used by the Residual Holder
only to offset any income generated by the same REMIC Pool.
A Residual Holder will not be permitted to amortize directly the cost of its
Residual Security as an offset to its share of the taxable income of the related
REMIC Pool. However, if, in any year, cash distributions to a Residual Holder
exceed its share of the REMIC's taxable income, the excess will constitute a
return of capital to the extent of the holder's basis in its Residual Security.
A return of capital is not treated as income for federal income tax purposes,
but will reduce the tax basis of the Residual Holder (but not below zero). If a
Residual Security's basis is reduced to zero, any cash distributions with
respect to that Residual Security in any taxable year in excess of its share of
the REMIC's income would be taxable to the holder as gain on the sale or
exchange of its interest in the REMIC.
A Residual Security may have a negative value if the net present value
of anticipated tax liabilities exceeds the present value of anticipated cash
flows. The REMIC Regulations appear to treat the issue price of the residual
interest as zero rather than the negative amount for purposes of determining the
REMIC Pool's basis in its assets. The preamble to the REMIC Regulations states
that the Internal Revenue Service may provide future guidance on the proper tax
treatment of payments made by a transferor of the residual interest to induce
the transferee to acquire the interest, and Residual Holders should consult
their own tax advisors in this regard.
Further, to the extent that the initial adjusted basis of a Residual
Holder (other than an original holder) in the Residual Security is greater than
the corresponding portion of the REMIC Pool's basis in the mortgage loans, the
Residual Holder will not recover a portion of the basis until termination of the
REMIC Pool unless future Treasury regulations provide for periodic adjustments
to the REMIC income otherwise reportable by the holder. The REMIC Regulations
currently in effect do not so provide. See "--Treatment of Certain Items of
REMIC Income and Expense--Market Discount" below regarding the basis of mortgage
loans to the REMIC Pool and "--Sale or Exchange of a Residual Security" below
regarding possible treatment of a loss upon termination of the REMIC Pool as a
capital loss.
(3) Treatment of Certain Items of REMIC Income and Expense
Although it is anticipated that the trustee will compute REMIC income
and expense in accordance with the Code and applicable regulations, the
authorities regarding the determination of specific items of income and expense
are subject to differing interpretations. The depositor makes no representation
as to the specific method that will be used for reporting income with respect to
the mortgage loans and expenses for the Regular Securities, and different
methods could result in different timing or reporting of taxable income or net
loss to Residual Holders or differences in capital gain versus ordinary income.
Original Issue Discount and Premium. Generally, the REMIC Pool's
deductions for original issue discount and income from amortization of premium
will be determined in the same manner as original issue discount income on
Regular Securities as described above under "--Taxation of Owners of Regular
Securities--Original Issue Discount" and "--Variable Rate Regular Securities,"
without regard to the de minimis rule described therein, and "--Amortizable
Premium."
Market Discount. The REMIC Pool will have market discount income in
respect of mortgage loans if, in general, the basis of the REMIC Pool in those
mortgage loans is exceeded by their unpaid principal balances. The REMIC Pool's
basis in those mortgage loans is generally the fair market value of the mortgage
loans immediately after the transfer of the mortgage loans to the REMIC Pool.
The REMIC Regulations provide that the basis is equal to the total of the issue
prices of all regular and residual interests in the REMIC Pool. The market
discount must be recognized currently as an item of ordinary income as it
accrues, rather than being included in income upon the sale of mortgage loans or
as principal on the mortgage loans is paid. Market discount income generally
should accrue in the manner described above under "--Taxation of Owners of
Regular Securities--Market Discount."
Premium. Generally, if the basis of the REMIC Pool in the mortgage
loans exceeds the unpaid principal balances of the mortgage loans, the REMIC
Pool will be considered to have acquired those mortgage loans at a premium equal
to the amount of that excess. As stated above, the REMIC Pool's basis in
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mortgage loans is generally the fair market value of the mortgage loans and is
based on the total of the issue prices of the regular and residual interests in
the REMIC Pool immediately after the transfer of the mortgage loans to the REMIC
Pool. In a manner analogous to the discussion above under "--Taxation of Owners
of Regular Securities--Amortizable Premium," a person that holds a mortgage loan
as a capital asset under Code Section 1221 may elect under Code Section 171 to
amortize premium on mortgage loans originated after September 27, 1985, under
the constant yield method. Amortizable bond premium will be treated as an offset
to interest income on the mortgage loans, rather than as a separate deduction
item. Because substantially all of the borrowers on the mortgage loans are
expected to be individuals, Code Section 171 will not be available for premium
on mortgage loans originated on or before September 27, 1985. Premium for those
mortgage loans may be deductible in accordance with a reasonable method
regularly employed by the holder of those mortgage loans. The allocation of that
premium pro rata among principal payments should be considered a reasonable
method; however, the Internal Revenue Service may argue that the premium should
be allocated in a different manner, such as allocating the premium entirely to
the final payment of principal.
(4) Limitations on Offset or Exemption of REMIC Income
A portion (or all) of the REMIC taxable income includible in
determining the federal income tax liability of a Residual Holder will be
subject to special treatment. That portion, referred to as the "excess
inclusion," is equal to the excess of REMIC taxable income for the calendar
quarter allocable to a Residual Security over the daily accruals for that
quarterly period of (1) 120% of the long-term applicable federal rate that would
have applied to the Residual Security (if it were a debt instrument) on the
Startup Day under Code Section 1274(d), multiplied by (2) the adjusted issue
price of the Residual Security at the beginning of the quarterly period. For
this purpose, the adjusted issue price of a Residual Security at the beginning
of a quarter is the issue price of the Residual Security, plus the amount of
those daily accruals of REMIC income described in this paragraph for all prior
quarters, decreased by any distributions made with respect to the Residual
Security before the beginning of that quarterly period.
The portion of a Residual Holder's REMIC taxable income consisting of
the excess inclusions generally may not be offset by other deductions, including
net operating loss carryforwards, on the Residual Holder's return. However, net
operating loss carryovers are determined without regard to excess inclusion
income. Further, if the Residual Holder is an organization subject to the tax on
unrelated business income imposed by Code Section 511, the Residual Holder's
excess inclusions will be treated as unrelated business taxable income of the
Residual Holder for purposes of Code Section 511. In addition, REMIC taxable
income is subject to 30% withholding tax for persons who are not U.S. Persons
(as defined below under "--Tax-Related Restrictions on Transfer of Residual
Securities--Foreign Investors"), and the portion thereof attributable to excess
inclusions is not eligible for any reduction in the rate of withholding tax (by
treaty or otherwise). See "--Taxation of Certain Foreign Investors--Residual
Securities" below. Finally, if a real estate investment trust or a regulated
investment company owns a Residual Security, a portion (allocated under Treasury
regulations yet to be issued) of dividends paid by the real estate investment
trust or regulated investment company could not be offset by net operating
losses of its shareholders, would constitute unrelated business taxable income
for tax-exempt shareholders, and would be ineligible for reduction of
withholding to persons who are not U.S. Persons.
Provisions governing the relationship between excess inclusions and the
alternative minimum tax provide that (i) alternative minimum taxable income for
a Residual Holder is determined without regard to the special rule, discussed
above, that taxable income cannot be less than excess inclusions, (ii) a
Residual Holder's alternative minimum taxable income for a taxable year cannot
be less than the excess inclusions for the year, and (iii) the amount of any
alternative minimum tax net operating loss deduction must be computed without
regard to any excess inclusions.
The Internal Revenue Service has authority to promulgate regulations
providing that if the aggregate value of the Residual Securities is not
considered to be "significant," then the entire share of REMIC taxable income of
a Residual Holder may be treated as excess inclusions subject to the foregoing
limitations. This authority has not been exercised to date.
(5) Tax-Related Restrictions on Transfer of Residual Securities
Disqualified Organizations. If any legal or beneficial interest in a
Residual Security is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (1) the
present value of the total anticipated excess inclusions for that Residual
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Security for periods after the transfer and (2) the highest marginal federal
income tax rate applicable to corporations. The REMIC Regulations provide that
the anticipated excess inclusions are based on actual prepayment experience to
the date of the transfer and projected payments based on the Prepayment
Assumption. The present value rate equals the applicable federal rate under Code
Section 1274(d) as of the date of the transfer for a term ending with the last
calendar quarter in which excess inclusions are expected to accrue. That rate is
applied to the anticipated excess inclusions from the end of the remaining
calendar quarters in which they arise to the date of the transfer. That tax
generally would be imposed on the transferor of the Residual Security, except
that where the transfer is through an agent (including a broker, nominee, or
other middleman) for a Disqualified Organization, the tax would instead be
imposed on the agent. However, a transferor of a Residual Security would in no
event be liable for the tax for a transfer if the transferee furnished to the
transferor an affidavit stating that the transferee is not a Disqualified
Organization and, as of the time of the transfer, the transferor does not have
actual knowledge that the affidavit is false. Under the REMIC Regulations, an
affidavit will be sufficient if the transferee furnishes (A) a social security
number, and states under penalties of perjury that the social security number is
that of the transferee, or (B) a statement under penalties of perjury that it is
not a disqualified organization.
"Disqualified Organization" means the United States, any state or
political subdivision of the United States, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing (provided, that the term does not include an instrumentality if all of
its activities are subject to tax and a majority of its board of directors in
not selected by any governmental entity), any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 531) that is exempt from
taxation under the Code unless the organization is subject to the tax on
unrelated business income imposed by Code Section 511.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income for a Residual Security during a taxable year and a
Disqualified Organization is the record holder of an equity interest in that
entity, then a tax is imposed on the entity equal to the product of (1) the
amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period that interest is held by the Disqualified
Organization, and (2) the highest marginal federal corporate income tax rate.
That tax would be deductible from the ordinary gross income of the Pass-Through
Entity for the taxable year. The Pass-Through Entity would not be liable for the
tax if (1) it has received an affidavit from the record holder stating, under
penalties of perjury, that it is not a Disqualified Organization, or providing
the holder's taxpayer identification number and stating, under penalties of
perjury, that the social security number is that of the record owner, and (2)
during the period that person is the record holder of the Residual Security, the
Pass-Through Entity does not have actual knowledge that the affidavit is false.
"Pass-Through Entity" means any regulated investment company, real
estate investment trust, common trust fund, partnership, trust or estate and
corporations operating on a cooperative basis. Except as may be provided in
Treasury regulations, any person holding an interest in a Pass-Through Entity as
a nominee for another will, with respect to that interest, be treated as a
Pass-Through Entity.
If an "electing large partnership" holds a Residual Security, all
interests in the electing large partnership are treated as held by Disqualified
Organizations for purposes of the tax imposed upon a Pass-Through Entity by
Section 860E(c) of the Code. The exception to this tax, otherwise available to a
Pass-Through Entity that is furnished particular affidavits by record holders of
interests in the entity and that does not know those affidavits are false, is
not available to an electing large partnership.
The pooling and servicing agreement for a series will provide that no
legal or beneficial interest in a Residual Security may be transferred or
registered unless (1) the proposed transferee furnished to the transferor and
the trustee an affidavit providing its taxpayer identification number and
stating that the transferee is the beneficial owner of the Residual Security and
is not a Disqualified Organization and is not purchasing the Residual Security
on behalf of a Disqualified Organization (i.e., as a broker, nominee or
middleman) and (2) the transferor provides a statement in writing to the trustee
that it has no actual knowledge that the affidavit is false. Moreover, the
pooling and servicing agreement will provide that any attempted or purported
transfer in violation of these transfer restrictions will be null and void and
will vest no rights in any purported transferee. Each Residual Security for a
series will bear a legend referring to those restrictions on transfer, and each
Residual Holder will be deemed to have agreed, as a condition of ownership of
the Residual Security, to any amendments to the related pooling and servicing
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agreement required under the Code or applicable Treasury regulations to
effectuate the foregoing restrictions. Information necessary to compute an
applicable excise tax must be furnished to the Internal Revenue Service and to
the requesting party within 60 days of the request, and the Seller or the
trustee may charge a fee for computing and providing that information.
Noneconomic Residual Interests. The REMIC Regulations would disregard
some transfers of Residual Securities, in which case the transferor would
continue to be treated as the owner of the Residual Securities and thus would
continue to be subject to tax on its allocable portion of the net income of the
REMIC Pool. Under the REMIC Regulations, a transfer of a "noneconomic residual
interest" (as defined below) to a Residual Holder (other than a Residual Holder
who is not a U.S. Person as defined below under "--Foreign Investors") is
disregarded to all federal income tax purposes if a significant purpose of the
transfer is to impede the assessment or collection of tax. A residual interest
in a REMIC (including a residual interest with a positive value at issuance) is
a "noneconomic residual interest" unless, at the time of the transfer, (1) the
present value of the expected future distributions on the residual interest at
least equals the product of the present value of the anticipated excess
inclusions and the highest corporate income tax rate in effect for the year in
which the transfer occurs, and (2) the transferor reasonably expects that the
transferee will receive distributions from the REMIC at or after the time at
which taxes accrue on the anticipated excess inclusions in an amount sufficient
to satisfy the accrued taxes on each excess inclusion. The anticipated excess
inclusions and the present value rate are determined in the same manner as set
forth above under "--Disqualified Organizations." The REMIC Regulations explain
that a significant purpose to impede the assessment or collection of tax exists
if the transferor, at the time of the transfer, either knew or should have known
that the transferee would be unwilling or unable to pay taxes due on its share
of the taxable income of the REMIC. A safe harbor is provided if (1) the
transferor conducted, at the time of the transfer, a reasonable investigation of
the financial condition of the transferee and found that the transferee
historically had paid its debts as they came due and found no significant
evidence to indicate that the transferee would not continue to pay its debts as
they came due in the future, (2) the transferee represents to the transferor
that it understands that, as the holder of the non-economic residual interest,
the transferee may incur liabilities in excess of any cash flows generated by
the interest and that the transferee intends to pay taxes associated with
holding the residual interest as they become due, and (3) either the formula
test or the asset test (each as described below) is satisfied.
The formula test is satisfied if the present value of the anticipated
tax liabilities associated with holding the Residual Security does not exceed
the sum of the present values of (1) any consideration given to the transferee
to the acquire the Residual Security, (2) the expected future distributions on
the Residual Security, and (3) the anticipated tax savings associated with
holding the Residual Security as the REMIC generates losses. For purposes of
this calculation, the present values generally are calculated using a discount
rate equal to the applicable federal rate, and the transferee is assumed to pay
tax at the highest corporate rate of tax.
The asset test is satisfied if
1. at the time of the transfer of the Residual Security, and at
the close of each of the transferee's two fiscal years
preceding the year of transfer, the transferee's gross assets
for financial reporting purposes exceed $100 million and its
net assets for financial reporting purposes exceed $10
million,
2. the transferee is a taxable domestic C corporation, other than
a RIC, REIT, REMIC or Subchapter T cooperative (an "Eligible
Corporation"), that makes a written agreement that any
subsequent transfer of the Residual Security will be to
another Eligible Corporation in a transaction that satisfies
the safe harbor described above, and the transferor does not
know, or have reason to know, that the transferee will not
honor such agreement, and
3. the facts and circumstances known to the transferor on or
before the date of transfer do not reasonably indicate that
the taxes associated with the Residual Security will not be
paid.
For purposes of requirement (1), the gross and net assets of a transferee do not
include any obligations of a person related to the transferee or any other asset
if a principal purpose for holding or acquiring the asset is to permit the
transferee to satisfy the asset test. Further, requirement (2) will not be
treated as satisfied in the case of any transfer or assignment of the Residual
Security to a foreign branch of an Eligible Corporation or any other arrangement
by which the Residual Security is at any time subject to net tax by a foreign
country or possession of the United States.
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Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Security that has "tax avoidance potential" to a "foreign person" will
be disregarded for all federal tax purposes. This rule appears intended to apply
to a transferee who is not a "U.S. Person" (as defined below), unless the
transferee's income is effectively connected with the conduct of a trade or
business within the United States. A Residual Security is deemed to have tax
avoidance potential unless, at the time of the transfer, the transferor
reasonably expects that (1) the future distributions on the Residual Security
will equal at least 30% of the anticipated excess inclusions after the transfer,
and (2) such amounts will be distributed at or after the time at which the
excess inclusions accrue and before the end of the next succeeding taxable year.
A safe harbor in the REMIC Regulations provides that the reasonable expectation
requirement will be satisfied if the above test would be met at all assumed
prepayment rates for the mortgage loans from 50 percent to 200 percent of the
Prepayment Assumption. If the non-U.S. Person transfers the Residual Security
back to a U.S. Person, the transfer will be disregarded and the foreign
transferor will continue to be treated as the owner unless arrangements are made
so that the transfer does not have the effect of allowing the transferor to
avoid tax on accrued excess inclusions.
The prospectus supplement relating to the Certificates of a series may
provide that a Residual Security may not be purchased by or transferred to any
person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which the transfer may be made. The term "U.S. Person"
means a citizen or resident of the United States, a corporation or partnership
(or other entity properly treated as a partnership or as a corporation for
federal income tax purposes) created or organized in or under the laws of the
United States or of any state (including, for this purpose, the District of
Columbia), an estate that is subject to U.S. federal income tax regardless of
the source of its income, or a trust if a court within the United States is able
to exercise primary supervision over the administration of the trust and one or
more U.S. Persons have the authority to control all substantial decisions of the
trust (or, to the extent provided in applicable Treasury regulations, trusts in
existence on August 20, 1996, which are eligible to elect and do elect to be
treated as U.S. Persons).
(6) Sale or Exchange of a Residual Security
Upon the sale or exchange of a Residual Security, the Residual Holder
will recognize gain or loss equal to the excess, if any, of the amount realized
over the adjusted basis (as described above under "--Taxation of Owners of
Residual Securities--Basis and Losses") of the Residual Holder in the Residual
Security at the time of the sale or exchange.
Further, as described above under "--Taxation of Owners of Residual
Securities--Basis and Losses", if a Residual Security's basis is reduced to
zero, any cash distributions with respect to that Residual Security in any
taxable year in excess of its share of the REMIC's income for that year would be
taxable to the holder as gain on the sale or exchange of its interest in the
REMIC. If a Residual Holder has an adjusted basis in its Residual Security when
its interest in the REMIC Pool terminates, then it will recognize a capital loss
(assuming the Residual Security was held as a capital asset) at that time in an
amount equal to the remaining adjusted basis.
Any gain on the sale of a Residual Security will be treated as ordinary
income (1) if a Residual Security is held as part of a "conversion transaction"
as defined in Code Section 1258(c), up to the amount of interest that would have
accrued on the Residual Holder's net investment in the conversion transaction at
120% of the appropriate applicable federal rate in effect at the time the
taxpayer entered into the transaction minus any amount previously treated as
ordinary income for any prior disposition of property that was held as a part of
that transaction or (2) in the case of a non-corporate taxpayer, to the extent
that the taxpayer has made an election under Code Section 163(d)(4) to have net
capital gains taxed as investment income at ordinary income rates. In addition,
gain or loss recognized from the sale of a Residual Security by some banks or
thrift institutions will be treated as ordinary income or loss pursuant to Code
Section 582(c).
Except as provided in Treasury regulations yet to be issued, the wash
sale rules of Code Section 1091 will apply to dispositions of Residual
Securities where the seller of the Residual Security, during the period
beginning six months before the sale or disposition of the Residual Security and
ending six months after the sale or disposition, acquires (or enters into any
other transaction that results in the application of Code Section 1091) any
residual interest in any REMIC or any interest in a "taxable mortgage pool"
(such as a non-REMIC owner trust) that is economically comparable to a Residual
Security.
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(7) Mark to Market Regulations
Treasury regulations provide that a Residual Security acquired on or
after January 4, 1995 is not treated as a security and thus may not be marked to
market pursuant to Section 475 of the Code.
Taxes That May Be Imposed on the REMIC Pool
(1) Prohibited Transactions
Income from transactions by the REMIC Pool, called prohibited
transactions, will not be part of the calculation of income or loss includible
in the federal income tax returns of Residual Holders, but rather will be taxed
directly to the REMIC Pool at a 100% rate. Prohibited transactions generally
include:
(1) the disposition of a qualified mortgages other than
for
(a) substitution for a defective (including a
defaulted) obligation within two years of the Startup Day (or
repurchase in lieu of substitution of a defective (including a
defaulted) obligation at any time) or for any qualified
mortgage within three months of the Startup Day;
(b) foreclosure, default, or imminent default of a
qualified mortgage;
(c) bankruptcy or insolvency of the REMIC Pool; or
(d) a qualified (complete) liquidation;
(2) the receipt of income from assets that are not the
type of mortgages or investments that the REMIC Pool is permitted to
hold;
(3) the receipt of compensation for services; or
(4) the receipt of gain from disposition of cash flow
investments other than pursuant to a qualified liquidation.
Notwithstanding (1) and (4) above, it is not a prohibited transaction
to sell a qualified mortgage or cash flow investment held by a REMIC Pool to
prevent a default on Regular Securities as a result of a default on qualified
mortgages or to facilitate a clean-up call (generally, an optional termination
to save administrative costs when no more than a small percentage of the Notes
or Certificates, as applicable, is outstanding). The REMIC Regulations indicate
that the modification of a mortgage loan generally will not be treated as a
disposition if it is occasioned by a default or reasonably foreseeable default,
an assumption of the mortgage loan, the waiver of a due-on-sale or
due-on-encumbrance clause, or the conversion of an interest rate by a borrower
pursuant to the terms of a convertible adjustable rate mortgage loan.
(2) Contributions to the REMIC Pool After the Startup Day
In general, the REMIC Pool will be subject to a tax at a 100% rate on
the value of any property contributed to the REMIC Pool after the Startup Day.
Exceptions are provided for cash contributions to the REMIC Pool
(1) during the three months following the Startup Day,
(2) made to a qualified reserve fund by a Residual Holder,
(3) in the nature of a guarantee,
(4) made to facilitate a qualified liquidation or clean-up call, and
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(5) as otherwise permitted in Treasury regulations yet to be issued.
It is not anticipated that there will be any contributions to the REMIC Pool
after the Startup Day.
(3) Net Income from Foreclosure Property
The REMIC Pool will be subject of federal income tax at the highest
corporate rate on "net income from foreclosure property," determined by
reference to the rules applicable to real estate investment trusts. Generally,
property acquired by deed in lieu of foreclosure would be treated as
"foreclosure property" until the close of the third calendar year after the year
in which the REMIC Pool acquired that property, with possible extensions. Net
income from foreclosure property generally means gain from the sale of a
foreclosure property that is inventory property and gross income from
foreclosure property other than qualifying rents and other qualifying income for
a real estate investment trust. It is not anticipated that the REMIC Pool will
have any taxable net income from foreclosure property.
(4) Liquidation of the REMIC Pool
If a REMIC Pool adopts a plan of complete liquidation, within the
meaning of Code Section 860F(a)(4)(A)(i), which may be accomplished by
designating in the REMIC Pool's final tax return a date on which that adoption
is deemed to occur, and sells all of its assets (other than cash) within a
90-day period beginning on that date, the REMIC Pool will not be subject to the
prohibited transaction rules on the sale of its assets, provided that the REMIC
Pool credits or distributes in liquidation all of the sale proceeds plus its
cash (other than amounts retained to meet claims) to holders of Regular
Securities and Residual Holders within the 90-day period.
(5) Administrative Matters
The REMIC Pool will be required to maintain its books on a calendar
year basis and to file federal income tax returns for federal income tax
purposes in a manner similar to a partnership. The form for the income tax
return is Form 1066, U.S. Real Estate Mortgage Investment Conduit Income Tax
Return. The trustee will be required to sign the REMIC Pool's returns. Treasury
regulations provide that, except where there is a single Residual Holder for an
entire taxable year, the REMIC Pool will be subject to the procedural and
administrative rules of the Code applicable to partnerships, including the
determination by the Internal Revenue Service of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit in a unified
administrative proceeding. The master servicer will be obligated to act as "tax
matters person," as defined in applicable Treasury regulations, for the REMIC
Pool as agent of the Residual Holders holding the largest percentage interest in
the Residual Securities. If the Code or applicable Treasury regulations do not
permit the master servicer to act as tax matters person in its capacity as agent
of the Residual Holder, the Residual Holder or any other person specified
pursuant to Treasury regulations will be required to act as tax matters person.
The tax matters person generally has responsibility for overseeing and providing
notice to the other Residual Holders of administrative and judicial proceedings
regarding the REMIC Pool's tax affairs, although other holders of the Residual
Securities of the same series would be able to participate in those proceedings
in appropriate circumstances.
(6) Limitations on Deduction of Certain Expenses
An investor who is an individual, estate, or trust will be subject to
limitation with respect to some itemized deductions described in Code Section
67, to the extent that those itemized deductions, in total, do not exceed 2% of
the investor's adjusted gross income. In the case of a partnership that has 100
or more partners and elects to be treated as an "electing large partnership,"
70% of that partnership's miscellaneous itemized deductions will be disallowed,
although the remaining deductions will generally be allowed at the partnership
level and will not be subject to the 2% floor that would otherwise be applicable
to individual partners. In addition, Code Section 68 provides that itemized
deductions otherwise allowable for a taxable year of an individual taxpayer will
be reduced by the lesser or (1) 3% of the excess, if any, of adjusted gross
income over $100,000 ($50,000 in the case of a married individual filing a
separate return) (subject to adjustment for inflation), or (2) 80% of the amount
of itemized deductions otherwise allowable for that year. In the case of a REMIC
Pool, those deductions may include deductions under Code Section 212 for the
Servicing Fee and all administrative and other expenses relating to the REMIC
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Pool, or any similar expenses allocated to the REMIC Pool for a regular interest
it holds in another REMIC. Those investors who hold REMIC Securities either
directly or indirectly through pass-through entities may have their pro rata
share of those expenses allocated to them as additional gross income, but may be
subject to that limitation on deductions. In addition, those expenses are not
deductible at all for purposes of computing the alternative minimum tax, and may
cause those investors to be subject to significant additional tax liability.
Temporary Treasury regulations provide that the additional gross income and
corresponding amount of expenses generally are to be allocated entirely to the
holders of Residual Securities in the case of a REMIC Pool that would not
qualify as a fixed investment trust in the absence of a REMIC election. For a
REMIC Pool that would be classified as an investment trust in the absence of a
REMIC election or that is substantially similar to an investment trust, any
holder of a Regular Security that is an individual, trust, estate, or
pass-through entity also will be allocated its pro rata share of those expenses
and a corresponding amount of income and will be subject to the limitations or
deductions imposed by Code Sections 67 and 68, as described above. The
prospectus supplement will indicate if all those expenses will not be allocable
to the Residual Securities.
Taxation of Certain Foreign Investors
(1) Regular Securities
Interest, including original issue discount, distributable to Regular
Securityholders who are non-resident aliens, foreign corporations, or other
Non-U.S. Persons (as defined below), generally will be considered "portfolio
interest" and, therefore, generally will not be subject to 30% United States
withholding tax, provided that (1) the interest is not effectively connected
with the conduct of a trade or business in the United States of the
securityholder, (2) the Non-U.S. Person is not a "10-percent shareholder" within
the meaning of Code Section 871(h)(3)(B) or a controlled foreign corporation
described in Code Section 881(c)(3)(C) and (3) that Non-U.S. Person complies to
the extent necessary with certain certification requirements, which generally
relate to the identity of the beneficial owner and the status of the beneficial
owner as a person that is a Non-U.S. person. Each Regular Securityholder should
consult its tax advisors regarding the tax documentation and certifications that
must be provided to secure the exemption from United States withholding taxes.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Regular Security by a Non-U.S. Person generally will be
exempt from United States federal income and withholding tax, provided that (i)
such gain is not effectively connected with the conduct of a trade or business
in the United States by the Non-U.S. Person and (ii) in the case of an
individual Non-U.S. Person, the Non-U.S. Person is not present in the United
States for 183 days or more in the taxable year.
If the interest on the Regular Security is effectively connected with
the conduct of a trade or business within the United States by that Non-U.S.
Person, the Non-U.S. Person, although exempt from the withholding tax previously
discussed if the holder provides an appropriate statement establishing that such
income is so effectively connected, will be subject to United States federal
income tax at regular rates. Investors who are Non-U.S. Persons should consult
their own tax advisors regarding the specific tax consequences to them of owning
a Regular Security. The term "Non-U.S. Person" means any person who is not a
U.S. Person.
(2) Residual Securities
The Conference Committee Report to the 1986 Act indicates that amounts
paid to Residual Holders who are Non-U.S. Persons generally should be treated as
interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Treasury regulations provide that amount distributed to
Residual Holders may qualify as "portfolio interest," subject to the conditions
described in "Regular Securities" above, but only to the extent that (1) the
mortgage loans were issued after July 18, 1984, and (2) the trust fund or
segregated pool of assets in the trust fund (as to which a separate REMIC
election will be made), to which the Residual Security relates, consists of
obligations issued in "registered form" within the meaning of Code Section 163
(f) (1). Generally, mortgage loans will not be, but regular interests in another
REMIC Pool will be, considered obligations issued in registered form.
Furthermore, Residual Holders will not be entitled to any exemption from the 30%
withholding tax (or lower treaty rate) to the extent of that portion of REMIC
taxable income that constitutes an "excess inclusion." See "--Taxation of Owners
of Residual Securities--Limitations on Offset or Exemption of REMIC Income"
above. If the amounts paid to Residual Holders who are Non-U.S. Persons are
effectively connected with the conduct of a trade or business within the United
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States by those Non-U.S. Persons, although exempt from the withholding tax
previously discussed if the holder provides an appropriate statement
establishing that such income is so effectively connected, the amounts paid to
those Non-U.S. Persons will be subject to United States federal income tax at
regular rates. See "--Tax-Related Restrictions on Transfer of Residual
Securities--Foreign Investors" above concerning the disregard of transfers
having "tax avoidance potential." Investors who are Non-U.S. Persons should
consult their own tax advisors regarding the specific tax consequences to them
of owning Residual Securities.
(3) Backup Withholding
Distributions made on the REMIC Securities, and proceeds from the sale
of the REMIC Securities to or through certain brokers, may be subject to a
"backup" withholding tax under Code Section 3406 of 31% on "reportable payments"
(including interest distributions, original issue discount, and, under some
circumstances, principal distributions) if the Holder fails to comply with
certain identification procedures, unless the Holder is otherwise an exempt
recipient under applicable provisions of the Code, and, if necessary,
demonstrates such status. Any amounts to be withheld from distribution on the
REMIC Securities would be refunded by the Internal Revenue Service or allowed as
a credit against the Regular Holder's federal income tax liability.
FASITs
Classification of FASITs
For each series of FASIT Securities, assuming compliance with all
provisions of the related pooling and servicing agreement, in the opinion of
Stroock & Stroock & Lavan LLP, the related trust fund (or each applicable
portion of the trust fund) will qualify as a FASIT. The trust fund will qualify
under the Code as a FASIT in which FASIT regular securities (the "FASIT Regular
Securities") and the ownership interest security (the "FASIT Ownership
Security") will constitute the "regular interests" and the "ownership interest,"
respectively, if
(1) a FASIT election is in effect;
(2) tests concerning
(a) the composition of the FASIT's assets and
(b) the nature of the securityholders' interests in
the FASIT are met on a continuing basis; and
(3) the trust fund is not a regulated investment company
as defined in Section 851(a) of the Code.
A segregated pool of assets may also qualify as a FASIT.
(1) Asset Composition
In order for the trust fund to be eligible for FASIT status,
substantially all of the assets of the trust fund must consist of "permitted
assets" as of the close of the third month beginning after the closing date and
at all times thereafter. Permitted assets include:
(1) cash or cash equivalents;
(2) debt instruments with fixed terms that would qualify
as regular interests if issued by a REMIC as defined in Section 860D of
the Code (generally, instruments that provide for interest at a fixed
rate, a qualifying variable rate, or a qualifying interest-only type
rate);
(3) foreclosure property;
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(4) some hedging instruments (generally, interest and currency
rate swaps and credit enhancement contracts) that are reasonably
required to guarantee or hedge against the FASIT's risks associated
with being the obligor on FASIT interests;
(5) contract rights to acquire qualifying debt instruments or
qualifying hedging instruments;
(6) FASIT regular interests; and
(7) REMIC regular interests.
Permitted assets do not include any debt instruments issued by the
holder of the FASIT's ownership interest or by any person related to that
holder. A debt instrument is a permitted asset only if the instrument is
indebtedness for federal income tax purposes, including regular interests in a
REMIC or regular interests issued by another FASIT, and it bears (1) fixed
interest or (2) variable interest of a type that relates to qualified variable
rate debt (as defined in Treasury regulations prescribed under section
860G(a)(1)(B)). Permitted hedges include interest rate or foreign currency
notional principal contracts, letters of credit, insurance, guarantees against
payment default and similar instruments to be provided in regulations, and which
are reasonably required to guarantee or hedge against the FASIT's risks
associated with being the obligor on interests issued by the FASIT. Foreclosure
property is real property acquired by the FASIT in connection with the default
or imminent default of a debt instrument, provided the depositor had no
knowledge or reason to know as of the date the debt instrument was acquired by
the FASIT that a default had occurred or would occur.
(2) Interests in a FASIT
In addition to the foregoing asset qualification requirements, the
interests in a FASIT also must meet specific requirements. All of the interests
in a FASIT must belong to either of the following:
(1) one or more classes of regular interests or
(2) a single class of ownership interest that is held by an
Eligible Corporation (as defined in this prospectus).
FASIT regular interests generally will be treated as debt for federal
income tax purposes. FASIT ownership interests generally will not treated as
debt for federal income tax purposes, but rather as representing rights and
responsibilities with respect to the taxable income or loss of the related
FASIT. The prospectus supplement for each Series of Notes or Certificates, as
applicable, will indicate which securities of the Series will be designated as
regular interests, and which, if any, will be designated as ownership interests.
A FASIT interest generally qualifies as a regular interest if:
(1) it is designated as a regular interest;
(2) it has a stated maturity no greater than thirty years;
(3) it entitles its holder to a specified principal amount;
(4) the issue price of the interest does not exceed 125% of
its stated principal amount;
(5) the yield to maturity of the interest is less than the
applicable Treasury rate published by the IRS plus 5%; and
(6) if it pays interest, this interest is payable at either:
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(a) a fixed rate with respect to the principal amount of the
regular interest
or
(b) a permissible variable rate with respect to the principal
amount.
Permissible variable rates for FASIT regular interests are the same as those for
REMIC regular interests. See "REMICs--Taxation of Owners of Regular
Securities--(1) General" for a discussion of permissible variable rates for
REMIC regular interests.
If an interest in a FASIT fails to meet one or more of the requirements
set out in clauses (3), (4), or (5) in the immediately preceding paragraph, but
otherwise meets all requirements to be treated as a FASIT, it may still qualify
as a type of regular interest known as a "high-yield interest." In addition, if
an interest in a FASIT fails to meet the requirement of clause (6), but the
interest payable on the interest consists of a specified portion of the interest
payments on permitted assets and that portion does not vary over the life of the
security, the interest will also qualify as a high-yield interest.
See "--Taxation of Owners of FASIT Regular Securities," "--Taxation of
Owners of High-Yield Interests" and "--Taxation of FASIT Ownership Securities"
below.
(3) Consequences of Disqualification
If the trust fund fails to comply with one or more of the Code's
ongoing requirements for FASIT status during any taxable year, the Code provides
that it's FASIT status may be lost for that year and thereafter. If FASIT status
is lost, the treatment of the former FASIT and interests in the FASIT for U.S.
federal income tax purposes is uncertain. Although the Code authorizes the
Treasury to issue regulations that address situations where a failure to meet
the requirements for FASIT status occurs inadvertently and in good faith, final
regulations have not yet been issued. It is possible that disqualification
relief might be accompanied by sanctions, such as the imposition of a corporate
tax on all or a portion of the FASIT's income for the period of time in which
the requirements for FASIT status are not satisfied.
Taxation of Owners of FASIT Regular Securities
(1) General
Payments received by holders of FASIT Regular Securities generally will
be accorded the same tax treatment under the Code as payments received on other
taxable debt instruments. Holders of FASIT Regular Securities must report income
from these Notes or Certificates, as applicable, under an accrual method of
accounting, even if they otherwise would have used the cash receipts and
disbursements method. Except in the case of FASIT Regular Securities issued with
original issue discount, interest paid or accrued on a FASIT Regular Security
generally will be treated as ordinary income to the Holder and a principal
payment on the security will be treated as a return of capital to the extent
that the securityholder's basis is allocable to that payment.
(2) Original Issue Discount; Market Discount; Acquisition Premium
FASIT Regular Securities issued with original issue discount or
acquired with market discount or acquisition premium generally will treat
interest and principal payments on these Notes or Certificates, as applicable,
in the same manner described for REMIC Regular Securities. See "--REMICs -
Taxation of Owners of Regular Securities" above.
(3) Sale or Exchange
If the FASIT Regular Securities are sold, the holder generally will
recognize gain or loss upon the sale in the manner described above for REMIC
Regular Securities. See "--REMICs--Taxation of Owners of Regular
Securities--Sale or Exchange of Regular Securities."
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Taxation of Owners of High-Yield Interests
(1) General
The treatment of high-yield interests is intended to ensure that the
return on instruments issued by a FASIT yielding an equity-like return continues
to have a corporate level tax. High-yield interests are subject to special rules
regarding the eligibility of holders of this interest, and the ability of these
holders to offset income derived from their FASIT Security with losses.
High-yield interests may only be held by Eligible Corporations, other
FASITs, and dealers in securities who acquire such interests as inventory
(together, "Eligible Holders").
o An "Eligible Corporation" is a taxable domestic C corporation
that does not qualify as a regulated investment company, a
real estate investment trust, a REMIC, or a cooperative.
If a securities dealer (other than an Eligible Corporation) initially
acquires a high-yield interest as inventory, but later begins to hold it for
investment, the dealer will be subject to an excise tax equal to the income from
the high-yield interest multiplied by the highest corporate income tax rate. In
addition, transfers of high-yield interests to a person that is not an Eligible
Holder will be disregarded for federal income tax purposes, and the transferor
will continue to be treated as the holder of the high-yield interest.
In addition, the FASIT Provisions contain an anti-abuse rule that
imposes corporate income tax on income derived from a FASIT Regular Interest
that is held by a pass-through entity (other than another FASIT) that issues
debt or equity securities backed by the FASIT Regular Interest and that have an
original yield to maturity that is both five percentage points above the
applicable federal rate and more than the yield on the FASIT Regular Interest.
The excise tax is limited to those arrangements that have a principal purpose of
avoiding the ownership restriction relating to high-yield interests.
(2) Treatment of Losses
The holder of a high-yield interest may not use non-FASIT current
losses or net operating loss carryforwards or carrybacks to offset any income
derived from the high-yield interest, for either regular federal income tax
purposes or for alternative minimum tax purposes.
Taxation of FASIT Ownership Security
(1) General
A FASIT Ownership Security represents the residual equity interest in a
FASIT. As such, the holder of a FASIT Ownership Security determines its taxable
income by taking into account all assets, liabilities, and items of income,
gain, deduction, loss, and credit of a FASIT. The holder, however, does not take
into account any item of income, gain or deduction allocable to a "prohibited
transaction" as discussed below. In general, the character of the income to the
holder of a FASIT Ownership Security will be the same as the character of the
income to the FASIT, except that any tax-exempt interest income taken into
account by the holder of a FASIT Ownership Security is treated as ordinary
income. In determining that taxable income, the holder of a FASIT Ownership
Security must determine the amount of interest, original issue discount, market
discount, and premium recognized with respect to each debt instrument held by
the FASIT according to a constant yield methodology and under an accrual method
of accounting. In addition, a holder of a FASIT Ownership Security is subject to
the same limitations on their ability to use losses to offset income from their
FASIT Regular Securities as are holders of high-yield interest. See "--Taxation
of Owners of High-Yield Interests" above.
Rules similar to the wash sale rules applicable to REMIC Residual
Securities also will apply to FASIT Ownership Security. Accordingly, losses on
dispositions of a FASIT Ownership Security generally will be disallowed where
within six months before or after the disposition, the seller of the Security
acquires any other FASIT Ownership Security that is economically comparable to a
FASIT Ownership Security. In addition, if any
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security that is sold or contributed to a FASIT by the holders of the related
FASIT Ownership Security was required to be marked-to-market under Section 475
of the Code by the holder, then Section 475 of the Code will continue to apply
to these securities, except that the amount realized under the mark-to-market
rules cannot be less than the securities' value determined after applying
special valuation rules contained in the FASIT Provisions. Those special
valuation rules generally require that the value of debt instruments that are
not traded on an established securities market be determined by calculating the
present value of the reasonably expected payments under the instrument using a
discount rate of 120% of the applicable federal rate, compounded semi-annually.
(2) Prohibited Transaction
The holder of a FASIT Ownership Security is required to pay a penalty
excise tax equal to 100 percent of net income derived from:
(1) an asset that is not a permitted asset;
(2) any disposition of an asset other than a permitted
disposition (as described below);
(3) any income attributable to loans originated by the FASIT;
and
(4) compensation for services (other than fees for a waiver,
amendment, or consent with respect to permitted assets other than
foreclosure property).
A permitted disposition is any disposition of any permitted asset:
(1) arising from complete liquidation of a class of regular
interest;
(2) incident to the foreclosure, default (or imminent default)
on the asset;
(3) incident to the bankruptcy or insolvency of the FASIT;
(4) necessary to avoid a default on any indebtedness of the a
FASIT attributable to a default (or imminent default) on an asset of
the FASIT;
(5) to facilitate a clean-up call; or
(6) to substitute a permitted debt instrument for another
permitted debt instrument or in order to reduce over-collateralization
by distributing a debt instrument contributed by the holder of the
FASIT Ownership Security to such holder, but only if a principal
purpose of acquiring the debt instrument which is disposed of was not
the recognition of gain (or the reduction of a loss) arising from an
increase in its market value after its acquisition by the FASIT.
Notwithstanding this rule, the holder of an Ownership Security may currently
deduct its losses incurred in prohibited transactions in computing its taxable
income for the year of the loss. A Series of Notes or Certificates, as
applicable, for which a FASIT election is made generally will be structured in
order to avoid application of the prohibited transactions tax.
(3) Backup Withholding, Reporting and Tax Administration
Holders of FASIT Securities will be subject to backup withholding to
the same extent as holders of REMIC Securities.
Grantor Trust Funds
Characterization. For each series of Grantor Trust Securities, Federal
Tax Counsel will deliver its opinion that the Grantor Trust Fund will not be
classified as an association taxable as a corporation and that the Grantor
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Trust Fund will be classified as a grantor trust under subpart E, Part I of
subchapter J of the Code. In this case, beneficial owners of Grantor Trust
Securities (referred to in this Prospectus as "Grantor Trust Securityholders")
will be treated for federal income tax purposes as owners of a portion of the
Grantor Trust Fund's assets as described below.
Taxation of Grantor Trust Securityholders. Subject to the discussion
below under "Stripped Certificates" and "Subordinated Certificates," each
Grantor Trust Securityholder will be treated as the owner of a pro rata
undivided interest in the assets of the Grantor Trust Fund. Accordingly, and
subject to the discussion below of the recharacterization of the servicing fee,
each Grantor Trust Securityholder must include in income its pro rata share of
the interest and other income from the assets of the Grantor Trust Fund,
including any interest, original issue discount, market discount, prepayment
fees, assumption fees, and late payment charges with respect to the assets, and,
subject to limitations discussed below, may deduct its pro rata share of the
fees and other deductible expenses paid by the Grantor Trust Fund, at the same
time and to the same extent as these items would be included or deducted by the
Grantor Trust Securityholder if the Grantor Trust Securityholder held directly a
pro rata interest in the assets of the Grantor Trust Fund and received and paid
directly the amounts received and paid by the Grantor Trust Fund. Any amounts
received by a Grantor Trust Securityholder in lieu of amounts due with respect
to any asset of the Grantor Trust Fund because of a default or delinquency in
payment will be treated for federal income tax purposes as having the same
character as the payments they replace.
Each Grantor Trust Securityholder will be entitled to deduct its pro
rata share of servicing fees, prepayment fees, assumption fees, any loss
recognized upon an assumption and late payment charges retained by the servicer,
provided that these amounts are reasonable compensation for services rendered to
the Grantor Trust Fund. Grantor Trust Securityholders that are individuals,
estates or trusts will be entitled to deduct their share of expenses only to the
extent these expenses plus all other miscellaneous itemized deductions exceed
two percent of the Grantor Trust Securityholder's adjusted gross income, and
will be allowed no deduction for these expenses in determining their liabilities
for alternative minimum tax. In addition, Section 68 of the Code provides that
the amount of itemized deductions otherwise allowable for the taxable year for
an individual whose adjusted gross income exceeds a prescribed threshold amount
will be reduced by the lesser of (1) 3% of the excess of adjusted gross income
over the specified threshold amount or (2) 80% of the amount of itemized
deductions otherwise allowable for the applicable taxable year. In the case of a
partnership that has 100 or more partners and elects to be treated as an
"electing large partnership," 70% of the partnership's miscellaneous itemized
deductions will be disallowed, although the remaining deductions will generally
be allowed at the partnership level and will not be subject to the 2% floor that
would otherwise be applicable to individual partners.
The servicing compensation to be received by the servicer may be
questioned by the IRS as exceeding a reasonable fee for the services being
performed in exchange for the servicing compensation, and a portion of the
servicing compensation could be recharacterized as an ownership interest
retained by the servicer or other party in a portion of the interest payments to
be made with respect to the Grantor Trust Fund's assets. In this event, a
certificate might be treated as a Stripped Certificate subject to the stripped
bond rules of Section 1286 of the Code, and either the original issue discount
or the market discount rules. See the discussion below under "--Stripped
Certificates". Except as discussed below under "Stripped Certificates" or
"--Subordinated Certificates," this discussion assumes that the servicing fees
paid to the servicer do not exceed reasonable servicing compensation.
A purchaser of a Grantor Trust Security will be treated as purchasing
an interest in each asset in the Grantor Trust Fund at a price determined by
allocating the purchase price paid for the certificate among all asset of the
Grantor Trust Fund in proportion to their fair market values at the time of the
purchase of the certificate. To the extent that the portion of the purchase
price of a Grantor Trust Security allocated to an asset of the Grantor Trust
Fund is less than or greater than the stated redemption price at maturity of the
asset, the interest in the asset will have been acquired at a discount or
premium. See "--Market Discount" and "--Premium," below.
The treatment of any discount on an asset of the Grantor Trust Fund
will depend on whether the discount represents original issue discount or market
discount. Except as indicated otherwise in the applicable Prospectus Supplement,
it is not expected that any asset of the Grantor Trust Fund (other than a
Stripped Agency Security or other instrument evidencing ownership of specific
interest and/or principal of a particular bond) will have original issue
discount (except as discussed below under "Stripped Certificates" or
"Subordinated Certificates"). For the
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rules governing original issue discount, see "REMICs--Taxation of Owners of
Regular Securities--Original Issue Discount" above.
The information provided to Grantor Trust Securityholders will not
include information necessary to compute the amount of discount or premium, if
any, at which an interest in each asset of the Grantor Trust Fund is acquired.
Market Discount. A Grantor Trust Securityholder that acquires an
undivided interest in the Grantor Trust Fund's assets may be subject to the
market discount rules of Sections 1276 through 1278 to the extent an undivided
interest in an asset of the Grantor Trust Fund is considered to have been
purchased at a "market discount". For a discussion of the market discount rules
under the Code, see "REMICs--Taxation of Owners of Regular Securities--Market
Discount" above. As discussed above, to the extent an asset of the Grantor Trust
Fund is a Stripped Agency Security or other instrument evidencing ownership of
specific interest and/or principal of a particular bond, it will be subject to
the rules relating to original issue discount (in lieu of the rules relating to
market discount). See "REMICs--Taxation of Owners of Regular
Securities--Original Issue Discount" above.
Premium. To the extent a Grantor Trust Securityholder is considered to
have purchased an undivided interest in an asset of the Grantor Trust Fund for
an amount that is greater than the stated redemption price at maturity of the
interest, the Grantor Trust Securityholder will be considered to have purchased
the interest in the asset with "amortizable bond premium" equal in amount to the
excess. For a discussion of the rules applicable to amortizable bond premium,
see "REMICs--Taxation of Owners of Regular Securities--Amortizable Premium"
above.
Status of the Grantor Trust Securities. Except for that portion of a
trust fund consisting of unsecured home improvement loans and except as
qualified below, a Grantor Trust Security owned by a:
o "domestic building and loan association" within the meaning of
Code Section 7701(a)(19) will be considered to represent
"loans . . . secured by an interest in real property" within
the meaning of Code Section 7701(a)(19)(C)(v), provided that
the real property securing the mortgage loans represented by
that Grantor Trust Security is of the type described in that
section of the Code.
o real estate investment trust will be considered to represent
"real estate assets" within the meaning of Code Section
856(c)(4)(A) to the extent that the assets of the related
Grantor Trust Fund consist of qualified assets, and interest
income on those assets will be considered "interest on
obligations secured by mortgages on real property" to that
extent within the meaning of Code Section 856(c)(3)(B).
o REMIC will be considered to represent an "obligation
(including any participation or certificate of beneficial
ownership therein) which is principally secured by an interest
in real property" within the meaning of Code Section
860G(a)(3)(A) to the extent that the assets of the related
Grantor Trust Fund consist of "qualified mortgages" within the
meaning of Code Section 860G(a)(3).
An issue arises as to whether Buydown Mortgage Loans may be
characterized in their entirety under the Code provisions cited in the first two
bullet points of the immediately preceding paragraph or whether the amount
qualifying for that treatment must be reduced by the amount of the Buydown
Mortgage Funds. Further, although it is not entirely clear, Grantor Trust
Certificates that are Stripped Certificates (as described below under "Stripped
Certificates") should be treated as qualifying under the Code provisions cited
in the bullet points above to the same extent as Grantor Trust Certificates that
are not Stripped Certificate. Grantor Trust Securityholders are urged to consult
their own tax advisors concerning the characterization of the securityholder's
investment for federal income tax purposes.
Stripped Certificates. Some classes of certificates may be subject to
the stripped bond rules of Section 1286 of the Code and for purposes of this
discussion will be referred to as "Stripped Certificates." In general, a
Stripped Certificate will be subject to the stripped bond rules where there has
been a separation of ownership of the right to receive some or all of the
principal payments on a mortgage loan held by the Grantor Trust Fund from
ownership of the right to receive some or all of the related interest payments.
Generally, where a separation has
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occurred, under the stripped bond rules of Section 1286 of the Code, the holder
of a right to receive a principal or interest payment on the bond is required to
accrue into income, on a constant yield basis under rules governing original
issue discount (see "REMICs--Taxation of Owners of Regular Securities--Original
Issue Discount"), the difference between the holder's initial purchase price for
the right to receive principal or interest, and the principal or interest
payment to be received with respect to that right. However, a holder of a
Stripped Certificate will account for any discount on the Stripped Certificate
(other than an interest treated as a "stripped coupon") as market discount
rather than original issue discount if either (i) the amount of original issue
discount with respect to the Stripped Certificate was treated as zero under the
original issue discount de minimis rule when the Stripped Certificate was
stripped or (ii) no more than 100 basis points (including any amount of
servicing in excess of reasonable servicing) is stripped off from the mortgage
assets.
Certificates will constitute Stripped Certificates and will be subject
to these rules under various circumstances, including the following:
o if any servicing compensation is deemed to exceed a reasonable
amount;
o if the company or any other party retains a retained yield
with respect to the assets held by the Grantor Trust Fund;
o if two or more classes of certificates are issued representing
the right to non-pro rata percentages of the interest or
principal payments on the Grantor Trust Fund's assets; or
o if certificates are issued which represent the right to
interest-only payments or principal-only payments.
The tax treatment of the Stripped Certificates with respect to the
application of the original issue discount provisions of the Code is currently
unclear. However, the trustee intends to treat each Stripped Certificate as a
single debt instrument issued on the day it is purchased for purposes of
calculating any original issue discount. Original issue discount with respect to
a Stripped Certificate must be included in ordinary gross income for federal
income tax purposes as it accrues in accordance with the constant yield method
that takes into account the compounding of interest and this accrual of income
may be in advance of the receipt of any cash attributable to that income. See
"REMICs--Taxation of Owners of Regular Securities--Original Issue Discount"
above. For purposes of applying the original issue discount provisions of the
Code, the issue price of a Stripped Certificate will be the purchase price paid
by each holder of the Stripped Certificate and the stated redemption price at
maturity may include the aggregate amount of all payments to be made with
respect to the Stripped Certificate whether or not denominated as interest. The
amount of original issue discount with respect to a Stripped Certificate may be
treated as zero under the original issue discount de minimis rules described
above.
Subordinated Certificates. In the event the Grantor Trust Fund issues
two classes of Grantor Trust Securities that are identical except that one class
is a subordinate class, with a relatively high certificate pass-through rate,
and the other is a senior class, with a relatively low certificate pass-through
rate (referred to in this Prospectus as the "Subordinate Certificates" and
"Senior Certificates", respectively), the Grantor Trust Securityholders in the
aggregate will be deemed to have acquired the following assets: (1) the
principal portion of each mortgage loan plus a portion of the interest due on
each mortgage loan (the "Grantor Trust Fund Stripped Bond"), and (2) a portion
of the interest due on each mortgage loan equal to the difference between the
Interest Rate on the Subordinate Certificates and the Interest Rate on the
Senior Certificates, if any, which difference is then multiplied by the
Subordinate Class Percentage (the "Grantor Trust Fund Stripped Coupon"). The
"Subordinate Class Percentage" equals the initial aggregate principal amount of
the Subordinate Certificates divided by the sum of the initial aggregate
principal amount of the Subordinate Certificates and the Senior Certificates.
The "Senior Class Percentage" equals the initial aggregate principal amount of
the Senior Certificates divided by the sum of the initial aggregate principal
amount of the Subordinate Certificates and the Senior Certificates.
The Senior Certificateholders in the aggregate will own the Senior
Class Percentage of the Grantor Trust Fund Stripped Bond and accordingly each
Senior Certificateholder will be treated as owning its pro rata share of such
asset. The Senior Certificateholders will not own any portion of the Grantor
Trust Fund Stripped Coupon. The Subordinate Certificateholders in the aggregate
own both the Subordinate Class Percentage of the Grantor Trust Fund Stripped
Bond plus 100% of the Grantor Trust Fund Stripped Coupon, if any, and
accordingly each Subordinate Certificateholder will be treated as owning its pro
rata share in both assets. The Grantor Trust Fund
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Stripped Bond will be treated as a "stripped bond" and the Grantor Trust Fund
Stripped Coupon will be treated as "stripped coupons" within the meaning of
Section 1286 of the Code.
Although not entirely clear, the interest income on the Subordinate
Certificates and the portion of the servicing fee allocable to such certificates
that does not constitute excess servicing will be treated by the Grantor Trust
Fund as qualified stated interest, assuming the interest with respect to the
mortgage loans held by the Grantor Trust Fund would otherwise qualify as
qualified stated interest. Accordingly, except to the extent modified below, the
income of the Subordinate Certificates will be reported in the same manner as
described generally above for holders of Senior Certificates.
If the Subordinate Certificateholders receive distribution of less than
their share of the Grantor Trust Fund's receipts of principal or interest (the
"Shortfall Amount") because of the subordination of the Subordinate
Certificates, holders of Subordinate Certificates would probably be treated for
federal income tax purposes as if they had
o received as distributions their full share of receipts;
o paid over to the Senior Certificateholders an amount equal to
the Shortfall Amount; and
o retained the right to reimbursement of the relevant amounts to
the extent these amounts are otherwise available as a result
of collections on the mortgage loans or amounts available from
a reserve account or other form of credit enhancement, if any.
Under this analysis,
o Subordinate Certificateholders would be required to accrue as
current income any interest income, original issue discount,
or (to the extent paid on assets of the Grantor Trust Fund)
accrued market discount of the Grantor Trust Fund that was a
component of the Shortfall Amount, even though that amount was
in fact paid to the Senior Certificateholders;
o a loss would only be allowed to the Subordinate
Certificateholders when their right to receive reimbursement
of the Shortfall Amount became worthless (i.e., when it
becomes clear that amount will not be available from any
source to reimburse the loss); and
o reimbursement of the Shortfall Amount prior to a claim of
worthlessness would not be taxable income to Subordinate
Certificateholders because the amount was previously included
in income.
Those results should not significantly affect the inclusion of income for
Subordinate Certificateholders on the accrual method of accounting, but could
accelerate inclusion of income to Subordinate Certificateholders on the cash
method of accounting by, in effect, placing them on the accrual method.
Moreover, the character and timing of loss deductions are unclear. Subordinate
Certificateholders are strongly urged to consult their own tax advisors
regarding the appropriate timing, amount and character of any losses sustained
with respect to the Subordinate Certificates including any loss resulting from
the failure to recover previously accrued interest or discount income.
Election to Treat All Interest as Original Issue Discount. The Treasury
Regulations relating to original issue discount permit a Grantor Trust
Securityholder to elect to accrue all interest, discount, including de minimis
market or original issue discount, reduced by any premium, in income as
interest, based on a constant yield method. If an election were to be made with
respect to an interest in a mortgage loan with market discount, the Grantor
Trust Securityholder would be deemed to have made an election to include in
income currently market discount with respect to all other debt instruments
having market discount that the Grantor Trust Securityholder acquires during the
year of the election or afterward. See "--Market Discount" above. Similarly, a
Grantor Trust Securityholder that makes this election for an interest in a
mortgage loan that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that the Grantor Trust Securityholder owns at the
beginning of the first taxable year to which the election applies or acquires
afterward. See "--Premium" above. The election to accrue interest, discount and
premium on a constant yield method with respect to a Grantor Trust Security is
irrevocable.
Prepayments. The Taxpayer Relief Act of 1997 (the "1997 Act") contains
a provision requiring original issue discount on any pool of debt instruments
the yield on which may be affected by reason of prepayments be
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calculated taking into account the Prepayment Assumption and requiring the
discount to be taken into income on the basis of a constant yield to assumed
maturity taking account of actual prepayments. The legislative history to the
1986 Act states that similar rules apply with respect to market discount and
amortizable bond premium on debt instruments.
Sale or Exchange of a Grantor Trust Security. Sale or exchange of a
Grantor Trust Security prior to its maturity will result in gain or loss equal
to the difference, if any, between the amount realized, exclusive of amounts
attributable to accrued and unpaid interest (which will be treated as ordinary
income allocable to the related asset of the Grantor Trust Fund), and the
owner's adjusted basis in the Grantor Trust Security. The adjusted basis
generally will equal the seller's cost for the Grantor Trust Security, increased
by the original issue discount and any market discount included in the seller's
gross income with respect to the Grantor Trust Security, and reduced, but not
below zero, by any premium amortized by the seller and by principal payments on
the Grantor Trust Security previously received by the seller. The gain or loss
will, except as discussed below, be capital gain or loss to an owner for which
the assets of the Grantor Trust Fund represented by a Grantor Trust Security are
"capital assets" within the meaning of Section 1221. A capital gain or loss will
be long-term or short-term depending on whether or not the Grantor Trust
Security has been owned for the long-term capital gain holding period, currently
more than one year.
Notwithstanding the foregoing, any gain realized on the sale or
exchange of a Grantor Trust Security will be ordinary income to the extent of
the seller's interest in accrued market discount on Grantor Trust Fund assets
not previously taken into income. See "--Market Discount," above. Further,
Grantor Trust Securities will be "evidences of indebtedness" within the meaning
of Section 582(c)(1), so that gain or loss recognized from the sale of a Grantor
Trust Security by a bank or thrift institution to which such section applied
will be treated as ordinary gain or loss.
Foreign Investors in Grantor Trust Securities. A holder of a Grantor
Trust Security who is not a "U.S. person" (as defined above at "REMICs--Tax
Related Restrictions on Transfer of Residual Securities--Foreign Investors") and
is not subject to federal income tax as a result of any direct or indirect
connection to the United States other than its ownership of a Grantor Trust
Security generally will not be subject to United States income or withholding
tax in respect of payments of interest or original issue discount on its Grantor
Trust Security to the extent attributable to debt obligations held by the
Grantor Trust Fund that were originated after July 18, 1984, provided that the
Grantor Trust Securityholder complies to the extent necessary with certain
certification requirements which generally relate to the identity of the
beneficial owner and the status of the beneficial owner as a person that is not
a U.S. person. Interest or original issue discount on a Grantor Trust Security
attributable to debt obligations held by the Grantor Trust Fund that were
originated prior to July 19, 1984 will be subject to a 30% withholding tax
(unless such tax is reduced or eliminated by an applicable tax treaty). All
holders of Grantor Trust Securities should consult their tax advisors regarding
the tax documentation and certifications that must be provided to secure any
applicable exemptions from United States withholding taxes.
Any capital gain realized on the sale or other taxable disposition of a
Grantor Trust Security by a Non-U.S. Person (as defined above at
"REMICs--Taxation of Certain Foreign Investors--Regular Securities") generally
will be exempt from United States federal income and withholding tax, provided
that (i) such gain is not effectively connected with the conduct of a trade or
business in the United States by the Non-U.S. Person and (ii) in the case of an
individual Non-U.S. Person, the Non-U.S. Person is not present in the United
States for 183 days or more in the taxable year.
If the interest, gain or income with respect to a Grantor Trust
Security held by a Non-U.S. Person is effectively connected with the conduct of
a trade or business in the United States by the Non-U.S. Person (although exempt
from the withholding tax previously discussed if the holder provides an
appropriate statement establishing that such income is so effectively
connected), the holder generally will be subject to United States federal income
tax on the interest, gain or income at regular federal income tax rates. In
addition, if the Non-U.S. Person is a foreign corporation, it may be subject to
a branch profits tax equal to 30% of its "effectively connected earnings and
profits," within the meaning of the Code, for the taxable year, as adjusted for
certain items, unless it qualifies for a lower rate under an applicable tax
treaty (as modified by the branch profits tax rules).
Backup Withholding. Distributions made on the Grantor Trust
Securities and proceeds from the sale of the Grantor Trust Securities will be
subject to a "backup" withholding tax of 31% if, in general, the Grantor
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Trust Securityholder fails to comply with particular identification procedures,
unless the holder is an exempt recipient under applicable provisions of the Code
and, if necessary, demonstrates such status. Any amounts so withheld would be
refunded by the IRS or allowable as a credit against the Grantor Trust
Securityholder's federal income tax.
Partnership Trust Funds and Disregarded Trust Funds
Classification of Trust Funds
For each series of Partnership Certificates or Debt Securities, Stroock
& Stroock & Lavan 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 related Agreement and related documents
will be complied with, and on counsel's opinion that the nature of the income of
the trust fund will exempt it from the rule that some publicly traded
partnerships are taxable as corporations.
Taxation of Debt Securityholders
The depositor will agree, and the securityholders will agree by their
purchase of Debt Securities, to treat the Debt Securities as debt for federal
income tax purposes. No regulations, published rulings, or judicial decisions
exist that discuss the characterization for federal income tax purposes of
securities with terms substantially the same as the Debt Securities. However,
for each series of Debt Securities, Stroock & Stroock & Lavan 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 Internal Revenue Service
successfully asserted that the Debt Securities were not debt for federal income
tax purposes, the Debt Securities might be treated as equity interests in the
trust fund. If so treated, the trust fund might be treated as a publicly traded
partnership that would be taxable as a corporation unless it met particular
qualifying income tests, and the resulting taxable corporation would not be able
to reduce its taxable income by deductions for interest expense on Debt
Securities recharacterized as equity. Treatment of the Debt Securities as equity
interests in a partnership could have adverse tax consequences to some holders,
even if the trust fund were not treated as a publicly traded partnership taxable
as a corporation. For example, income allocable to foreign holders might be
subject to United States tax and United States tax return filing and withholding
requirements, income allocable to tax-exempt holders might constitute "unrelated
business taxable income" (if some, but not all, of the Debt Securities were
recharacterized as equity in a partnership), individual holders might be subject
to limitations on their ability to deduct their share of trust fund expenses,
and income from the trust fund's assets would be taxable to owners of Debt
Securities without regard to whether cash distributions are made to such owners
and without regard to the owners' method of tax accounting.
Debt Securities generally will be subject to the same rules of taxation
as Regular Securities issued by a REMIC, as described above, except that (1)
income reportable on Debt Securities is not required to be reported under the
accrual method unless the holder otherwise uses the accrual method and (2) the
special 110% yield rule treating a portion of the gain on sale or exchange of a
Regular Security as ordinary income is inapplicable to Debt Securities. See
"--REMICs--Taxation of Owners of Regular Securities" and "--Sale or Exchange of
Regular Securities."
Further, for federal income tax purposes, (i) Debt Securities held by a
thrift institution taxed as a domestic building and loan association will not
constitute "loans . . . secured by an interest in real property" within the
meaning of Section 7701(a)(19)(C)(v) of the Code; (ii) interest on Debt
Securities held by a real estate investment trust will not be treated as
"interest on obligations secured by mortgages on real property or on interests
in real property "within the meaning of Code Section 856(c)(3)(B); (iii) Debt
Securities held by a real estate investment trust will not constitute "real
estate assets" or "Government securities" within the meaning of Section
856(c)(4)(A) of the Code; (iv) Debt Securities held by a regulated investment
company will not constitute "Government securities" within the meaning of
Section 851(b)(3)(A)(i) of the Code; and (v) Debt Securities will not constitute
"qualified mortgages" with in the meaning of Section 860G(a)(3) of the Code for
REMICs.
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Taxation of Owners of Partnership Certificates
(1) Treatment of the Trust Fund as a Partnership
The Partnership Trust Fund will agree, and the related owners of
Partnership Certificates ("Partnership Certificate Owners") will agree by their
purchase of Partnership Certificates, if there is more than one Partnership
Certificate Owner, to treat the Partnership Trust Fund as a partnership for
purposes of federal and state income tax, franchise tax and any other tax
measured in whole or in part by income, with the assets of the partnership being
the assets held by the Partnership Trust Fund, the partners of the partnership
being the Partnership Certificate Owners, including, to the extent relevant, the
depositor in its capacity as recipient of distributions from any reserve fund,
and the Debt Securities, if any, being debt of the partnership, and if there is
one Partnership Certificate Owner, to treat the Partnership Certificate Owner as
the owner of the assets of the Partnership Trust Fund and to treat the
Partnership Trust Fund as a disregarded entity. However, the proper
characterization of the arrangement involving the Partnership Trust Fund, the
Partnership Certificates, the Debt Securities and the depositor is not certain
because there is no authority on transactions closely comparable to that
contemplated in this prospectus.
A variety of alternative characterizations are possible. For example,
because the Partnership Certificates have certain features characteristic of
debt, the Partnership Certificates might be considered debt of the Partnership
Trust Fund. Generally, provided such Partnership Certificates are issued at or
close to face value, any such characterization would not result in materially
adverse tax consequences to holders of Partnership Certificates as compared to
the consequences from treatment of the Partnership Certificates as equity in a
partnership, described below. The following discussion assumes that the
Partnership Certificates represent equity interests in a partnership. The
following discussion also assumes that all payments on the Partnership
Certificates are denominated in U.S. dollars, none of the Partnership
Certificates have Interest Rates which would qualify as contingent interest
under the Treasury regulations relating to original issue discount, and that a
series of securities includes a single class of Partnership Certificates. If
these conditions are not satisfied with respect to any given series of
Partnership Certificates, additional tax considerations with respect to such
Partnership Certificates will be disclosed in the applicable prospectus
supplement.
(2) Partnership Taxation
As a partnership, the Partnership Trust Fund will not be subject to
federal income tax. Rather, each Partnership Certificate Owner will be required
to take into account separately the Partnership Certificate Owner's allocable
share of income, gains, losses, deductions and credits of the Partnership Trust
Fund, whether or not there is a corresponding cash distribution. Thus, cash
basis holders will in effect be required to report income from the Partnership
Certificates on the accrual basis and Partnership Certificate Owners may become
liable for taxes on Partnership Trust Fund income even if they have not received
cash from the Partnership Trust Fund to pay the taxes. The Partnership Trust
Fund's income will consist primarily of interest and finance charges earned on
the related mortgage loans, including appropriate adjustments for market
discount, original issue discount and bond premium, and any gain upon collection
or disposition of the mortgage loans.
The Partnership Trust Fund's deductions will consist primarily of
interest accruing with respect to the Debt Securities, servicing and other fees,
and losses or deductions upon collection or disposition of mortgage loans.
The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the partnership agreement
(i.e., the Agreement and related documents). The Agreement will provide, in
general, that the Partnership Certificate Owners will be allocated taxable
income of the Partnership Trust Fund for each month equal to the sum of:
o the interest or other income that accrues on the Partnership
Certificates in accordance with their terms for the relevant
month including, as applicable, interest accruing at the
related Partnership Certificate Interest Rate for that month
and interest on amounts previously due on the Partnership
Certificates but not yet distributed;
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o any income of the Partnership Trust Fund attributable to
discount on the related mortgage loans that corresponds to any
excess of the principal amount of the Partnership Certificates
over their initial issue price;
o any prepayment premium payable to the Partnership Certificate
Owners for the applicable month; and
o any other amounts of income payable to the Partnership
Certificate Owners for the applicable month.
The 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 Certificates over their principal amount. All remaining taxable
income of the Partnership Trust Fund will be allocated to the depositor. Losses
will generally be allocated in the manner in which they are borne.
Based on the economic arrangement of the parties, the foregoing
approach for allocating income of the Partnership Trust Fund 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 Partnership Certificate Owners. Moreover, even under the foregoing method of
allocation, Partnership Certificate Owners may be allocated income equal to the
entire Partnership Certificate Interest Rate plus the other items described
above, even though the Partnership Trust Fund might not have sufficient cash to
make current cash distributions of the amount. In addition, because tax
allocations and tax reporting will be done on a uniform basis for all
Partnership Certificate Owners, but Partnership Certificate Owners may be
purchasing Partnership Certificates at different times and at different prices,
Partnership Certificate Owners may be required to report on their tax returns
taxable income that is greater or less than the amount reported to them by the
Partnership Trust Fund.
Assuming Debt Securities are also issued, all or substantially all of
the taxable income allocated to a Partnership Certificate Owner that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity,
including an individual retirement account, will constitute "unrelated business
taxable income" generally taxable to the holder under the Code.
An individual taxpayer's share of expenses of the Partnership Trust
Fund, including fees to the servicer, but not interest expense, would be
miscellaneous itemized deductions and thus deductible only to the extent such
expenses plus all other miscellaneous itemized deductions exceeds two percent of
the individual's adjusted gross income. An individual taxpayer will be allowed
no deduction for his share of expenses of the Partnership Trust Fund, other than
interest, in determining his liability for alternative minimum tax. In addition,
Section 68 of the Code provides that the amount of itemized deductions otherwise
allowable for the taxable year for an individual whose adjusted gross income
exceeds a prescribed threshold amount will be reduced by the lesser of (1) 3% of
the excess of adjusted gross income over the specified threshold amount or (2)
80% of the amount of itemized deductions otherwise allowable for the applicable
taxable year. Accordingly, deductions might be disallowed to the individual in
whole or in part and might result in the Partnership Certificate Owner being
taxed on an amount of income that exceeds the amount of cash actually
distributed to the holder over the life of the Partnership Trust Fund. In the
case of a partnership that has 100 or more partners and elects to be treated as
an "electing large partnership," 70% of that partnership's miscellaneous
itemized deductions will be disallowed, although the remaining deductions will
generally be allowed at the partnership level and will not be subject to the 2%
floor that would otherwise be applicable to individual partners.
The Partnership Trust Fund intends to make all tax calculations
relating to income and allocations to Partnership Certificate Owners on an
aggregate basis to the extent relevant. If the IRS were to require that the
calculations be made separately for each mortgage loan, the calculations may
result in some timing and character differences under some circumstances.
(3) Discount and Premium
The purchase price paid by the Partnership Trust Fund for the related
mortgage loans may be greater or less than the remaining principal balance of
the mortgage loans at the time of purchase. If so, the mortgage loans will have
been acquired at a premium or market discount, as the case may be. See
"REMICs--Taxation of Owners of Regular Securities--Acquisition Premium" and "--
Market Discount" above. As indicated above, the Partnership Trust Fund will make
this calculation on an aggregate basis, but it is possible that the IRS might
require that it be
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recomputed on a mortgage loan-by-mortgage loan basis. Further, with respect to
any asset of the Partnership Trust Fund that is a Stripped Agency Security or
other instrument evidencing ownership of specific interest and/or principal of a
particular bond, it will be subject to the rules relating to original issue
discount with respect to such security or instrument (in lieu of the rules
relating to market discount). See "REMICs--Taxation of Owners of Regular
Securities--Original Issue Discount" above.
If the Partnership Trust Fund acquires the mortgage loans at a market
discount or premium, the Partnership Trust Fund will elect to include any market
discount in income currently as it accrues over the life of the mortgage loans
or to offset any premium against interest income on the mortgage loans. As
indicated above, a portion of the market discount income or premium deduction
may be allocated to Partnership Certificate Owners.
(4) Section 708 Termination
Under Section 708 of the Code, the Partnership Trust Fund will be
deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Partnership Trust Fund are sold or
exchanged within a 12-month period. If a termination occurs under Section 708 of
the Code, the Partnership Trust Fund will be considered to contribute its assets
to a new Partnership Trust Fund, which would be treated as a new partnership, in
exchange for Partnership Certificates in the new Partnership Trust Fund. The
original Partnership Trust Fund will then be deemed to distribute the
Partnership Certificates in the new Partnership Trust Fund to each of the owners
of Partnership Certificates in the original Partnership Trust Fund in
liquidation of the original Partnership Trust Fund. The Partnership Trust Fund
will not comply with particular technical requirements that might apply when a
constructive termination occurs. As a result, the Partnership Trust Fund may be
subject to some tax penalties and may incur additional expenses if it is
required to comply with those requirements. Furthermore, the Partnership Trust
Fund might not be able to comply with these requirements due to lack of data.
(5) Disposition of Partnership Certificates
Generally, capital gain or loss will be recognized on a sale of
Partnership Certificates in an amount equal to the difference between the amount
realized and the seller's tax basis in the Partnership Certificates sold. Any
gain or loss would be long-term capital gain or loss if the Partnership
Certificate Owner's holding period exceeded one year. A Partnership Certificate
Owner's tax basis in a Partnership Certificate will generally equal its cost,
increased by its share of Partnership Trust Fund income allocable to the
Partnership Certificate Owner and decreased by any distributions received or
losses allocated with respect to the Partnership Certificate. In addition, both
the tax basis in the Partnership Certificates and the amount realized on a sale
of a Partnership Certificate would include the Partnership Certificate Owner's
share, determined under Treasury Regulations, of the Debt Securities and other
liabilities of the Partnership Trust Fund. A Partnership Certificate Owner
acquiring Partnership Certificates at different prices will generally be
required to maintain a single aggregate adjusted tax basis in the Partnership
Certificates and, upon a sale or other disposition of some of the Partnership
Certificates, allocate a portion of the aggregate tax basis to the Partnership
Certificates sold, rather than maintaining a separate tax basis in each
Partnership Certificate for purposes of computing gain or loss on a sale of that
Partnership Certificate.
If a Partnership Certificate Owner is required to recognize an
aggregate amount of income (not including income attributable to disallowed
itemized deductions described above) over the life of the Partnership
Certificates that exceeds the aggregate cash distributions with respect to the
Partnership Certificates, the excess will generally give rise to a capital loss
upon the retirement of the Partnership Certificates.
(6) Allocations Between Transferors and Transferees.
In general, the Partnership Trust Fund's taxable income and losses will
be determined each Due Period and the tax items for a particular Due Period will
be apportioned among the Partnership Certificate Owners in proportion to the
principal amount of Partnership Certificates owned by them as of the close of
the last day of that Due Period. As a result, a Partnership Certificate Owner
purchasing Partnership Certificates may be allocated tax items, which will
affect the purchaser's tax liability and tax basis, attributable to periods
before the actual transaction.
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The use of a Due Period convention may not be permitted by existing
Treasury regulations. If a Due Period convention is not allowed, or only applies
to transfers of less than all of the partner's interest, taxable income or
losses of the Partnership Trust Fund might be reallocated among the Partnership
Certificate Owners. The Partnership Trust Fund's method of allocation between
transferors and transferees may be revised to conform to a method permitted by
future laws, regulations or other IRS guidance.
(7) Section 731 Distributions
In the case of any distribution to a Partnership Certificate Owner, no
gain will be recognized to that Partnership Certificate Owner to the extent that
the amount of any money distributed for that Partnership Certificate exceeds the
adjusted basis of that Partnership Certificate Owner's interest in the
Partnership Certificate. To the extent that the amount of money distributed
exceeds that Partnership Certificate Owner's adjusted basis, gain will be
currently recognized. In the case of any distribution to a Partnership
Certificate Owner, no loss will be recognized except upon a distribution in
liquidation of a Partnership Certificate Owner's interest. Any gain or loss
recognized by a Partnership Certificate Owner generally will be capital gain or
loss.
(8) Section 754 Election
In the event that a Partnership Certificate Owner sells its Partnership
Certificates at a profit (or loss), the purchasing Partnership Certificate Owner
will have a higher (or lower) basis in the Partnership Certificates than the
selling Partnership Certificate Owner had. The tax basis of the Partnership
Trust Fund's assets will not be adjusted to reflect that higher (or lower) basis
unless the Partnership Trust Fund were to file an election under Section 754 of
the Code. In order to avoid the administrative complexities that would be
involved in keeping accurate accounting records, as well as potentially onerous
information reporting requirements, the Partnership Trust Fund current does not
intend to make an election under Section 754 of the Code. As a result,
Partnership Certificate Owners might be allocated a greater or lesser amount of
Partnership Trust Fund income than would be appropriate based on their own
purchase price for Partnership Certificates.
(9) Administrative Matters
The trustee is required to keep or cause to be kept complete and
accurate books of the Partnership Trust Fund. The trustee will file a
partnership information return (IRS Form 1065) with the IRS for each taxable
year of the Partnership Trust Fund and will report each Partnership Certificate
Owner's allocable share of items of Partnership Trust Fund income and expense to
Partnership Certificate Owners and the IRS on Schedule K-1. The Partnership
Trust Fund will provide the Schedule K-1 information to nominees that fail to
provide the Partnership Trust Fund with the information statement described
below and the nominees will be required to forward this information to the
beneficial owners of the Partnership Certificates. Generally, holders must
timely file tax returns that are consistent with the information return filed by
the Partnership Trust Fund or be subject to penalties unless the holder notifies
the IRS of all the inconsistencies.
Under Section 6031 of the Code, any person that holds Partnership
Certificates as a nominee at any time during a calendar year is required to
furnish the Partnership Trust Fund with a statement containing specific
information on the nominee, the beneficial owners and the Partnership
Certificates so held. The information includes (1) the name, address and
taxpayer identification number of the nominee and (2) as to each beneficial
owner
o the name, address and identification number of such person,
o whether such person is a United States person, a tax-exempt
entity or a foreign government, an international organization,
or any wholly owned agency or instrumentality of either of the
foregoing, and
o particular information on Partnership Certificates that were
held, bought or sold on behalf of the person throughout the
year.
In addition, brokers and financial institutions that hold Partnership
Certificates through a nominee are required to furnish directly to the
Partnership Trust Fund information as to themselves and their ownership of
Partnership
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Certificates. A clearing agency registered under Section 17A of the Exchange Act
is not required to furnish any information statement to the Partnership Trust
Fund. The information referred to above for any calendar year must be furnished
to the Partnership Trust Fund on or before the following January 31. Nominees,
brokers and financial institutions that fail to provide the Partnership Trust
Fund with the information described above may be subject to penalties.
Unless another designation is made, the depositor will be designated as
the tax matters partner for each Partnership Trust Fund in the pooling and
servicing greement and, as the tax matters partner, will be responsible for
representing the Partnership Certificate Owners in some specific disputes with
the IRS. The Code provides for administrative examination of a partnership as if
the partnership were a separate and distinct taxpayer. Generally, the statute of
limitations for partnership items does not expire before the later of three
years after the date on which the partnership information return is filed or the
last day for filing the return for the applicable year, determined without
regard to extensions. Any adverse determination following an audit of the return
of the Partnership Trust Fund by the appropriate taxing authorities could result
in an adjustment of the returns of the Partnership Certificate Owners, and,
under some circumstances, a Partnership Certificate Owner may be precluded from
separately litigating a proposed adjustment to the items of the Partnership
Trust Fund. An adjustment could also result in an audit of a Partnership
Certificate Owner's returns and adjustments of items not related to the income
and losses of the Partnership Trust Fund.
A special audit system exists for qualifying large partnerships that
have elected to apply a simplified flow-through reporting system under Sections
771 through 777 of the Code. Unless otherwise specified in the applicable
prospectus supplement, a Partnership Trust Fund will not elect to apply the
simplified flow-through reporting system.
(10) Taxation of Certain Foreign Partnership Certificate Owners
As used below, the term "Non-United States Owner" means a Partnership
Certificate Owner that is not a U.S. Person, as defined under "REMICs--Taxation
of Owners of Residual Securities--Tax Related Restrictions on Transfer of
Residual Securities--Foreign Investors," above.
It is not clear whether the Partnership Trust Fund would be considered
to be engaged in a trade or business in the United States for purposes of
federal withholding taxes with respect to Non-United States Owners because there
is no clear authority dealing with that issue under facts substantially similar
to those described in this Prospectus. Although it is not expected that the
Partnership Trust Fund would be engaged in a trade or business in the United
States for these purposes, the Partnership Trust Fund will withhold as if it
were so engaged in order to protect the Partnership Trust Fund from possible
adverse consequences of a failure to withhold. The Partnership Trust Fund
expects to withhold on the portion of its taxable income that is allocable to
Non-United States Owners pursuant to Section 1446 of the Code, as if the income
were effectively connected to a U.S. trade or business, at a rate of 35% for
Non-United States Owners that are taxable as corporations and 39.6% for all
other Non-United States Owners.
Subsequent adoption of Treasury regulations or the issuance of other
administrative pronouncements may require the Partnership Trust Fund to change
its withholding procedures.
Each Non-United States Owner might be required to file a U.S.
individual or corporate income tax return on its share of the income of the
Partnership Trust Fund including, in the case of a corporation, a return in
respect of the branch profits tax. Assuming the Partnership Trust Fund is not
engaged in a U.S. trade or business, a Non-United States Owner would be entitled
to a refund with respect to all or a portion of taxes withheld by the
Partnership Trust Fund if, in particular, the Owner's allocable share of
interest from the Partnership Trust Fund constituted "portfolio interest" under
the Code.
The interest, however, may not constitute "portfolio interest" if,
among other reasons, the underlying obligation is not in registered form or if
the interest is determined without regard to the income of the Partnership Trust
Fund, in the later case, the interest being properly characterized as a
guaranteed payment under Section 707(c) of the Code. If this were the case,
Non-United States Owners would be subject to a United States federal income and
withholding tax at a rate of 30 percent on the Partnership Trust Fund's gross
income, without any deductions or
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other allowances for costs and expenses incurred in producing the income, unless
reduced or eliminated pursuant to an applicable treaty. In this case, a
Non-United States Owner would only be entitled to a refund for that portion of
the taxes, if any, in excess of the taxes that should have been withheld with
respect to the interest.
(11) Backup Withholding
Distributions made on the Partnership Certificates and proceeds from
the sale of the Partnership Certificates will be subject to a "backup"
withholding tax of 31% if, in general, the Partnership Certificate Owner fails
to comply with particular identification procedures, unless the holder is an
exempt recipient under applicable provisions of the Code and, if necessary,
demonstrates such status. Any amounts so withheld would be refunded by the IRS
or allowable as a credit against the Non-United States Owner's federal income
tax.
Consequences for Particular Investors
The federal tax discussions above may not be applicable depending on a
securityholder's particular tax situation. The depositor recommends that
prospective purchasers consult their tax advisors for the tax consequences to
them of the purchase, ownership and disposition of REMIC Securities, FASIT
Securities, Grantor Trust Securities, Partnership Certificates 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.
State and Other Tax Considerations
In addition to the federal income tax consequences described in
"Material Federal Income Tax Considerations," potential investors should
consider the state and local tax consequences of the acquisition, ownership, and
disposition of the Notes or Certificates, as applicable, offered under this
prospectus. State tax law may differ substantially from the corresponding
federal tax law, and the discussion above does not purport to describe any
aspect of the tax laws of any state or other jurisdiction. Therefore,
prospective investors should consult their own tax advisors for the various tax
consequences of investments in the Notes or Certificates, as applicable, offered
under this prospectus.
ERISA Considerations
General
A fiduciary of a pension, profit-sharing, retirement or other employee
benefit plan subject to Title I of ERISA should consider the fiduciary standards
under the Employee Retirement Income Security Act of 1974, as amended ("ERISA")
in the context of the plan's particular circumstances before authorizing an
investment of a portion of such plan's assets in the Securities. Accordingly,
pursuant to Section 404 of ERISA, such fiduciary should consider among other
factors (i) whether the investment is for the exclusive benefit of plan
participants and their beneficiaries; (ii) whether the investment satisfies the
applicable diversification requirements; (iii) whether the investment is in
accordance with the documents and instruments governing the plan; and (iv)
whether the investment is prudent, considering the nature of the investment.
Fiduciaries of plans also should consider ERISA's prohibition on improper
delegation of control over, or responsibility for, plan assets.
In addition, employee benefit plans or other retirement arrangements
subject to ERISA, as well as individual retirement accounts, certain types of
Keogh plans not subject to ERISA but subject to Section 4975 of the Code, or any
entity (including insurance company separate or general accounts) whose
underlying assets include plan assets by reason of such plans, arrangements or
accounts investing in the entity (each, a "Plan") are prohibited from engaging
in a broad range of transactions involving Plan assets and persons having
certain specified relationships to a Plan ("parties in interest" and
"disqualified persons"). Such transactions are treated as "prohibited
transactions" under Sections 406 of ERISA and excise taxes and/or other
penalties are imposed upon such persons under ERISA and/or Section 4975 of the
Code unless an exemption applies. The depositor, underwriter, each master
servicer or other servicer, any insurer, the trustee, the indenture trustee and
certain of their affiliates might be considered "parties in interest" or
"disqualified persons" with respect to a Plan. If so, the acquisition, holding
or disposition of Securities by or on behalf of such Plan could be considered to
give rise to a "prohibited transaction"
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within the meaning of ERISA and the Code unless a statutory, regulatory or
administrative exception or exemption is available.
ERISA Considerations Relating to Certificates
Plan Assets
In 29 C.R.F ss.2510.3-101 (the "Plan Asset Regulations"), the U.S.
Department of Labor ("DOL") has defined what constitutes "plan assets" for
purposes of ERISA and Section 4975 of the Code. The Plan Asset Regulations
provide that if a Plan makes an investment in an "equity interest" in an entity,
an undivided portion of the assets of the entity will be considered the assets
of such Plan unless certain exceptions set forth in such Regulations apply. The
Certificates will be deemed an equity interest for purposes of the Plan Asset
Regulations, and the depositor can give no assurance that the Certificates will
qualify for any of the exceptions under the Plan Asset Regulations. As a result,
(i) a Plan may be deemed to have acquired an interest in the Assets of the trust
fund and not merely an interest in the Certificates, (ii) the fiduciary
investment standards of ERISA could apply to such Assets and (iii) transactions
occurring in the course of managing, operating and servicing the trust fund and
its Assets might constitute prohibited transactions, unless a statutory,
regulatory or administrative exemption applies.
Prohibited Transaction Class Exemption 83-1
The DOL has issued an administrative exemption, Prohibited Transaction
Class Exemption 83-1 ("PTCE 83-1"), which under certain conditions exempts from
the application of the prohibited transaction rules of ERISA and the excise tax
provisions of Section 4975 of the Code transactions involving a Plan in
connection with the operation of a "mortgage pool" and the purchase, sale and
holding of Certificates which are "mortgage pool pass-through certificates." A
"mortgage pool" is defined as a fixed investment pool consisting solely of
interest-bearing obligations secured by first or second mortgages or deeds of
trust on single-family residential property, property acquired in foreclosure
and undistributed cash. A "mortgage pool pass-through certificate" is defined as
a Certificate which represents a beneficial undivided interest in a mortgage
pool which entitles the holder to pass through payments of principal and
interest from the mortgage loans. PTCE 83-1 requires that: (i) the depositor and
the trustee maintain a system of insurance or other protection for the mortgage
loans, the property securing such mortgage loans and for indemnifying holders of
Certificates against reductions in pass-through payments due to defaults in loan
payments or property damage in an amount at least equal to the greater of (x) 1%
of the aggregate principal balance of the mortgage loans or (y) 1% of the
principal balance of the largest covered pooled mortgage loans; (ii) the trustee
may not be an affiliate of the depositor; and (iii) the payments made to, and
retained by, the depositor in connection with the trust fund, together with all
funds inuring to its benefit for administering the trust fund, represent no more
than "adequate consideration" for selling the mortgage loans, plus reasonable
compensation for services provided to the trust fund. In addition, PTCE 83-1
exempts the initial sale of Certificates to a Plan with respect to which the
depositor, the insurer, the master servicer or other servicer or the trustee is
a party in interest if the Plan does not pay more than fair market value for
such Certificates and the rights and interests evidenced by such Certificates
are not subordinated to the rights and interests evidenced by other Certificates
of the same pool.
PTCE 83-1 also exempts from the prohibited transaction rules any
transactions in connection with the servicing and operation of the mortgage
pool, provided that any payments made to the master servicer in connection with
the servicing of the trust fund are made in accordance with a binding agreement,
copies of which must be made available to prospective Plan investors. In the
case of any Plan with respect to which the depositor, the master servicer, the
insurer or the trustee is a fiduciary, PTCE 83-1 will only apply if, in addition
to the other requirements: (i) the initial sale, exchange or transfer of
Certificates is expressly approved by an independent fiduciary who has authority
to manage and control those Plan assets being invested in Certificates; (ii) the
Plan pays no more for the Certificates than would be paid in an arm's-length
transaction; (iii) no investment management, advisory or underwriting fee, sales
commission or similar compensation is paid to the depositor with regard to the
sale, exchange or transfer of Certificates to the Plan; (iv) the total value of
the Certificates purchased by such Plan does not exceed 25% of the amount issued
and (v) at least 50% of the aggregate amount of Certificates is acquired by
persons independent of the depositor, the trustee, the master servicer and the
insurer. Before purchasing Certificates, a fiduciary of a Plan should confirm
that the trust fund is a "mortgage pool," that the Certificates constitute
"mortgage pool pass-through certificates" and that the conditions set forth in
PTCE 83-1 would be
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satisfied. In addition to making its own determination as to the availability of
the exemptive relief provided in PTCE 83-1, the Plan fiduciary should consider
the availability of any other prohibited transaction exemptions. The Plan
fiduciary should also consider its general fiduciary obligations under ERISA in
determining whether to purchase any Certificates on behalf of a Plan pursuant to
PTCE 83-1.
Underwriter Exemption
The DOL has granted to Deutsche Banc Alex. Brown Inc. an individual
exemption, Prohibited Transaction Exemption 94-84, and to Deutsche Morgan
Grenfell/C.J. Lawrence Inc., similar approval (FAN 97-03E), which were both
amended by Prohibited Transaction Exemption 97-34 ("PTE 97-34") and further
recently amended pursuant to Prohibited Transaction Exemption 2000-58 ("PTE
2000-58") (collectively, the "Exemption") which is applicable to Certificates
which meet its requirements whenever the underwriter or its affiliate is the
sole underwriter, manager or co-manager of an underwriting syndicate or is the
selling or placement agent. The Exemption generally exempts certain transactions
from the application of certain of the prohibited transaction provisions of
ERISA and the Code provided that the conditions set forth in the Exemption are
satisfied. These transactions include the servicing, managing and operation of
investment trusts holding fixed (generally non-revolving pools) of enumerated
categories of assets which include: single and multi-family residential mortgage
loans, home equity loans or receivables (including cooperative housing loans),
manufactured housing loans and guaranteed government mortgage pool certificates
and the purchase, sale and holding of Certificates which represent beneficial
ownership interests in the assets of such trusts.
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General Conditions of Exemption
The Exemption sets forth general conditions which must be satisfied for
a transaction involving the purchase, sale and holding of the Certificates to be
eligible for exemptive relief thereunder. First, the acquisition of Certificates
by Plans must be on terms that are at least as favorable to the Plan as they
would be in an arm's-length transaction with an unrelated party. Second, the
Assets held by the trust fund must be fully secured (other than one-to-four
family residential mortgage loans and home equity loans or receivables backing
certain types of Certificates, as described below). (Mortgage loans, loans,
obligations and receivables will be collectively referred to herein as
"loans."). Third, unless the Certificates are issued in "designated
transactions" (as described below) and are backed by fully-secured loans, they
may not be subordinated. Fourth, the Certificates at the time of acquisition by
the Plan must generally be rated in one of the three (or in the case of
designated transactions, four) highest generic rating categories by Standard &
Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc., Moody's
Investors Services, Inc. or Fitch, Inc. (each, a "Rating Agency"). Fifth, the
trustee and the indenture trustee generally cannot be affiliates of any member
of the "Restricted Group" which consists of any (i) underwriter as defined in
the Exemption, (ii) the depositor, (iii) the master servicer, (iv) each
servicer, (v) the insurer, (vi) the counterparty of any "interest rate swap" (as
described below) held as an Asset of the trust fund and (vii) any obligor with
respect to loans constituting more than 5% of the aggregate unamortized
principal balance of the loans held in the trust fund as of the date of initial
issuance of the Certificates. Sixth, the sum of all payments made to, and
retained by, such underwriters must represent not more than reasonable
compensation for underwriting the Certificates; the sum of all payments made to,
and retained by, the depositor pursuant to the assignment of the loans to the
related trust fund must represent not more than the fair market value of such
loans; and the sum of all payments made to, and retained by, the master servicer
and any servicer must represent not more than reasonable compensation for such
person's services under the Agreement and reimbursement of such person's
reasonable expenses in connection therewith. Seventh, (i) the investment pool
must consist only of assets of the type enumerated in the Exemption and which
have been included in other investment pools; (ii) Certificates evidencing
interests in such other investment pools must have been rated in one of the
three (or in the case of designated transactions, four) highest generic rating
categories by one of the Rating Agencies for at least one year prior to a Plan's
acquisition of Certificates; and (iii) Certificates evidencing interests in such
other investment pools must have been purchased by investors other than Plans
for at least one year prior to a Plan's acquisition of Certificates. Finally,
the investing Plan must be an accredited investor as defined in Rule 501(a)(1)
of Regulation D of the Commission under the Securities Act of 1933, as amended.
If Securities are being sold under the Exemptions, the depositor assumes that
only Plans which are accredited investors under the federal securities laws will
be permitted to purchase the Certificates.
Recent Amendments to Exemption
PTE 2000-58 (the "Amendment") recently amended the Exemption to make
the acquisition of Certificates by Plans in an initial offering or in a
secondary market transaction, the holding or transfer of Certificates and the
servicing, management and operation of the trust fund and its Assets on or after
November 13, 2000 eligible for exemptive relief to a broader range of
Certificates. Prior to such amendment, the Exemption generally permitted Plans
to purchase only unsubordindated Certificates rated within the highest three
generic rating categories backed by secured collateral. Such Certificates had to
be issued by a trust fund which was a grantor trust, REMIC or a FASIT whose
corpus could not include certain types of Assets such as interest-rate swaps.
Types of Trust Funds
The Amendment has expanded the types of permitted trust funds to
include owner-trusts, as well as grantor trusts, REMICs and FASITs. Owner-trusts
are subject to certain restrictions in their governing documents to ensure that
their Assets may not be reached by the creditors of the depositor in the event
of bankruptcy or other insolvency and must provide certain legal opinions.
Designated Transactions
In the case where the Certificates are backed by trust fund Assets
which are residential, home equity, manufactured housing or multi-family loans
which are described and defined in the Exemption as designated transactions
("Designated Transactions"), the Amendment permits the Certificates issued by
the trust fund in such
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transactions to be rated in one of the highest four generic rating categories by
a Rating Agency and/or to be subordinated. The Assets will qualify for
Designated Transaction treatment under the Exemption unless otherwise specified
in the prospectus supplement. In addition, one subset of Designated
Transactions, residential (one- to-four family) and home equity loans, may be
less than fully secured, provided that the rights and interests evidenced by
Certificates issued in such Designated Transactions are: (a) not subordinated to
the rights and interests evidenced by Securities of the same trust fund; (b)
such Certificates acquired by the Plan have received a rating from a Rating
Agency at the time of such acquisition that is in one of the two highest generic
rating categories; and (c) any loan included in the corpus or Assets of the
trust fund is secured by collateral whose fair market value on the closing date
of the Designated Transactions is at least equal to 80% of the sum of: (i) the
outstanding principal balance due under the loan which is held by the trust fund
and (ii) the outstanding principal balance(s) of any other loan(s) of higher
priority (whether or not held by the trust fund) which are secured by the same
collateral.
Insurance Company General Accounts
In the event that Certificates do not meet the requirements of the
Exemption solely because they are Subordinate Certificates or fail to meet a
minimum rating requirement under the Exemption, certain Plans may be eligible to
purchase Certificates pursuant to Section III of Prohibited Transaction Class
Exemption 95-60 ("PTCE 95-60") which permits insurance company general accounts
as defined in PTCE 95-60 to purchase such Certificates if they otherwise meet
all of the other requirements of the Exemption.
Permitted Assets
The Amendment permits an interest-rate swap to be an Asset of a trust
fund which issues Certificates acquired by Plans in an initial offering or in
the secondary market on or after November 13, 2000 and clarifies the
requirements regarding yield supplement agreements. An interest-rate swap (or if
purchased by or on behalf of the trust fund) an interest-rate cap contract
(collectively, a "Swap" or "Swap Agreement") is a permitted trust fund Asset if
it: (a) is an "eligible Swap;" (b) is with an "eligible counterparty;" (c) is
purchased by a "qualified plan investor;" (d) meets certain additional specific
conditions which depend on whether the Swap is a "ratings dependent Swap" or a
"non-ratings dependent Swap" and (e) permits the trust fund to make termination
payments to the Swap counterparty (other than currently scheduled payments)
solely from excess spread or amounts otherwise payable to the servicer or
depositor.
An "eligible Swap" is one which: (a) is denominated in U.S. dollars;
(b) pursuant to which the trust fund pays or receives, on or immediately prior
to the respective payment or distribution date for the class of Certificates to
which the Swap relates, a fixed rate of interest or a floating rate of interest
based on a publicly available index (e.g., LIBOR or the U.S. Federal Reserve's
Cost of Funds Index (COFI)), with the trust fund receiving such payments on at
least a quarterly basis and obligated to make separate payments no more
frequently than the counterparty, with all simultaneous payments being netted
("Allowable Interest Rate"); (c) has a notional amount that does not exceed
either: (i) the principal balance of the class of Certificates to which the Swap
relates, or (ii) the portion of the principal balance of such class represented
by obligations ("Allowable Notional Amount"); (d) is not leveraged (i.e.,
payments are based on the applicable notional amount, the day count fractions,
the fixed or floating rates permitted above, and the difference between the
products thereof, calculated on a one-to-one ratio and not on a multiplier of
such difference) ("Leveraged"); (e) has a final termination date that is either
the earlier of the date on which the issuer terminates or the related class of
Certificates are fully repaid and (f) does not incorporate any provision which
could cause a unilateral alteration in the interest rate requirements described
above or the prohibition against leveraging.
An "eligible counterparty" means a bank or other financial institution
which has a rating at the date of issuance of the Certificates, which is in one
of the three highest long-term credit rating categories or one of the two
highest short-term credit rating categories, utilized by at least one of the
Rating Agencies rating the Certificates; provided that, if a counterparty is
relying on its short-term rating to establish eligibility hereunder, such
counterparty must either have a long-term rating in one of the three highest
long-term rating categories or not have a long-term rating from the applicable
Rating Agency.
A "qualified plan investor" is a Plan or Plans where the decision to
buy such class of Certificates is made on behalf of the Plan by an independent
fiduciary qualified to understand the Swap transaction and the effect the
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Swap would have on the rating of the Certificates and such fiduciary is either
(a) a "qualified professional asset manager" ("QPAM") under Prohibited
Transaction Class Exemption 84-14 ("PTCE 84-14") (see below), (b) an "in-house
asset manager" under Prohibited Transaction Class Exemption 96-23 ("PTCE 96-23")
(see below) or (c) has total assets (both Plan and non-Plan) under management of
at least $100 million at the time the Certificates are acquired by the Plan.
In "ratings dependent Swaps" (where the rating of a class of
Certificates is dependent on the terms and conditions of the Swap), the Swap
Agreement must provide that if the credit rating of the counterparty is
withdrawn or reduced by any Rating Agency below a level specified by the Rating
Agency, the servicer must, within the period specified under the Swap Agreement:
(a) obtain a replacement Swap Agreement with an eligible counterparty which is
acceptable to the Rating Agency and the terms of which are substantially the
same as the current Swap Agreement (at which time the earlier Swap Agreement
must terminate); or (b) cause the Swap counterparty to establish any
collateralization or other arrangement satisfactory to the Rating Agency such
that the then current rating by the Rating Agency of the particular class of
Certificates will not be withdrawn or reduced (and the terms of the Swap
Agreement must specifically obligate the counterparty to perform these duties
for any class of Certificates with a term of more than one year). In the event
that the servicer fails to meet these obligations, Plan certificateholders must
be notified in the immediately following periodic report which is provided to
certificateholders but in no event later than the end of the second month
beginning after the date of such failure. Sixty days after the receipt of such
report, the exemptive relief provided under the Exemption will prospectively
cease to be applicable to any class of Certificates held by a Plan which
involves such ratings dependent Swap.
"Non-ratings dependent Swaps" (those where the rating of the
Certificates does not depend on the terms and conditions of the Swap) are
subject to the following conditions. If the credit rating of the counterparty is
withdrawn or reduced below the lowest level permitted above, the servicer will,
within a specified period after such rating withdrawal or reduction: (a) obtain
a replacement Swap Agreement with an eligible counterparty, the terms of which
are substantially the same as the current Swap Agreement (at which time the
earlier Swap Agreement must terminate); (b) cause the counterparty to post
collateral with the trust fund in an amount equal to all payments owed by the
counterparty if the Swap transaction were terminated; or (c) terminate the Swap
Agreement in accordance with its terms.
An "eligible yield supplement agreement" is any yield supplement
agreement or similar arrangement (or if purchased by or on behalf of the trust
fund) an interest rate cap contract to supplement the interest rates otherwise
payable on obligations held by the trust fund ("EYS Agreement"). If the EYS
Agreement has a notional principal amount and/or is written on an International
Swaps and Derivatives Association, Inc. (ISDA) form, the EYS Agreement may only
be held as an Asset of the trust fund with respect to Certificates purchased by
Plans on or after April 7, 1998 if it meets the following conditions: (a) it is
denominated in U.S. dollars; (b) it pays an Allowable Interest Rate; (c) it is
not Leveraged; (d) it does not allow any of these three preceding requirements
to be unilaterally altered without the consent of the trustee; (e) it is entered
into between the trust fund and an eligible counterparty and (f) it has an
Allowable Notional Amount.
Pre-Funding Accounts
The Exemption was amended by PTE 97-34 to extend exemptive relief to
Certificates issued in transactions using pre-funding accounts whereby a portion
of the loans backing the Certificates are transferred to the trust fund within a
specified period following the closing date ("DOL Pre-Funding Period") (see
below) instead of requiring that all such loans be either identified or
transferred on or before the closing date. The relief is effective for
transactions occurring on or after May 23, 1997 provided that the following
conditions are met. First, the ratio of the amount allocated to the Pre-Funding
Account to the total principal amount of the Certificates being offered
("Pre-Funding Limit") must not exceed twenty-five percent (25%). Second, all
loans transferred after the closing date (referred to here as "additional
loans") must meet the same terms and conditions for eligibility as the original
loans used to create the trust fund, which terms and conditions have been
approved by the Rating Agency. Third, the transfer of such additional loans to
the trust fund during the DOL Pre-Funding Period must not result in the
Certificates receiving a lower credit rating from the Rating Agency upon
termination of the DOL Pre-Funding Period than the rating that was obtained at
the time of the initial issuance of the Certificates by the trust fund. Fourth,
solely as a result of the use of pre-funding, the weighted average annual
percentage interest rate (the "average interest rate") for all of the loans in
the trust fund at the end of the DOL Pre-Funding Period must not be
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more than 100 basis points lower than the average interest rate for the loans
which were transferred to the trust fund on the closing date. Fifth, either: (i)
the characteristics of the additional loans must be monitored by an insurer or
other credit support provider which is independent of the depositor; or (ii) an
independent accountant retained by the depositor must provide the depositor with
a letter (with copies provided to the Rating Agency, the underwriter and the
trustee) stating whether or not the characteristics of the additional loans
conform to the characteristics described in the Prospectus, Prospectus
Supplement, Private Placement Memorandum ("Offering Documents") and/or the
Agreement. In preparing such letter, the independent accountant must use the
same type of procedures as were applicable to the loans which were transferred
as of the closing date. Sixth, the DOL Pre-Funding Period must end no later than
three months or 90 days after the closing date or earlier, in certain
circumstances, if the amount on deposit in the Pre-Funding Account is reduced
below the minimum level specified in the Agreement or an event of default occurs
under the Agreement. Seventh, amounts transferred to any Pre-Funding Account
and/or Capitalized Interest Account used in connection with the pre-funding may
be invested only in investments which are permitted by the Rating Agency and (i)
are direct obligations of, or obligations fully guaranteed as to timely payment
of principal and interest by, the United States or any agency or instrumentality
thereof (provided that such obligations are backed by the full faith and credit
of the United States); or (ii) have been rated (or the obligor has been rated)
in one of the three highest generic rating categories by the Rating Agency
("Acceptable Investments"). Eighth, certain disclosure requirements must be met.
Revolving Pool Features
The Exemption only covers Certificates backed by "fixed" pools of loans
which require that all the loans must be transferred to the trust fund or
identified at closing (or transferred within the DOL Pre-Funding Period, if
pre-funding meeting the conditions described above is used). Accordingly,
Certificates issued by trust funds which feature revolving pools of Assets will
not be eligible for a purchase by Plans. However, Securities which are Notes
backed by revolving pools of Assets may be eligible for purchase by Plans
pursuant to certain other prohibited transaction exemptions. See discussion
below in "ERISA Considerations Relating to Notes."
Limitations on Scope of the Exemption
If the general conditions of the Exemption are satisfied, the Exemption
may provide an exemption from the restrictions imposed by ERISA and the Code in
connection with the initial acquisition, transfer or holding, and the
acquisition or disposition in the secondary market, of the Certificates by
Plans. However, no exemption is provided from the restrictions of ERISA for the
acquisition or holding of a Certificates on behalf of an "Excluded Plan" by any
person who is a fiduciary with respect to the assets of such Excluded Plan. For
those purposes, an Excluded Plan is a Plan sponsored by any member of the
Restricted Group. Exemptive relief may also be provided for the acquisition,
holding and disposition of Certificates by Plans if the fiduciary or its
affiliate is the obligor with respect to 5% or less of the fair market value of
the Loans in the trust fund provided that: (i) the Plan is not an Excluded Plan,
(ii) each Plan's investment in each class of Certificates does not exceed 25% of
the outstanding Certificates in the class, (iii) after the Plan's acquisition of
the Certificates, no more than 25% of the assets over which the fiduciary has
investment authority are invested in Certificates of a trust containing assets
which are sold or serviced by the same entity and (iv) in the case of initial
issuance (but not secondary market transactions), at least 50% of each class of
Certificates and at least 50% of the aggregate interests in the trust fund are
acquired by persons independent of the Restricted Group.
ERISA Considerations Relating to Notes
Under the Plan Asset Regulations, the Assets of the trust fund would be
treated as "plan assets" of a Plan for the purposes of ERISA and the Code only
if the Plan acquires an "equity interest" in the trust fund and none of the
exceptions contained in the Plan Asset Regulations is applicable. An equity
interest is defined under the Plan Asset Regulations as an interest other than
an instrument which is treated as indebtedness under applicable local law and
which has no substantial equity features. Assuming that the Notes are treated as
indebtedness without substantial equity features for purposes of the Plan Asset
Regulations, then such Notes will be eligible for purchase by Plans. However,
without regard to whether the Notes are treated as an "equity interest" for such
purposes, the acquisition or holding of Notes by or on behalf of a Plan could be
considered to give rise to a prohibited transaction if the trust fund or any of
its affiliates is or becomes a party in interest or disqualified person with
respect to such Plan, or in the event that a Note is purchased in the secondary
market and such purchase constitutes a sale or
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exchange between a Plan and a party in interest or disqualified person with
respect to such Plan. There can be no assurance that the trust fund or any of
its affiliates will not be or become a party in interest or a disqualified
person with respect to a Plan that acquires Notes.
The Amendment to the Exemption permits trust funds which are grantor
trusts, owner-trusts, REMICs or FASITs to issue Notes, as well as Certificates,
provided a legal opinion is received to the effect that the noteholders have a
perfected security interest in the trust fund's Assets. The exemptive relief
provided under the Exemption for any prohibited transactions which could be
caused as a result of the operation, management or servicing of the trust fund
and its Assets would not be necessary with respect to Notes with no substantial
equity features which are issued as obligations of the trust fund. However,
effective for the acquisition, holding or transfer of Notes between a Plan and a
party in interest which occurs on or after November 13, 2000, the Exemption
would provide prohibited transaction exemptive relief, provided that the same
conditions of the Exemption described above relating to Certificates are met
with respect to the Notes. The same limitations of such exemptive relief
relating to acquisitions of Certificates by fiduciaries with respect to Excluded
Plans would also be applicable to the Notes as described herein in "Limitations
on Scope of the Exemption."
In the event that the Exemption is not applicable to the Notes, one or
more other prohibited transactions exemptions may be available to Plans
purchasing or transferring the Notes depending in part upon the type of Plan
fiduciary making the decision to acquire the Notes and the circumstances under
which such decision is made. These exemptions include, but are not limited to,
Prohibited Transaction Class Exemption 90-1 (regarding investments by insurance
company pooled separate accounts), Prohibited Transaction Class Exemption 91-38
(regarding investments by bank collective investments funds), PTCE 84-14
(regarding transactions effected by "qualified professional asset managers"),
PTCE 95-60 (regarding investments by insurance company general accounts) and
PTCE 96-23 (regarding transactions effected by "in-house asset managers")
(collectively, the "Investor-Based Exemptions"). However, even if the conditions
specified in these Investor-Based Exemptions are met, the scope of the relief
provided under such Exemptions might or might not cover all acts which might be
construed as prohibited transactions.
EACH PROSPECTUS SUPPLEMENT WILL CONTAIN INFORMATION CONCERNING
CONSIDERATIONS RELATING TO ERISA AND THE CODE THAT ARE APPLICABLE TO THE RELATED
SECURITIES. BEFORE PURCHASING SECURITIES IN RELIANCE ON PTCE 83-1, THE
EXEMPTION, THE INVESTOR-BASED EMEMPTIONS OR ANY OTHER EXEMPTION, A FIDUCIARY OF
A PLAN SHOULD ITSELF CONFIRM THAT REQUIREMENTS SET FORTH IN SUCH EXEMPTION WOULD
BE SATISFIED.
ANY PLAN INVESTOR WHO PROPOSES TO USE "PLAN ASSETS" OF ANY PLAN TO
PURCHASE SECURITIES OF ANY SERIES OR CLASS SHOULD CONSULT WITH ITS COUNSEL WITH
RESPECT TO THE POTENTIAL CONSEQUENCES UNDER ERISA AND SECTION 4975 OF THE CODE
OF THE ACQUISITION AND OWNERSHIP OF SUCH SECURITIES.
Governmental plans and church plans as defined in ERISA are not subject
to ERISA or Code Section 4975, although they may elect to be qualified under
Section 401(a) of the Code and exempt from taxation under Section 501(a) of the
Code and would then be subject to the prohibited transaction rules set forth in
Section 503 of the Code. In addition, governmental plans may be subject to
federal, state and local laws which are to a material extent similar to the
provisions of ERISA or a Code Section 4975 ("Similar Law"). A fiduciary of a
governmental plan should make its own determination as to the propriety of an
investment in Securities under applicable fiduciary or other investment
standards and the need for the availability of any exemptive relief under any
Similar Law.
Legal Investment
The prospectus supplement will specify which classes of the Notes or
Certificates, as applicable, if any, will constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984, as amended ("SMMEA"). Generally, only classes of Offered Notes or Offered
Certificates, as applicable, that (1) are rated in one of the two highest rating
categories by one or more rating agencies and (2) are part of a series
representing interests in, or secured by, a trust fund consisting of loans
secured by first liens on real property and originated by particular types of
originators specified in SMMEA, will be "mortgage related securities" for
purposes of SMMEA.
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Those classes of Offered Notes or Offered Certificates, as applicable,
qualifying as "mortgage related securities" will constitute legal investments
for persons, trusts, corporations, partnerships, associations, business trusts
and business entities (including, but not limited to, state chartered savings
banks, commercial banks, savings and loan associations and insurance companies,
as well as trustees and state government employee retirement systems) created
pursuant to or existing under the laws of the United States or of any state
(including the District of Columbia and Puerto Rico) whose authorized
investments are subject to state regulation to the same extent that, under
applicable law, obligations issued by or guaranteed as to principal and interest
by the United States or any agency or instrumentality of the United States
constitute legal investments for those entities. Pursuant to SMMEA, a number of
states enacted legislation, on or before the October 3, 1991 cut-off for those
enactments, limiting to varying extents the ability of some entities (in
particular, insurance companies) to invest in mortgage related securities
secured by liens on residential, or mixed residential and commercial,
properties, in most cases by requiring the affected investors to rely solely
upon existing state law, and not SMMEA.
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 these
securities, and national banks may purchase these 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
regulations that 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 general standards concerning "safety
and soundness" and retention of credit information in 12 C.F.R. ss.1.5), some
"Type IV securities," defined in 12 C.F.R. ss.1.2(l) to include some
"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 some 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. Thrift institutions that are subject to the jurisdiction of the
Office of Thrift Supervision (the "OTS") should consider the OTS' Thrift
Bulletin 13a (December 1, 1998), "Management of Interest Rate Risk, Investment
Securities, and Derivatives Activities," before investing in any of the Offered
Notes or Offered Certificates, as applicable.
All depository institutions considering an investment in the
Certificates 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.
If specified in the prospectus supplement, other classes of Offered
Notes or Offered Certificates, as applicable, offered pursuant to this
prospectus will not constitute "mortgage related securities" under SMMEA. The
appropriate characterization of those classes under various legal investment
restrictions, and thus the ability of investors subject to these restrictions to
purchase these Offered Notes or Offered Certificates, as applicable, may be
subject to significant interpretive uncertainties.
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 Offered
Notes or Offered Certificates, as applicable, as some classes or subclasses may
be deemed unsuitable investments, or may otherwise be restricted, under those
rules, policies or guidelines (in some instances irrespective of SMMEA).
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits provisions that
may restrict or prohibit investment in
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securities that are not "interest bearing" or "income paying," and with regard
to any Offered Notes or Offered Certificates, as applicable, issued in
book-entry form, provisions that may restrict or prohibit investments in
securities that are issued in book-entry form.
Except as to the status of some classes of Offered Notes or Offered
Certificates, as applicable, as "mortgage related securities," no representation
is made as to the proper characterization of the Offered Notes or Offered
Certificates, as applicable, for legal investment, financial institution
regulatory, or other purposes, or as to the ability of particular investors to
purchase any Offered Notes or Offered Certificates, as applicable, under
applicable legal investment restrictions. The uncertainties described above (and
any unfavorable future determinations concerning legal investment or financial
institution regulatory characteristics of the Offered Notes or Offered
Certificates, as applicable,) may adversely affect the liquidity of the Offered
Notes or Offered Certificates, as applicable.
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 own legal advisors in
determining whether and to what extent the Offered Notes or Offered
Certificates, as applicable, of any class constitute legal investments for them
or are subject to investment, capital or other restrictions, and, if applicable,
whether SMMEA has been overridden in any jurisdiction relevant to that investor.
Methods of Distribution
The Notes or Certificates, as applicable, offered by this prospectus
and by the supplements to this prospectus will be offered in series. The
distribution of the Notes or Certificates, as applicable, 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 specified in the prospectus
supplement, the Notes or Certificates, as applicable, will be distributed in a
firm commitment underwriting, subject to the terms and conditions of the
underwriting agreement, by Deutsche Banc Alex. Brown Inc. ("DBAB") acting as
underwriter with other underwriters, if any, named in the underwriting
agreement. In that event, the prospectus supplement may also specify that the
underwriters will not be obligated to pay for any Notes or Certificates, as
applicable, agreed to be purchased by purchasers pursuant to purchase agreements
acceptable to the depositor. In connection with the sale of the Notes or
Certificates, as applicable, underwriters may receive compensation from the
depositor or from purchasers of the Notes or Certificates, as applicable, in the
form of discounts, concessions or commissions. The prospectus supplement will
describe any compensation paid by the depositor.
Alternatively, the prospectus supplement may specify that the Notes or
Certificates, as applicable, will be distributed by DBAB acting as agent or in
some cases as principal with respect to Notes or Certificates, as applicable,
that it has previously purchased or agreed to purchase. If DBAB acts as agent in
the sale of Notes or Certificates, as applicable, DBAB will receive a selling
commission for each series of Notes or Certificates, as applicable, depending on
market conditions, expressed as a percentage of the total principal balance of
the related mortgage loans as of the Cut-off Date. The exact percentage for each
series of Notes or Certificates, as applicable, will be disclosed in the
prospectus supplement. To the extent that DBAB elects to purchase Notes or
Certificates, as applicable, as principal, DBAB may realize losses or profits
based upon the difference between its purchase price and the sales price. The
prospectus supplement for any series offered other than through underwriters
will contain information regarding the nature of that offering and any
agreements to be entered into between the depositor and purchasers of Notes or
Certificates, as applicable, of that series.
The depositor will indemnify DBAB and any underwriters against
particular civil liabilities, including liabilities under the Securities Act of
1933, or will contribute to payments DBAB and any underwriters may be required
to make in respect of these civil liabilities.
In the ordinary course of business, DBAB 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 those mortgage loans or interests in those mortgage loans,
including the Notes or Certificates, as applicable. DBAB performs management
services for the depositor.
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The depositor anticipates that the Notes or Certificates, as
applicable, will be sold primarily to institutional investors. Purchasers of
Notes or Certificates, as applicable, including dealers, may, depending on the
facts and circumstances of those purchases, be deemed to be "underwriters"
within the meaning of the Securities Act of 1933 in connection with reoffers and
sales by them of Notes or Certificates, as applicable. securityholders should
consult with their legal advisors in this regard before any reoffer or sale of
Notes or Certificates, as applicable.
As to each series of Notes or Certificates, as applicable, only those
classes rated in one of the four highest rating categories by any rating agency
will be offered by this prospectus. Any lower rated or unrated class may be
initially retained by the depositor, and may be sold by the depositor at any
time to one or more institutional investors.
Additional Information
The Depositor has filed with the Commission a registration statement on
Form S-3 under the Securities Act of 1933, as amended, with respect to the Notes
or Certificates, as applicable, (the "Registration Statement"). This prospectus,
which forms a part of the Registration Statement, omits some of the information
contained in the Registration Statement pursuant to the rules and regulations of
the Commission. The Registration Statement and the exhibits to the Registration
Statement can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
and at Regional Offices in the following locations:
o Chicago Regional Office, Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511; and
o New York Regional Office, 7 World Trade Center, Suite 1300,
New York, New York 10048.
Copies of these materials can also be obtained from the Public Reference Section
of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates.
The Commission also maintains a site on the world wide web at
"http://www.sec.gov" at which users 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 to
the Registration Statement, through the EDGAR system and therefore these
materials should be available by logging onto the Commission's web site. The
Commission maintains computer terminals providing access to the EDGAR system at
each of the offices referred to above.
Copies of the most recent Fannie Mae prospectus for Fannie Mae
certificates and Fannie Mae's annual report and quarterly financial statements
as well as other financial information are available from the Director of
Investor Relations of Fannie Mae, 3900 Wisconsin Avenue, N.W., Washington, D.C.
20016 (202-752-7115). The Depositor did not participate in the preparation of
Fannie Mae's prospectus or its annual or quarterly reports or other financial
information and, accordingly, makes no representation as to the accuracy or
completeness of the information in those documents.
Copies of the most recent Offering Circular for Freddie Mac
certificates as well as Freddie Mac's most recent Information Statement and
Information Statement supplement and any quarterly report made available by
Freddie Mac may be obtained by writing or calling the Investor Inquiry
Department of Freddie Mac at 8200 Jones Branch Drive, McLean, Virginia 22102
(outside Washington, D.C. metropolitan area, telephone 800-336-3672; within
Washington, D.C. metropolitan area, telephone 703-759-8160). The Depositor did
not participate in the preparation of Freddie Mac's Offering Circular,
Information Statement or any supplement to the Information Statement or any
quarterly report of the Information Statement and, accordingly, makes no
representation as to the accuracy or completeness of the information in those
documents.
Incorporation of Certain Documents by Reference
All documents subsequently filed by or on behalf of the trust fund
referred to in the prospectus supplement with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act, after the date of this
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prospectus and prior to the termination of any offering of the Notes or
Certificates, as applicable, issued by that trust fund will be deemed to be
incorporated by reference in this prospectus and to be a part of this prospectus
from the date of the filing of those documents. Any statement contained in a
document incorporated or deemed to be incorporated by reference in this
prospectus will be deemed to be modified or superseded for all purposes of this
prospectus to the extent that a statement contained in this prospectus (or in
the prospectus supplement) or in any other subsequently filed document that also
is or is deemed to be incorporated by reference modifies or replaces that
statement. Any statement so modified or superseded will not be deemed, except as
so modified or superseded, to constitute a part of this prospectus.
The Trustee on behalf of any trust fund will provide without charge to
each person to whom this prospectus is delivered, upon request, a copy of any or
all of the documents referred to above that have been or may be incorporated by
reference in this prospectus (not including exhibits to the information that is
incorporated by reference unless the exhibits are specifically incorporated by
reference into the information that this prospectus incorporates). Requests for
information should be directed to the corporate trust office of the Trustee
specified in the prospectus supplement.
Legal Matters
Certain legal matters, including the federal income tax consequences to
securityholders of an investment in the Notes or Certificates, as applicable, of
a series, will be passed upon for the depositor by Stroock & Stroock & Lavan
LLP, Washington, D.C., and Sidley Austin Brown & Wood LLP, New York, NY.
Financial Information
A new trust fund will be formed for each series of Notes or
Certificates, as applicable, and no trust fund will engage in any business
activities or have any assets or obligations before the issuance of the related
series of Notes or Certificates, as applicable. Accordingly, financial
statements for a trust fund will generally not be included in this prospectus or
in the prospectus supplement.
Rating
As a condition to the issuance of any class of Offered Notes or Offered
Certificates, as applicable, they must not be rated lower than investment grade;
that is, they must be rated in one of the four highest rating categories, by a
rating agency.
Ratings on mortgage pass-through certificates and mortgage-backed notes
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 the Notes or Certificates, as applicable,
the nature of the underlying assets and the credit quality of the guarantor, if
any. Ratings on mortgage pass-through certificates, mortgage-backed notes and
other asset backed securities do not represent any assessment of the likelihood
of principal prepayments by borrowers or of the degree by which 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.
-122-
INDEX OF DEFINED TERMS
1986 Act.......................................79
1997 Act......................................103
1998 Policy Statement.........................119
Accrual Period.................................16
Accrual Securities.............................22
Accrued Security Interest......................24
Adjustable Rate Assets..........................3
Agency Securities...............................3
Agreemen.......................................35
ARM Loans.......................................6
Asset Conservation Act.........................67
Asset Group....................................22
Asset Seller....................................3
Available Distribution Amount..................23
Balloon Payment Assets..........................4
Bankruptcy Code................................65
Beneficial Owner...............................30
Bi-weekly Assets................................4
Book-Entry Securities..........................22
borrower.......................................59
Buy Down Assets.................................3
Buydown Funds..................................78
Buydown Mortgage Loans.........................19
Buydown Period.................................19
Capitalized Interest Account...................15
Cash Flow Agreement............................15
Cedel..........................................30
CERCLA.........................................66
Certificates...................................21
Charter Act....................................11
Code...........................................74
Collection Account.............................39
Commission......................................6
contract borrower..............................61
contract lender................................61
Convertible Assets..............................4
Cooperative....................................60
Cooperative Corporation........................31
Cooperative Loans..............................60
Cooperatives....................................5
Covered Trust..................................56
CPR............................................18
credit support.................................15
Crime Control Act..............................70
Cut-off Date....................................6
Debt Securities................................75
defective obligation...........................76
Definitive Securities..........................22
Determination Date.............................22
Disqualified Organization......................89
Distribution Date..............................16
DTC............................................30
Due Period.....................................23
EDGAR.........................................121
Eligible Corporation...........................98
Euroclear......................................30
Euroclear Operator.............................31
European Depositaries..........................32
Exchange Act...................................30
Fannie Mae......................................3
FASIT..........................................74
FASIT Ownership Security.......................95
FASIT Provisions...............................74
FASIT Regular Securities.......................95
FASIT Securities...............................74
FDIC...........................................39
FFIEC.........................................119
FHA.............................................5
Financial Intermediary.........................32
Freddie Mac.....................................3
Freddie Mac Act................................12
Freddie Mac Certificate Group..................12
Garn-St. Germain Act...........................68
GEM Assets......................................4
Ginnie Mae......................................3
GPM Assets......................................4
Grantor Trust Fund.............................74
Grantor Trust Fund Stripped Bond..............102
Grantor Trust Fund Stripped Coupon............102
Grantor Trust Securities.......................74
Grantor Trust Securityholders.................100
Home Equity Loans...............................5
Housing Act....................................10
HUD............................................46
Increasing Payment Asset........................4
Indirect Participants..........................30
Insurance Proceeds.............................23
Interest Rate..................................24
Interest Reduction Assets.......................3
land sale contract.............................61
Land Sale Contracts.............................5
Level Payment Assets............................3
Liquidation Proceeds...........................23
Loan-to-Value Ratio.............................5
Lock-out Date...................................7
Lock-out Period.................................7
Mortgage Securities.............................3
Mortgaged Properties............................4
Mortgages.......................................5
NCUA..........................................119
Nonrecoverable Advance.........................26
Non-U.S. Person................................94
Notes..........................................21
OCC...........................................119
-123-
Offered Securities.............................22
OID Regulations............................75, 79
Participants...................................30
Partnership Certificates.......................75
Partnership Trust Fund.........................75
Pass-Through Entity............................89
PCBs...........................................66
Permitted Investments..........................39
pooling and servicing agreement................35
Pre-Funded Amount..............................14
Pre-Funding Account............................14
Pre-Funding Period.............................14
prepayment.....................................18
Prepayment Assumption..........................80
Purchase Price.................................36
RCRA...........................................67
Record Date....................................22
Refinance Loans.................................5
Registration Statement........................121
Regular Securities.............................76
Regular Securityholder.........................78
Related Proceeds...............................26
Relevant Depositary............................32
Relief Act.....................................70
REMIC..........................................74
REMIC Pool.....................................75
REMIC Regulations..............................75
REMIC Securities...............................35
REO Property...................................27
Residual Securities............................76
Retained Interest..............................48
Revolving Credit Line Loans.....................7
RICO...........................................70
Rules..........................................32
secured-creditor exemption.....................67
Securities.....................................21
Security Balance...............................25
Senior Certificates...........................102
Senior Class Percentage.......................102
Senior Securities..............................22
Servicemen's Readjustment Act..................14
Servicing Standard.............................42
Shortfall Amount..............................103
Single Family Property..........................4
SMMEA.........................................118
SPA............................................18
Special servicer...............................50
Startup Day....................................76
Step-up Rate Assets.............................4
Strip Securities...............................22
Stripped Agency Securities.....................13
Stripped Certificates.........................101
Subordinate Certificates......................102
Subordinate Class Percentage..................102
Subordinate Securities.........................22
Subsequent Assets..............................14
Superliens.....................................66
super-premium..................................80
Taxable Mortgage Pools.........................75
Terms and Conditions...........................32
Tiered REMICs..................................78
Title V........................................69
Title VIII.....................................70
U.S. Person....................................91
UCC............................................30
UST............................................67
VA 5
VA Guaranty Policy.............................47
Value...........................................5
Warranting Party...............................37
Yield Considerations...........................24
-124-
$181,455,000
(Approximate)
ACE Securities Corp.
Depositor
C-BASS Mortgage Loan
Asset-Backed Certificates, Series 2001-CB2
--------------------------------
PROSPECTUS SUPPLEMENT
--------------------------------
Litton Loan Servicing LP
Servicer
Deutsche Banc Alex. Brown
First Union Securities, Inc.
Underwriters
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We
have not authorized anyone to provide you with different information.
We are not offering the certificates offered by this prospectus
supplement in any state where the offer is not permitted.
Dealers will be required to deliver a prospectus supplement and
prospectus when acting as underwriters of the certificates offered by this
prospectus supplement and with respect to their unsold allotments or
subscriptions. In addition, all dealers selling the Offered Certificates,
whether or not participating in this offering, may be required to deliver a
prospectus supplement and prospectus for 90 days following the date of this
prospectus supplement.
Dated June 11, 2001