PROSPECTUS SUPPLEMENT
(To Prospectus dated November 27, 2001)
$181,934,150
(Approximate)
Bear Stearns Asset Backed Securities Trust 2001-3
Issuer
Asset-Backed Certificates, Series 2001-3
EMC Mortgage Corporation
Seller and Master Servicer
Bear Stearns Asset Backed Securities, Inc.
Depositor
-------------------------
The issuer is offering the following classes of certificates pursuant to this
prospectus supplement and the accompanying prospectus:
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Original Original
Certificate Certificate
Class Principal Balance Pass-Through Rate Class Principal Balance Pass-Through Rate
- -----------------------------------------------------------------------------------------------------------
Class A-1 $ 75,000,000 Adjustable (1)(2) Class M-2 $ 5,913,000 Adjustable (1)(2)
Class A-2 $ 77,831,000 Adjustable (1)(2) Class B $ 2,729,000 Adjustable (1)(2)
Class A-3 $ 10,000,000 Adjustable (1)(2) Class R-1 $ 50 N/A
Class A-IO Notional (3) 8.00% (1) Class R-2 $ 50 N/A
Class M-1 $ 10,461,000 Adjustable (1)(2) Class R-3 $ 50 N/A
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(1) Subject to a maximum rate as described in this prospectus supplement.
(2) Subject to a step-up if the optional termination right is not
exercised.
(3) Equal to the lesser of $18,193,000 and the aggregate outstanding
principal balance of the mortgage loans.
The certificates represent interests in a pool of fixed and adjustable rate,
conventional mortgage loans that are secured by first or second liens on one- to
four-family residential properties.
Credit enhancement will be provided by:
o excess spread and overcollateralization
o subordination of the Class M-1, Class M-2 and Class B Certificates
Neither the SEC nor any state securities commission has approved these
securities or determined that this prospectus supplement or the prospectus is
accurate or complete. Any representation to the contrary is a criminal offense.
Bear, Stearns & Co. Inc. and Countrywide Securities Corporation, as the
underwriters, will offer the certificates listed above at varying prices to be
determined at the time of sale.
The underwriters will deliver the Class R-1, Class R-2 and Class R-3
Certificates in physical form and the remaining offered certificates in
book-entry form only through the facilities of The Depository Trust Company,
Clearstream and Euroclear, on or about November 30, 2001.
Bear, Stearns & Co. Inc. Countrywide Securities Corporation
The date of the prospectus supplement is November 27, 2001
- --------------------------------------------------------------------------------
Consider carefully the risk factors beginning on page S-12 in this prospectus
supplement and on page 3 in the prospectus.
The certificates represent obligations of the trust only and do not represent an
interest in or obligation of Bear Stearns Asset Backed Securities, Inc., EMC
Mortgage Corporation, LaSalle Bank National Association, or any of their
affiliates.
This prospectus supplement may be used to offer and sell the offered
certificates only if accompanied by the prospectus.
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TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT PROSPECTUS
--------------------- ----------
SUMMARY...........................................S-4 Risk Factors........................................3
RISK FACTORS.....................................S-12 Description of the Securities......................12
THE MORTGAGE POOL................................S-29 The Trust Funds....................................16
SERVICING OF THE MORTGAGE LOANS..................S-37 Credit Enhancement.................................34
DESCRIPTION OF THE CERTIFICATES..................S-49 Servicing of Loans.................................38
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS....S-72 The Agreements.....................................45
USE OF PROCEEDS..................................S-85 Material Legal Aspects of the Loans................56
FEDERAL INCOME TAX The Depositor......................................67
CONSEQUENCES................................S-85 Use of Proceeds....................................68
STATE TAXES......................................S-86 Material Federal Income
ERISA CONSIDERATIONS.............................S-86 Tax Considerations.............................68
RESTRICTIONS ON PURCHASE AND State Tax Considerations...........................93
TRANSFER OF THE RESIDUAL FASIT Securities...................................93
CERTIFICATES................................S-87 ERISA Considerations...............................98
METHOD OF DISTRIBUTION...........................S-88 Legal Matters.....................................104
LEGAL MATTERS....................................S-89 Financial Information.............................104
RATINGS..........................................S-89 Available Information.............................104
INDEX OF DEFINED TERMS...........................S-90 Incorporation of Certain
SCHEDULE A - MORTGAGE LOAN Information by Reference......................104
STATISTICAL DATA.............................A-1 Ratings...........................................105
Legal Investment Considerations...................105
Plan of Distribution..............................106
Glossary of Terms.................................106
S-2
Important Notice About Information Presented In This
Prospectus Supplement And The Accompanying Prospectus
We describe the certificates in two separate documents that provide
varying levels of detail: (a) the accompanying prospectus, which provides
general information, some of which may not apply to your certificates and (b)
this prospectus supplement, which describes the specific terms of your
certificates. If there is conflicting information between this prospectus
supplement and the accompanying prospectus, you should rely on the information
in this prospectus supplement.
Cross-references are included in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further discussions about related topics. The table of contents on page S-2
above provides the pages on which these captions are located.
You can find a listing of the pages where certain capitalized and other
terms used in this prospectus supplement and the accompanying prospectus are
defined under the caption "Glossary" beginning on page S-57 of this prospectus
supplement, "Index of Defined Terms" beginning on page S-90 of this prospectus
supplement or "Glossary of Terms" beginning on page 106 of the prospectus.
S-3
SUMMARY
o This summary highlights selected information from this document and
does not contain all of the information that you need to consider when
making your investment decision. To understand all of the terms of an
offering of the certificates, you should read this entire document and
the accompanying prospectus carefully.
o Certain statements contained in or incorporated by reference in this
prospectus supplement and the accompanying prospectus consist of
forward-looking statements relating to future economic performance or
projections and other financial items. These statements can be
identified by the use of forward-looking words such as "may," "will,"
"should," "expects," "believes," "anticipates," "estimates," or other
comparable words. Forward-looking statements are subject to a variety
of risks and uncertainties that could cause actual results to differ
from the projected results. Those risks and uncertainties include,
among others, general economic and business conditions, regulatory
initiatives and compliance with governmental regulations, customer
preferences and various other matters, many of which are beyond our
control. Because we cannot predict the future, what actually happens
may be very different from what is contained in our forward-looking
statements.
The Certificates
Asset-Backed Certificates, Series 2001-3, represent beneficial ownership
interests in a trust fund that consists primarily of a pool of fixed and
adjustable rate, conventional mortgage loans that are secured by first or second
liens on one- to four-family residential properties as described in this
prospectus supplement.
Originators
The mortgage loans have been acquired by the seller from a variety of sources.
The principal originators of the mortgage loans were United Companies Financial
Corporation, which originated approximately 41.08% of the mortgage loans and
First Union National Bank, which originated approximately 30.93% of the mortgage
loans.
Depositor
Bear Stearns Asset Backed Securities, Inc., a Delaware corporation and a limited
purpose finance subsidiary of The Bear Stearns Companies Inc. and an affiliate
of Bear, Stearns & Co. Inc., one of the underwriters.
Seller
EMC Mortgage Corporation, a Delaware corporation and an affiliate of the
depositor and Bear, Stearns & Co. Inc., which will sell the mortgage loans to
the depositor.
Master Servicer
EMC Mortgage Corporation.
We refer you to "Servicing of the Mortgage Loans" in this prospectus supplement
for a description of the servicing of the mortgage loans.
Trustee
LaSalle Bank National Association, a national banking association.
S-4
Pooling and Servicing Agreement
The pooling and servicing agreement among the seller, the master servicer, the
depositor, and the trustee, under which the trust will be formed and will issue
the certificates.
Cut-Off Date
The close of business on November 1, 2001.
Closing Date
On or about November 30, 2001.
The Mortgage Loans
The aggregate principal balance of the mortgage loans as of the cut-off date is
approximately $181,934,777. The mortgage loans are fixed and adjustable rate
mortgage loans that are secured by first or second liens on one- to four-family
residential properties.
Set forth below is certain information regarding the mortgage loans and the
related mortgaged properties as of the cut-off date. The information provided is
approximate. All weighted average information provided below reflects weighting
of the mortgage loans by their scheduled principal balances as of the cut-off
date. Except for simple interest loans, the scheduled principal balance has been
calculated on the assumption that the principal portion of all monthly payments
due with respect to each mortgage loan on or before the cut-off date has been
received. Schedule A, which is attached and is a part of this prospectus
supplement presents more detailed statistical information relating to the
mortgage loans. You should also refer to "The Mortgage Pool" in this prospectus
supplement.
Number of mortgage loans............ 2,702
Aggregate principal balance......... $181,934,777
Average principal balance........... $67,333
Range of principal balances....... $328 to $4,096,772
Range of mortgage rates.......... 5.125% to 18.500%
Weighted average
mortgage rate................... 10.731%
Weighted average
loan-to-value ratio............. 82.18%
Weighted average scheduled
remaining term to maturity...... 258 months
Range of scheduled remaining
terms to maturity...... 0 months to 358 months
Original Term:
2-15 years...................... 28.86%
16-31 years..................... 71.14%
Interest rate type:
Fixed rate balloon.............. 18.79%
Fixed rate fully amortizing..... 30.15%
Adjustable/ 1-year CMT.......... 7.29%
Adjustable/ 6-month LIBOR....... 43.09%
Type of mortgaged properties:
Single-family dwellings......... 87.04%
2-4 family dwellings............ 5.00%
Planned unit developments....... 2.14%
Condominiums.................... 2.44%
Mobile/Manufactured housing
(treated as real property)... 2.17%
Other/Not Available............. 0.19%
Owner-occupied..................... 94.69%
First liens......................... 91.21%
Second liens........................ 8.79%
State concentrations:
California...................... 14.46%
Florida......................... 7.34%
Georgia......................... 6.41%
North Carolina.................. 5.19%
Ohio............................ 6.17%
Delinquencies:
31-60 days...................... 12.03%
61-90 days...................... 1.80%
Adjustable rate loans:
Weighted average:
gross margin.................. 5.278%
initial rate cap.............. 2.773%
periodic cap.................. 1.187%
maximum mortgage rate......... 15.800%
months to next adjustment..... 5 months
Approximately 328 of the mortgage loans, having a scheduled principal balance as
of the cut-off date of approximately $12,457,264, are simple interest loans.
Simple interest loans accrue interest on their outstanding principal balances on
a daily basis, and their scheduled principal balance reflects actual principal
payments, as opposed to the principal owed, as of a particular date. As a
result, the scheduled principal balance of simple interest loans will not be
reduced if any installment of principal due has not been paid. Each monthly
payment with respect to a simple interest loan is applied first to interest
accrued to the date of payment and then to a reduction of the principal balance
of that loan.
S-5
One of the mortgage loans has a scheduled principal balance as of the cut-off
date of approximately $4,096,772 representing approximately 2.25% of the
mortgage pool. We refer you to "The Mortgage Pool--General" for additional
information about this mortgaged property.
Description of the Certificates
General
The trust will issue the Class A-1, Class A-2, Class A-3, Class M-1, Class M-2
and Class B Certificates, which will have initial principal balances as shown on
the cover page hereto. The Class A-IO Certificates will be issued with a
notional principal balance equal at all times to the lesser of $18,193,000 and
the then existing outstanding principal balance of the mortgage loans. The Class
R-1, Class R-2 and Class R-3 Certificates represent the residual interests in
the real estate mortgage investment conduits established by the trust. We
sometimes refer to them as Class R Certificates or as residual certificates.
The trust will also issue Class B-IO Certificates, which we are not offering by
this prospectus supplement.
The last scheduled distribution date for the offered certificates, other than
the Class A-IO Certificates, is October 27, 2032, and for the Class A-IO
Certificates is May 25, 2004.
Record Date
For each class of offered certificates (other than the Class A-IO Certificates),
the record date is the business day preceding the applicable distribution date
so long as such adjustable rate certificates remain in book-entry form and
otherwise the record date shall be the same as for the Class A-IO Certificates.
For the Class A-IO Certificates, the record date is, with respect to the first
distribution date, the closing date, and for any distribution date thereafter,
the last business day of the month preceding the month in which such
distribution date occurs.
Denominations
$25,000 and multiples of $1,000 in excess thereof.
Registration of Certificates
The trust will issue the certificates, other than the Class R Certificates,
initially in book-entry form. Persons acquiring beneficial ownership interests
in the certificates may elect to hold their beneficial interests through The
Depository Trust Company, in the United States, or Clearstream Luxembourg or
Euroclear, in Europe.
We refer you to "Description of Certificates -- Book-Entry Certificates" in this
prospectus supplement.
S-6
Pass-Through Rates
On any distribution date, the pass-through rate per annum for each class of
offered certificates (other than the Class A-IO and Class R Certificates) will
be equal to:
(i) One-month LIBOR, plus the per annum pass-through margins of:
o for the Class A-1 Certificates, initially 0.45% and after the
optional termination date, 0.90%,
o for the Class A-2 Certificates, initially 0.40% and after the
optional termination date, 0.80%,
o for the Class A-3 Certificates, initially 0.65% and after the
optional termination date, 1.30%,
o for the Class M-1 Certificates, initially 1.00% and after the
optional termination date, 1.50%,
o for the Class M-2 Certificates, initially 1.50% and after the
optional termination date, 2.25%,
o for the Class B Certificates, initially 2.50% and after the
optional termination date, 3.75%, but
(ii) in each case subject to the applicable interest rate cap.
The per annum pass-through rate for the Class A-IO Certificates will be 8.00%,
subject to the applicable interest rate cap.
The initial per annum pass-through rates for the Class A-1, Class A-2, Class
A-3, Class M-1, Class M-2 and Class B certificates will be approximately 2.558%,
2.508%, 2.758%, 3.108%, 3.608% and 4.608%, respectively.
The interest rate cap for the Class A-IO Certificates is equal to the weighted
average of the net mortgage rates of all of the mortgage loans.
The interest rate cap for all classes of interest bearing offered certificates,
other than the Class A-IO Certificates, is equal to: for so long as the Class
A-IO Certificates are outstanding, the weighted average of the net mortgage
rates of all of the mortgage loans minus the interest payable to the Class A-IO
Certificates with respect to the related accrual period (expressed as a per
annum rate calculated based on the aggregate mortgage loan balance), and after
the Class A-IO Certificates are no longer outstanding, the weighted average of
the net mortgage rates of all of the mortgage loans, in each case adjusted to an
effective rate reflecting the accrual of interest on an actual/360 basis.
We refer you to "Description of the Certificates -- Pass-Through Rate" and " --
Calculation of One-Month LIBOR" in this prospectus supplement.
If on any distribution date, the pass-through rate for a class of offered
certificates is based on the applicable interest rate cap, the holders of that
class of certificates will receive a smaller amount of interest than such
holders would have received on such distribution date had the pass-through rate
for that class not been calculated based on the applicable interest rate cap.
There will be no carryover of such shortfall to future distribution dates.
We refer you to "Description of the Certificates -- Distributions" in this
prospectus supplement.
Distribution Dates
The trustee will make distributions on the certificates on the 25th day of each
calendar month beginning in December 2001 to the appropriate holders of record .
If the 25th day of a month is not a business day, then the trustee will make
distributions on the next business day after the 25th day of the month. The
first distribution date will be on December 26, 2001.
S-7
Interest Payments
On each distribution date holders of the offered certificates will be entitled
to receive:
o the interest that has accrued on the certificate principal balance or
notional balance of such certificates at the related pass-through rate
during the related accrual period, and
o any interest due on a prior distribution date that was not paid, less
o interest shortfalls allocated to such certificates.
The accrual period for all classes of offered certificates (other than the Class
A-IO and Class R Certificates) will be the period from and including the
preceding distribution date (or from the closing date, in the case of the first
distribution date) to and including the day prior to the current distribution
date. The accrual period for the Class A-IO Certificates will be the calendar
month immediately preceding the calendar month in which a distribution date
occurs. Calculations of interest on all classes of offered certificates (other
than the Class A-IO and Class R Certificates) will be based on a 360-day year
and the actual number of days elapsed during the related accrual period.
Calculations of interest on the Class A-IO Certificates will be based on a
360-day year that consists of twelve 30-day months.
The notional balance of the Class A-IO Certificates for purposes of calculating
accrued interest will be equal to the lesser of $18,193,000 and the aggregate
outstanding principal balance of the mortgage loans immediately prior to the
applicable distribution date but without giving effect to payments or
prepayments of principal during the related due period or prepayment period.
Principal Payments
On each distribution date, holders of the offered certificates, other than the
Class A-IO Certificates, will receive a distribution of principal on their
certificates if there is cash available on that date for the payment of
principal. Monthly principal distributions will generally include:
o principal payments on the mortgage loans, and
o until a specified overcollateralization level has been reached,
interest payments on the mortgage loans not needed to pay interest on
the certificates and monthly fees and expenses.
You should review the priority of payments described under "Description of the
Certificates -- Distributions" in this prospectus supplement.
Credit Enhancement
Credit enhancements provide limited protection to holders of specified
certificates against shortfalls in payments received on the mortgage loans. This
transaction employs the following forms of credit enhancement.
Subordination. By issuing senior certificates and subordinated certificates, the
trust has increased the likelihood that senior certificateholders will receive
regular payments of interest and principal. The Class A-1, Class A-2, Class A-3
and Class A-IO Certificates constitute the senior certificates, and the Class
M-1, Class M-2 and Class B Certificates constitute the subordinated
certificates.
S-8
The certificates designated as senior certificates will have a payment priority
over the certificates designated as subordinated certificates. Among the classes
of subordinated certificates:
o the Class M-1 Certificates will have payment priority over the Class
M-2 Certificates, and
o the Class M-2 Certificates will have payment priority over the Class B
Certificates.
Subordination provides the holders of certificates having a higher payment
priority with protection against losses realized when the remaining unpaid
principal balance on a mortgage loan exceeds the amount of proceeds recovered
upon the liquidation of that mortgage loan. In general, we accomplish this loss
protection by allocating any realized losses in excess of any current
overcollateralization among the certificates, beginning with the subordinated
certificates with the lowest payment priority, until the principal amount of
that subordinated class has been reduced to zero. We then allocate realized
losses to the next most junior class of subordinated certificates, until the
principal balance of each class of subordinated certificates is reduced to zero.
Once all of the subordinated certificates have been reduced to zero, realized
losses will be allocated among the senior certificates pro rata based on their
certificate principal balances, except that so long as the Class A-3
Certificates are outstanding, they will bear the realized losses otherwise
allocable to the Class A-2 Certificates.
Excess Spread and Overcollateralization. We expect the mortgage loans to
generate more interest than is needed to pay interest on the offered
certificates because we expect the weighted average net interest rate of the
mortgage loans to be higher than the weighted average pass-through rate on the
offered certificates and, as overcollateralization increases, such higher
interest rate is paid on a principal balance of mortgage loans that is larger
than the principal balance of the certificates. Interest payments received in
respect of the mortgage loans in excess of the amount that is needed to pay
interest on the offered certificates and related trust expenses will be used
after the first distribution date to reduce the total principal balance of such
certificates until a required level of overcollateralization has been achieved.
As of the closing date, the aggregate principal balance of the mortgage loans is
approximately equal to the aggregate principal balance of the certificates.
We refer you to "Description of the Certificates -- Excess Spread and
Overcollateralization Provisions" in this prospectus supplement.
Advances
The master servicer will make cash advances with respect to delinquent payments
of scheduled interest and principal on the related mortgage loans (but not
principal on simple interest loans) to the extent that the master servicer
reasonably believes that such cash advances can be repaid from future payments
on the related mortgage loans. These cash advances are only intended to maintain
a regular flow of scheduled interest and principal payments on the certificates
and are not intended to guarantee or insure against losses.
We refer you to "Servicing of the mortgage loans" in this prospectus supplement.
S-9
Optional Termination
The master servicer may purchase all of the remaining assets in the trust fund
when the principal balance of the mortgage loans and any foreclosed real estate
owned by the trust fund has declined to or below 10% of the principal balance of
the mortgage loans as of the cut-off date. Such a purchase will result in the
early retirement of all the certificates.
Federal Income Tax Consequences
For federal income tax purposes, the trust will comprise multiple real estate
mortgage investment conduits, organized in a tiered REMIC structure. The
certificates offered by this prospectus supplement (other than the Class R
Certificates) and the Class B-IO Certificates (which are not offered hereby)
will represent beneficial ownership of "regular interests" in the related REMIC
identified in the pooling and servicing agreement.
Each class of residual certificates will represent the beneficial ownership of
the sole class of "residual interest" in a REMIC. Certain classes of offered
certificates may be issued with original issue discount for federal income tax
purposes.
We refer you to "Federal Income Tax Consequences" in this prospectus supplement
and "Material Federal Income Tax Considerations" in the prospectus for
additional information concerning the application of federal income tax laws.
Legal Investment
None of the certificates will be "mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act of 1984.
We refer you to "Legal Investment Considerations" in the prospectus.
ERISA Considerations
The certificates may only be purchased by a pension or other employee benefit
plan subject to the Employee Retirement Income Security Act of 1974 or Section
4975 of the Internal Revenue Code of 1986, if one of a number of prohibited
transaction class exemptions are applicable to the acquisition and holding of
such certificates and based on the identity of the fiduciary of such pension or
employeee benefit plan.
We refer you to "ERISA Considerations" in this prospectus supplement and in the
prospectus.
S-10
Ratings
The classes of certificates listed below will not be offered unless they receive
the respective ratings set forth below from Moody's Investors Service, Inc.,
which we refer to as "Moody's" and Standard & Poor's Rating Services, a division
of The McGraw-Hill Companies, Inc., which we refer to as "Standard & Poor's."
Standard & Poor's
Class Moody's Rating Rating
- ----- -------------- -----------------
A-1 Aaa AAA
A-2 Aaa AAA
A-3 Aaa AAA
A-IO Aaa AAA
M-1 Aa2 AA
M-2 A2 A
B Baa2 BBB
R-1 -- AAA
R-2 -- AAA
R-3 -- AAA
A rating is not a recommendation to buy, sell or hold securities and either
rating agency can revise or withdraw such ratings at any time. In general,
ratings address credit risk and do not address the likelihood of prepayments.
S-11
RISK FACTORS
In addition to the matters described elsewhere in this prospectus supplement and
the prospectus, you should carefully consider the following risk factors before
deciding to purchase a certificate.
The subordinated
certificates have a
greater risk of loss
than the senior
certificates When certain classes of certificates provide credit
enhancement for other classes of certificates it is
sometimes referred to as "subordination." For
purposes of this prospectus supplement, "related
subordinated classes" means:
o with respect to the senior certificates, the
Class M-1 Class M-2 and Class B Certificates
and any overcollateralization;
o with respect to the Class M-1 Certificates,
the Class M-2 and Class B Certificates and
any overcollateralization;
o with respect to the Class M-2 Certificates,
the Class B Certificates and any
overcollateralization; and
o with respect to the Class B Certificates,
any overcollateralization.
We will provide credit enhancement for the
certificates, first, by the right of the holders of
the certificates to receive certain payments of
interest and principal prior to the related
subordinated classes and, second, by the allocation
of realized losses to the related subordinated
classes. This form of credit enhancement uses
collections on the mortgage loans otherwise payable
to the holders of the related subordinated classes to
pay amounts due on the more senior classes. Such
collections are the sole source of funds from which
such credit enhancement is provided. Realized losses
in excess of current overcollateralization are
allocated to the offered certificates, beginning with
the offered certificates with the lowest payment
priority, until the principal amount of that class
has been reduced to zero. This means that with
respect to the certificates offered by this
prospectus supplement, realized losses on the
mortgage loans would first be allocated to the Class
B certificates until the principal balance of such
Class B certificates is reduced to zero. Subsequent
realized losses would be allocated to the next most
junior class of offered certificates, until the
principal balance of that class of offered
certificates is reduced to zero. Accordingly, if the
aggregate principal balance of a subordinated class
were to be reduced to zero, delinquencies and
defaults on the mortgage loans would reduce the
amount of funds available for distributions to
holders of the remaining subordinated class or
classes and, if the aggregate principal balance of
all the subordinated classes were to be reduced to
zero, delinquencies and defaults on the mortgage
loans would reduce the amount of funds available for
monthly distributions to holders of the remaining
certificates.
S-12
You should fully consider the risks of investing in a
subordinated certificate, including the risk that you
may not fully recover your initial investment as a
result of realized losses.
See "Description of the Certificates" in this
prospectus supplement.
Additional risks
associated with the
subordinated
certificates The weighted average lives of, and the yields to
maturity on, the Class M-1 Certificates, the Class
M-2 Certificates and the Class B Certificates will be
progressively more sensitive, in that order, to the
rate and timing of mortgagor defaults and the
severity of ensuing losses on the mortgage loans. If
the actual rate and severity of losses on the
mortgage loans is higher than those assumed by an
investor in such certificates, the actual yield to
maturity of such certificates may be lower than the
yield anticipated by such holder based on such
assumption. The timing of losses on the mortgage
loans will also affect an investor's actual yield to
maturity, even if the rate of defaults and severity
of losses over the life of the mortgage loans are
consistent with an investor's expectations. In
general, the earlier a loss occurs, the greater the
effect on an investor's yield to maturity. Realized
losses on the mortgage loans, to the extent they
exceed the amount of overcollateralization following
distributions of principal on the related
distribution date, will reduce the certificate
principal balance of the Class B Certificates, the
Class M-2 Certificates and the Class M-1
Certificates, in that order. As a result of such
reductions, less interest will accrue on such class
of subordinated certificates than would otherwise be
the case. Once a realized loss is allocated to a
subordinated certificate, no interest will be
distributable with respect to such written down
amount. However, the amount of any realized losses
allocated to the subordinated certificates may be
reimbursed to the holders of the subordinated
certificates according to the priorities set forth
under "Description of the Certificates--
Distributions" in this prospectus supplement.
S-13
Unless the certificate principal balances of the
senior certificates have been reduced to zero, the
subordinated certificates will not be entitled to any
principal distributions until at least December 2004
or during any period in which delinquencies on the
mortgage loans exceed certain levels. 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
among all of the certificates at the same time. 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 such
certificates might not receive any principal if
certain delinquency levels occur, it is possible for
such certificates to receive no principal
distributions even if no losses have occurred on the
mortgage pool.
In addition, the multiple class structure of the
subordinated certificates causes the yield of such
classes to be particularly sensitive to changes in
the rates of prepayment of the mortgage loans.
Because distributions of principal will be made to
the holders of such certificates according to the
priorities described in this prospectus supplement,
the yield to maturity on such classes of certificates
will be sensitive to the rates of prepayment on the
mortgage loans experienced both before and after the
commencement of principal distributions on such
classes. The yield to maturity on such classes of
certificates will also be extremely sensitive to
losses due to defaults on the mortgage loans and the
timing thereof, to the extent such losses are not
covered by overcollateralization, excess spread, or a
class of subordinated certificates with a lower
payment priority. Furthermore, the timing of receipt
of principal and interest by the subordinated
certificates may be adversely affected by losses even
if such classes of certificates do not ultimately
bear such loss.
S-14
The Class A-3
Certificates will bear
a disproportionate
share of realized
losses After the certificate principal balances of the
subordinated certificates have been reduced to zero,
the Class A-1, Class A-2 and Class A-3 Certificates
will be allocated their share of any future realized
losses on a pro rata basis based on their respective
certificate principal balances. However, until the
certificate principal balance of the Class A-3
Certificates has been reduced to zero, any losses
that would otherwise be allocated to the Class A-2
Certificates will instead be absorbed by the Class
A-3 Certificates.
Credit enhancement may
be inadequate to cover
losses and/or to build
overcollateralization The mortgage loans are expected to generate more
interest than is needed to pay interest on the
offered certificates because we expect the weighted
average interest rate on the mortgage loans (less the
monthly fees due to the master servicer and the
trustee) to be higher than the weighted average
pass-through rate on the offered certificates. If the
mortgage loans generate more interest than is needed
to pay interest on the offered certificates and trust
fund expenses, we will use such "excess spread" to
make additional principal payments on the offered
certificates, which will reduce the total principal
balance of the offered certificates below the
aggregate principal balance of the mortgage loans,
thereby creating "overcollateralization."
Overcollateralization is intended to provide limited
protection to certificateholders by absorbing the
certificates' share of losses from liquidated
mortgage loans. However, we cannot assure you that
enough excess spread will be generated on the
mortgage loans to establish or maintain the required
level of overcollateralization. The aggregate
principal balances of the mortgage loans as of the
cut-off date will approximately equal the aggregate
certificate principal balance on the closing date
and, therefore, the initial amount of
overcollateralization will be considerably less than
the specified overcollateralization amount we
describe in this prospectus supplement.
S-15
The excess spread available on any distribution date
will be affected by the actual amount of interest
received, advanced or recovered in respect of the
mortgage loans during the preceding month. Such
amount may be influenced by changes in the weighted
average of the mortgage rates resulting from
prepayments, defaults and liquidations of the
mortgage loans.
If the protection afforded by overcollateralization
is insufficient, then you could experience a loss on
your investment.
The interest rate caps
may reduce the yields
on the offered
certificates The pass-through rates on the offered certificates
are each subject to an interest rate cap equal to or
based upon the weighted average of the net mortgage
rates on the mortgage loans. If on any distribution
date the pass-through rate for a class of offered
certificates is based on the applicable interest rate
cap, the holders of the applicable certificates will
receive a smaller amount of interest than they would
have received on that distribution date had the
pass-through rate for that class not been calculated
based on the applicable interest rate cap. The
holders of those certificates will not be entitled to
recover any resulting shortfall in interest on that
distribution date or on any other distribution date.
If mortgage loans with relatively higher mortgage
rates prepay or default, the applicable interest rate
cap will result in lower interest than otherwise
would be the case.
The certificates
(other than the Class
A-IO Certificates) may
not always receive
interest based on
One-Month LIBOR plus
the related margin The certificates (other than the Class A-IO
Certificates) may not always receive interest at a
rate equal to One-Month LIBOR plus the applicable
margin. If the applicable interest rate cap is less
than One-Month LIBOR plus the related margin, the
interest rate on the related classes of certificates
will be reduced to such interest rate cap. Thus, the
yield to investors in such classes of certificates
will be sensitive both to fluctuations in the level
of One-Month LIBOR and to the adverse effects of the
application of the applicable interest rate cap. The
prepayment or default of mortgage loans with
relatively higher net mortgage rates, particularly
during a period of increased One-Month LIBOR rates,
may result in the applicable interest rate cap being
lower than otherwise would be the case. If on any
distribution date the application of the related
interest rate cap results in an interest payment
lower than One-Month LIBOR plus the applicable margin
on any of such classes of certificates during the
related interest accrual period, the value of such
class or class of certificates may be temporarily or
permanently reduced.
S-16
The originator of a
substantial portion of
the mortgage loans has
ceased operations as a
result of financial
difficulties Mortgage loans constituting approximately 41.08% of
the cut-off date principal balance of the mortgage
loans were originated or purchased by United
Companies Financial Corporation (referred to herein
as United Companies) primarily during the period from
1994 through 1996. In March 1999, United Companies
filed for bankruptcy protection. The seller acquired
substantially all of these mortgage loans from
clean-up calls of several series of United Companies'
sponsored mortgage pass-through certificates, which
such mortgage loans backed. There can be no assurance
that the performance of these mortgage loans will
correlate with the performance of mortgage loans
originated by United Companies in prior years, or
correlate with the performance of mortgage loans
historically serviced by EMC Mortgage Corporation.
Certain mortgage loans
were underwritten to
non-conforming
underwriting
standards, which may
result in losses or
shortfalls to be
incurred on the
offered certificates Certain mortgage loans were underwritten generally in
accordance with underwriting standards which are
primarily intended to provide for single family
"non-conforming" mortgage loans. A "non-conforming"
mortgage loan means a mortgage loan which is
ineligible for purchase by Fannie Mae or Freddie Mac
due to either credit characteristics of the related
mortgagor or documentation standards in connection
with the underwriting of the related mortgage loan
that do not meet the Fannie Mae or Freddie Mac
underwriting guidelines for "A" credit mortgagors.
These credit characteristics include mortgagors whose
creditworthiness and repayment ability do not satisfy
such Fannie Mae or Freddie Mac underwriting
guidelines and mortgagors who may have a record of
credit write-offs, outstanding judgments, prior
bankruptcies and other credit items that do not
satisfy such Fannie Mae or Freddie Mac underwriting
guidelines. These documentation standards may include
mortgagors who provide limited or no documentation in
connection with the underwriting of the related
mortgage loan. Accordingly, mortgage loans
underwritten under such non-conforming credit
underwriting standards are likely to experience rates
of delinquency, foreclosure and loss that are higher,
and may be substantially higher, than mortgage loans
originated in accordance with the Fannie Mae or
Freddie Mac underwriting guidelines. Any resulting
losses, to the extent not covered by credit
enhancement, may affect the yield to maturity of the
offered certificates.
S-17
Defaults could cause
payment delays and
losses There could be substantial delays in the liquidation
of defaulted mortgage loans and corresponding delays
in your receiving your portion of the proceeds of
liquidation. These delays could last up to several
years. Furthermore, an action to obtain a deficiency
judgment is regulated by statutes and rules, and the
amount of a deficiency judgment may be limited by
law. In the event of a default by a borrower, these
restrictions may impede the ability of the master
servicer to foreclose on or to sell the mortgaged
property or to obtain a deficiency judgment. In
addition, liquidation expenses such as legal and
appraisal fees, real estate taxes and maintenance and
preservation expenses, will reduce the amount of
security for the mortgage loans and, in turn, reduce
the proceeds payable to certificateholders.
In the event that:
o the mortgaged properties fail to provide
adequate security for the related mortgage
loans, and
S-18
o the protection provided by the subordination
of certain classes and the availability of
overcollateralization are insufficient to
cover any shortfall,
you could lose all or a portion of the money you paid
for your certificates.
Second lien mortgage
loans Approximately 8.79% of the Mortgage Loans by
scheduled principal balance as of the cut-off date,
are secured by second liens on the related mortgaged
properties. With respect to 0.92% of such second lien
mortgage loans, the related senior lien is also
included in the pool of mortgage loans.
The proceeds from any liquidation, insurance or
condemnation proceedings will be available to satisfy
the outstanding principal balance of a junior lien
mortgage loan only to the extent that the claims of
the prior lienholders have been satisfied in full,
including any related foreclosure costs. In
circumstances when it is determined to be
uneconomical to foreclose on the related mortgaged
property, the master servicer may write off the
entire outstanding principal balance of such a
mortgage loan as a bad debt. The foregoing
considerations will be particularly applicable to
junior lien mortgage loans that have high
loan-to-value ratios because it is comparatively more
likely that the master servicer would determine
foreclosure to be uneconomical in the case of such
mortgage loans. An overall decline in the residential
real estate market, a rise in interest rates or the
deterioration of the mortgaged properties could
adversely affect the values of the mortgaged
properties securing a junior lien mortgage loan such
that the outstanding principal balance thereof,
together with the related senior financing thereon,
exceeds the value of the related mortgaged property.
The rate of default of junior lien mortgage loans may
be greater than that of mortgage loans secured by
first liens on comparable properties. For all
purposes herein, the "loan-to-value ratio" of a
junior lien mortgage loan refers to the combined
loan-to-value ratio of such loan calculated with
reference to the sum of the amount secured by all
more senior liens on the related mortgaged property
and the outstanding principal balance secured by the
junior lien on the related mortgaged property.
S-19
Balloon mortgage loans With respect to approximately 18.79% of the mortgage
loans by scheduled principal balance as of the
cut-off date, mortgagors make monthly payments of
principal that are less than sufficient to amortize
those mortgage loans by their maturity dates. These
mortgage loans are commonly called "balloon loans."
As a result of these lower monthly payments, a
borrower generally will be required to pay a large
remaining principal balance upon the maturity of a
balloon loan. The ability of a mortgagor to make that
payment may depend on its ability to obtain
refinancing of the balance due on the mortgage loan
or to sell the related mortgaged property. Certain of
such mortgagors may have negative payment histories
which may affect their ability to refinance. In
addition, an increase in prevailing market interest
rates over the mortgage rate on the mortgage loan at
origination may reduce the mortgagor's ability to
obtain refinancing and to pay the principal balance
of the mortgage loan at its maturity.
Your yield could be
adversely affected by
the unpredictability
of prepayments No one can accurately predict the level of
prepayments that the trust will experience. The
trust's prepayment experience may be affected by many
factors, including:
o general economic conditions,
o the level of prevailing interest rates,
o the availability of alternative financing,
and
o homeowner mobility.
Substantially all of the mortgage loans contain
due-on-sale provisions, and the master servicer
intends to enforce those provisions unless doing so
is not permitted by applicable law or the master
servicer, in a manner consistent with reasonable
commercial practice, permits the purchaser of the
mortgaged property in question to assume the related
mortgage loan. In addition, certain of the mortgage
loans, by cut-off date principal balance, imposed a
prepayment charge in connection with voluntary
prepayments made within up to five years after
origination, which charges may discourage prepayments
during the applicable period. Mortgage loans imposing
such a prepayment charge at origination constitute
approximately 52.66% of the mortgage loans, by
aggregate principal balance; however, due to the
seasoning of the mortgage loans, the related
prepayment charge periods have expired with respect
to approximately 39.73% of these mortgage loans.
S-20
Certain factors may particularly affect the
prepayment rate of junior lien mortgage loans, such
as the amounts of, and interest on, the related
senior lien mortgage loan and the use of such senior
lien mortgage loan as long-term financing for home
purchases or refinances and junior lien mortgage
loans as shorter-term financing for a variety of
purposes, such as home improvement, educational
expenses and purchases of consumer durables such as
automobiles. The junior lien mortgage loans may
therefore experience a higher rate of prepayments
than senior lien mortgage loans.
The weighted average lives of the certificates will
be sensitive to the rate and timing of principal
payments, including prepayments, on the mortgage
loans, which may fluctuate significantly from time to
time.
You should note that:
o if you purchase your certificates at a
discount and principal is repaid on the
related mortgage loans slower 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 on the
related mortgage loans faster than you
anticipate, then your yield may be lower
than you anticipate;
o except with respect to the Class A-IO
Certificates, your yield will also be
sensitive both to the level of one-month
LIBOR and the applicable interest rate cap,
and the yield on the Class A-IO Certificates
will be subject to the applicable interest
rate cap;
S-21
o the yield to maturity of the Class A-IO
Certificates will be extremely sensitive to
the rate of principal prepayment on the
mortgage loans, if prior to May 25, 2004 the
aggregate principal balance of the mortgage
loans is reduced to or below $18,193,000.
Investors in the Class A-IO Certificates
should fully consider the risk that an
extremely rapid rate of principal prepayment
on the mortgage loans could result in the
failure of such investors to recover their
initial investments;
o since repurchases of mortgage loans as a
result of breaches of representations and
warranties and liquidations of mortgage
loans following default have the same effect
as prepayments, your yield may be lower than
you expect if the rate of such repurchases
and liquidations is higher than you expect;
o the overcollateralization provisions,
initially and whenever overcollateralization
is at a level below the required level, are
intended to result in an accelerated rate of
principal distributions to holders of the
classes of offered certificates then
entitled to distributions of principal. An
earlier return of principal to the holders
of the offered certificates as a result of
the overcollateralization provisions will
influence the yield on the offered
certificates in a manner similar to the
manner in which principal prepayments on the
mortgage loans will influence the yield on
the offered certificates; and
o you bear the reinvestment risks resulting
from a faster or slower rate of principal
payments than you expected.
We refer you to "The Mortgage Pool" and "Yield,
Prepayment and Maturity Considerations" in this
prospectus supplement and "Material Legal Aspects of
the Loans -- Due-on-Sale Clauses in Mortgage Loans"
in the prospectus for a description of certain
provisions of the mortgage loans that may affect the
prepayment experience on the mortgage loans.
S-22
Mortgage loan
modifications may
affect interest rate
caps Modifications of mortgage loans agreed to by the
master servicer in order to maximize ultimate
proceeds of such mortgage loans may extend the period
over which principal is received on the certificates
or, if such modifications downwardly adjust interest
rates, may lower the interest rate caps.
Violations of consumer
protection laws may
result in losses Certain of the mortgage loans may be subject to
special rules, disclosure requirements and other
provisions that were added to the federal
Truth-in-Lending Act by the Home Ownership and Equity
Protection Act of 1994, if such mortgage loans
o were originated on or after October 1, 1995
o are not mortgage loans made to finance the
purchase of the mortgaged property and
o have interest rates or origination costs in
excess of certain prescribed levels.
We refer to these mortgage loans as "high cost
loans." The seller generally does not possess
sufficient information regarding the origination
costs of the mortgage loans to determine whether such
mortgage loans would be high cost loans. However,
based upon a review of the mortgage rates,
origination dates and loan purposes with respect to
the mortgage loans, the seller believes that the
mortgage loans include some high cost loans.
The act provides that any purchaser or assignee of a
high cost loan is subject to all of the claims and
defenses which the borrower could assert against the
original lender. The maximum damages that may be
recovered under the act from an assignee is the
remaining amount of indebtedness plus the total
amount paid by the borrower in connection with the
high cost loan.
S-23
In addition, with respect to approximately 3.53% of
the mortgage loans, by cut-off date principal
balance, part of the proceeds from such mortgage
loans were used to finance certain life insurance
policies which we refer to as "credit life
insurance." Such credit life insurance policies
provide that, upon the death of the borrower, an
amount generally sufficient to fully repay the
mortgage loan shall be payable by the insurer. Credit
life insurance premiums are financed by adding the
total premium payments payable under the policy to
the principal balance of the related mortgage loan.
In the event of a claim under the credit life
insurance policy, the insurer would pay applicable
proceeds to the master servicer. However, credit life
insurance policies have been challenged by borrowers
as being unlawfully predatory and a violation of
federal law.
The trust could be subject to all of the claims and
defenses which the borrower could assert against the
originator. Remedies available to the borrower
include monetary penalties, as well as rescission
rights if the appropriate disclosures were not given
as required. Any violation of the Home Ownership and
Equity Protection Act of 1994, as amended, which
would result in this type of liability would be a
breach of the seller's representations and warranties
and the seller would be obligated to cure or
repurchase (or in certain instances substitute for)
the mortgage loan in question, which could accelerate
the timing of principal distributions and may thereby
affect the yields and weighted average lives of the
certificates. If the seller fails to cure, repurchase
or substitute for the applicable mortgage loan, you
may suffer a loss.
The mortgage loans are also subject to other federal
and state laws. We refer you to "Material Legal
Aspects of Loans" in the prospectus for a discussion
of certain of those laws.
A reduction in
certificate rating
could have an adverse
effect on the value of
your certificates The ratings of each class of offered certificates
will depend primarily on an assessment by the rating
agencies of the mortgage loans, the amount of
overcollateralization and the subordination afforded
by certain classes of certificates. The ratings by
each of the rating agencies of the offered
certificates are not recommendations to purchase,
hold or sell the offered certificates because such
ratings do not address the market prices of the
certificates or suitability for a particular
investor.
S-24
The rating agencies may suspend, reduce or withdraw
the ratings on the offered certificates at any time.
Any reduction in, or suspension or withdrawal of, the
rating assigned to a class of offered certificates
would probably reduce the market value of such class
of offered certificates and may affect your ability
to sell them.
Your distributions
could be adversely
affected by the
bankruptcy or
insolvency of certain
parties The seller will treat its transfer of the mortgage
loans to the depositor as a sale of the mortgage
loans. However, if the seller becomes bankrupt, the
trustee in bankruptcy may argue that the mortgage
loans were not sold but were only pledged to secure a
loan to the seller. If that argument is made, you
could experience delays or reductions in payments on
the certificates. If that argument is successful, the
bankruptcy trustee could elect to sell the mortgage
loans and pay down the certificates early. Thus, you
could lose the right to future payments of interest,
and might suffer reinvestment loss in a lower
interest rate environment.
In addition, if the master servicer becomes bankrupt,
a bankruptcy trustee or receiver may have the power
to prevent the appointment of a successor master
servicer. Any related delays in servicing could
result in increased delinquencies or losses on the
mortgage loans.
Developments in
specified states could
have a disproportionate
effect on the mortgage
loans due to geographic
concentration of
mortgaged properties Approximately 14.46%, 7.34%, 6.41%, 5.19% and 6.17%,
of the mortgage loans as of the cut-off date are
secured by mortgaged properties that are located in
the states of California, Florida, Georgia, North
Carolina and Ohio, respectively. Property in certain
of those states, including California and Florida,
may be more susceptible than homes located in other
parts of the country to certain types of uninsurable
hazards, such as earthquakes, floods, mudslides and
other natural disasters. In addition,
o economic conditions in the specified states,
which may or may not affect real property
values, may affect the ability of borrowers
to repay their loans on time;
S-25
o declines in the residential real estate
market in the specified states may reduce
the values of properties located in those
states, which would result in an increase in
the loan-to-value ratios; and
o any increase in the market value of
properties located in the specified states
would reduce the loan-to-value ratios and
could, therefore, make alternative sources
of financing available to the borrowers at
lower interest rates, which could result in
an increased rate of prepayment of the
mortgage loans.
The return on your
certificates may be
affected by the
revised servicing
procedures that have
been adopted in
response to the
terrorist attacks on
September 11, 2001 In response to the terrorist attacks on September 11,
2001 in New York City and Arlington, Virginia, EMC
has announced that it will implement revised
servicing procedures for mortgagors who have been
personally or financially affected by such attacks.
Certain government agencies, government sponsored
entities and private financial institutions have
implemented similar procedures.
The revised servicing procedures implemented by EMC
include:
o Increased use of repayment plans that will
seek to cure delinquencies without imposing
undue hardship on the affected mortgagor;
o Extending due dates for payments;
o Waiving or reducing late payment fees or
similar fees;
S-26
o Waiving deficiency balances for victims of
the terrorist attacks; and
o Suspending the submission of reports to
credit bureaus for affected mortgagors that
have delinquent mortgage loans.
We do not know at this time how many of the
mortgagors of the mortgage loans may have been
affected by the terrorist attacks. However, as a
result of the terrorist attacks and the revised
servicing procedures that have been implemented, the
rate of delinquencies and losses on mortgage loans
made to affected mortgagors may be larger than would
otherwise be the case.
The return on your
certificates could be
reduced by shortfalls
due to the Soldiers'
and Sailors' Civil
Relief Act The Soldiers' and Sailors' Civil Relief Act of 1940,
or Relief Act, provides relief to mortgagors who
enter active military service and to mortgagors in
reserve status who are called to active duty after
the origination of their mortgage loans. The response
of the United States to the terrorist attacks on
September 11, 2001 has included rescue efforts and
military operations that will increase the number of
citizens who are in active military service,
including persons in reserve status who have been
called or will be called to active duty. The Relief
Act provides, generally, that a mortgagor who is
covered by the Relief Act may not be charged interest
on the related mortgage loan in excess of 6% per
annum during the period of the mortgagor's active
duty. These shortfalls are not required to be paid by
the mortgagor at any future time. The master servicer
is not required to advance these shortfalls as
delinquent payments, and such shortfalls are not
covered by any form of credit enhancement on the
certificates. Interest shortfalls on the mortgage
loans due to the application of the Relief Act or
similar legislation or regulations will be applied to
reduce accrued interest on each class of the
certificates on a pro rata basis.
S-27
The Relief Act also limits the ability of the master
servicer to foreclose on the property securing a
mortgage loan during the related mortgagor's period
of active duty and, in some cases, may require the
servicer to extend the maturity of the mortgage loan,
lower the monthly payments and readjust the payment
schedule for a period of time after the completion of
the mortgagor's military service. As a result, there
may be delays in payment and increased losses on the
mortgage loans. Those delays and increased losses
will be borne first by the Class B, Class M-2 and
Class M-1 certificates, in that order, and then by
the senior certificates other than the Class A-IO
Certificates. In addition, the interest rate caps may
be affected as a result of lowered interest payments
due to the application of the Relief Act.
We do not know how many mortgage loans have been or
may be affected by the application of the Relief Act.
You may have
difficulty selling
your certificates The underwriters intend to make a secondary market in
the offered certificates, but the underwriters have
no obligation to do so. We cannot assure you that 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, and such fluctuations may be significant
and could result in significant losses to you.
The secondary markets for asset 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
certificates that are especially sensitive to
prepayment, credit or interest rate risk, or that
have been structured to meet the investment
requirements of limited categories of investors.
S-28
THE MORTGAGE POOL
General
We have provided below and in Schedule A to this prospectus supplement
information with respect to the conventional mortgage loans that we expect to
include in the pool of mortgage loans in the trust fund. Prior to the closing
date of November 30, 2001, we may remove mortgage loans from the mortgage pool
and we may substitute other mortgage loans for the mortgage loans we remove. The
depositor believes that the information set forth herein with respect to the
mortgage pool as presently constituted is representative of the characteristics
of the mortgage pool as it will be constituted at the closing date, although
certain characteristics of the mortgage loans in the mortgage pool may vary.
Unless we have otherwise indicated, the information we present below and in
Schedule A is expressed as of the cut-off date of November 1, 2001.
The mortgage loans to be transferred by the depositor to the trust fund
on the closing date will consist of 2,702 mortgage loans with a stated principal
balance as of the cut-off date of approximately $181,934,777.
Each mortgage loan in the trust fund will bear interest at a fixed or
adjustable rate and will be secured by a first or second lien on the related
mortgaged property. Approximately 81.21% by cut-off date principal balance of
the mortgage loans provide for monthly payments sufficient to amortize such
mortgage loans by their stated maturity. The remaining mortgage loans provide
for a balloon payment at maturity. All of the mortgage loans provide for
payments due as of a specified due date in each month. These due dates occur
throughout the month.
The Seller purchased substantially all of the mortgage loans that were
originated or purchased by United Companies through the exercise of clean-up
calls applicable to certain pass-through certificate offerings, and acquired the
remaining mortgage loans directly in privately negotiated transactions,
primarily with First Union National Bank (referred to herein as "First Union").
We refer you to "Servicing of the Mortgage Loans" and "--Underwriting
Guidelines" for further information regarding the mortgage loans.
Except with respect to simple interest loans, scheduled monthly
payments made by the mortgagors on the mortgage loans either earlier or later
than the scheduled due dates thereof will not affect the amortization schedule
or the relative application of such payments to principal and interest. The
mortgage notes generally provide for a grace period for monthly payments. Any
mortgage loan may be prepaid in full or in part at any time, in some cases upon
the payment of a prepayment charge during an initial period. Prepayment charges
typically discourage prepayments during the applicable period. Approximately
52.66% of the mortgage loans, by cut-off date principal balance, imposed such a
prepayment charge at origination. Due to the seasoning of these mortgage loans,
the related prepayment charge periods have expired with respect to approximately
39.73% of these mortgage loans.
S-29
Approximately 328 of the mortgage loans, with a cut-off date principal
balance of approximately $12,457,264, are simple interest loans. "Simple
interest loans" accrue interest on their outstanding principal balances on a
daily basis, and their scheduled principal balance reflects actual principal
payments, as opposed to the principal owed, as of a particular date. As a
result, the scheduled principal balance of simple interest loans will not be
reduced if any installment of principal due has not been paid. Each monthly
payment with respect to a simple interest loan is applied first to interest
accrued to the date of payment and then to a reduction of the principal balance
of that loan.
One of the mortgage loans has a stated principal balance as of the
cut-off date of approximately $4,096,772, representing approximately 2.25% of
the mortgage pool. This mortgage loan had an original principal balance of
$5,000,000 when it was originated on July 31, 1998 as a refinancing and is
secured by a mortgaged property in Georgia that consists of several tracts of
land, including several single-family detached houses, sports facilities and
various out-buildings. This mortgaged property was given a quick sale value of
approximately $6,500,000 in March 2001 by a broker's price opinion obtained by
the seller. A broker's price opinion is a drive-by valuation (the interior of
the property is not inspected) performed by a real estate broker in the
community in which the property is located who is independent of the seller. The
loan-to-value ratio based on such quick sale value as of the cut-off date is
approximately 63%.
Loan-to-Value Ratio. The loan-to-value ratio of a mortgage loan is
equal to
o the principal balance of such mortgage loan at the date of
origination plus the principal balance of any senior mortgage
loan, with respect to a mortgage loan that is not a first lien
mortgage loan, divided by
o the collateral value of the related mortgaged property.
The "collateral value" of a mortgaged property is the lesser of
o the appraised value based on an appraisal made by an
independent fee appraiser at the time of the origination of
the related mortgage loan, and
o the sales price of that mortgaged property at the time of
origination.
With respect to a mortgage loan the proceeds of which were used to
refinance an existing mortgage loan, the collateral value is the appraised value
of the mortgaged property based upon the appraisal obtained at the time of
refinancing. No assurance can be given that the values of the mortgaged
properties have remained or will remain at their levels as of the dates of
origination of the related mortgage loans.
Credit Life Insurance. Approximately 3.53% of the mortgage loans, by
cut-off date principal balance, are loans the proceeds from which were used to
finance certain life insurance policies which we refer to as credit life
insurance. Such credit life insurance policies provide that, upon the death of
the borrower, an amount generally sufficient to fully repay the mortgage loan
shall be payable by the insurer. Credit life insurance premiums are financed by
adding the total premium payments payable under the policy to the principal
balance of the related mortgage loan. In the event of a claim under the credit
life insurance policy, the insurer would pay applicable proceeds to the master
servicer. Credit life insurance policies have been challenged by borrowers as
being unlawfully predatory.
S-30
Credit scores. Many lenders obtain credit scores in connection with
mortgage loan applications to help them assess a borrower's creditworthiness.
They obtain credit scores from credit reports provided by various credit
reporting organizations, each of which may employ differing computer models and
methodologies. The credit score is designed to assess a borrower's credit
history at a single point, using objective information currently on file for the
borrower at a particular credit reporting organization. Information utilized to
create a credit score may include, among other things, payment history,
delinquencies on accounts, level of outstanding indebtedness, length of credit
history, types of credit, and bankruptcy experience. Credit scores range from
approximately 350 to approximately 840, with higher scores indicating an
individual with a more favorable credit history compared to an individual with a
lower score. However, a credit score purports only to be a measurement of the
relative degree of risk a borrower represents to a lender, that is, a borrower
with a higher score is statistically expected to be less likely to default in
payment than a borrower with a lower score. In addition, it should be noted that
credit scores were developed to indicate a level of default probability over a
two-year period, which does not correspond to the life of a mortgage loan.
Furthermore, credit scores were not developed specifically for use in connection
with mortgage loans, but for consumer loans in general, and assess only the
borrower's past credit history. Therefore, a credit score does not take into
consideration the differences between mortgage loans and consumer loans
generally or the specific characteristics of the related mortgage loan
including, for example, the loan-to-value ratio, the collateral for the mortgage
loan, or the debt to income ratio. We cannot assure you that the credit scores
of the mortgagors will be an accurate predictor of the likelihood of repayment
of the related mortgage loans.
Adjustable Rate Mortgage Loans
Approximately 51.06% of the mortgage loans are adjustable rate mortgage
loans evidenced by a note bearing interest at a mortgage rate which is adjusted
monthly, semiannually or annually to equal an index plus (or minus) a fixed
percentage set forth in or computed in accordance with the related mortgage
note, the sum of which is generally as specified in the related mortgage note,
subject, however, to certain limitations described below. The value of the index
on which each adjustment is based (as specified in the related mortgage note)
generally corresponds to that available on the date on which such adjustment is
made, which we refer to as, an "interest adjustment date") or, on a prior date.
If the applicable index described therein becomes unavailable, generally an
alternative index based on comparable information will become the index.
With respect to a substantial portion of the adjustable rate mortgage
loans, adjustments of the applicable mortgage rate are subject to rounding and
to a maximum mortgage rate and with respect to a substantial number of the
mortgage loans, the adjustments of the mortgage rates are subject to a minimum
mortgage rate and, with respect to a majority of the adjustable rate mortgage
loans, adjustments of the mortgage rates are subject to maximum limitations
applicable to increases or decreases of the mortgage rate on an interest
adjustment date, all as set forth in the related mortgage note. A majority of
the adjustable rate mortgage loans are assumable upon sale or transfer of the
related mortgaged property.
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Indices on the Adjustable Rate Mortgage Loans.
The principal indices with respect to the adjustable rate mortgage
loans are six-month LIBOR with respect to 84.38% of the cut-off date principal
balance of the adjustable rate mortgage loans and one-year CMT with respect to
14.27% of the cut-off date principal balance of the adjustable rate mortgage
loans.
6-Month LIBOR. This index is the London interbank offered rate
("LIBOR") for U.S. dollar deposits having a maturity of six months ("6-month
LIBOR"). The following tables show approximate historical values for 6-Month
LIBOR as reported by Bloomberg on the first business day of each month since
January 1996:
6-Month LIBOR
-------------
Month 1996 1997 1998 1999 2000 2001
- --------------------------------------------------------------------------------
January 5.27% 5.69% 5.63% 4.97% 6.29% 5.26%
February 5.30 5.69 5.70 5.13 6.33 4.91
March 5.50 5.94 5.75 5.06 6.53 4.71
April 5.56 6.00 5.81 5.04 6.73 4.30
May 5.63 6.00 5.75 5.25 7.11 3.98
June 5.79 5.91 5.78 5.65 7.00 3.91
July 5.88 5.80 5.75 5.71 6.89 3.69
August 5.77 5.84 5.59 5.92 6.83 3.45
September 5.73 5.84 5.25 5.96 6.76 2.52
October 5.57 5.79 4.98 6.12 6.72 2.15
November 5.54 5.91 5.15 6.06 6.64 --
December 5.60 5.84 5.07 6.13 6.20 --
1-Year CMT. This index is the weekly average yield on U.S. Treasury
securities, adjusted to a constant maturity of one year ("1-Year CMT"). Yields
on U.S. Treasury securities are estimated from the U.S. Treasury's daily yield
curve. This curve, which relates the yield on a security to its time to
maturity, is based on the closing market bid yields on actively-traded U.S.
Treasury securities in the over-the-counter market. These market yields are
calculated from composites of quotations reported by five leading U.S. Treasury
securities dealers to the Federal Reserve Bank of New York. The constant yield
values are read from the yield curve at fixed maturities. This method permits,
for example, estimations of the yield for one-year maturity even if no
outstanding security has exactly one year remaining to maturity. Such yields of
different U.S. Treasury securities are generally published in Federal Reserve
Statistical Release No. H.15 (519).
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Listed below are some of the approximate historical values of 1-Year
CMT since January 1996:
1-Year CMT
----------
Month 1996 1997 1998 1999 2000 2001
- --------------------------------------------------------------------------------
January 5.45% 5.44% 5.44% 4.52% 5.50% 6.14%
February 5.35 5.46 5.53 4.49 5.69 5.78
March 5.17 5.61 5.25 4.55 6.12 4.79
April 4.85 5.53 5.28 4.67 6.20 4.72
May 5.15 5.72 5.37 4.77 6.18 4.47
June 5.62 5.99 5.39 4.67 6.14 4.07
July 5.67 5.90 5.46 4.79 6.38 3.76
August 5.67 5.72 5.42 5.12 6.23 3.53
September 5.90 5.54 5.36 5.01 6.09 3.62
October 5.60 5.55 5.23 5.23 6.17 3.50
November 5.88 5.59 4.76 5.28 6.20 3.02
December 5.57 5.45 4.18 5.34 5.98 --
- ----------
* Figures are averages of daily rates and do not necessarily
correspond to 1-Year CMT values determined as provided in any
related notes.
Mortgage Loan Statistical Data
Schedule A to this prospectus supplement sets forth in tabular format
certain information, as of the cut-off date, about the mortgage loans. Other
than with respect to rates of interest, percentages are approximate and are
stated by cut-off date principal balance of the mortgage loans. The sum of the
respective columns may not equal the total indicated due to rounding.
Assignment of the Mortgage Loans; Repurchase
At the time of issuance of the certificates, the depositor will cause
the mortgage loans, together with all principal and interest due with respect to
such mortgage loans after the cut-off date to be sold to the trust. The mortgage
loans will be identified in a schedule appearing as an exhibit to the pooling
and servicing agreement. Such schedule will include information as to the
principal balance of each mortgage loan as of the cut-off date, as well as
information including, among other things, the mortgage rate, the borrower's
monthly payment and the maturity date of each mortgage note.
In addition, subject to the provisions of the pooling and servicing
agreement, the depositor will deposit with the trustee the following documents
with respect to each mortgage loan:
(a) the original mortgage note, endorsed without recourse
in the following form: "Pay to the order of LaSalle Bank National
Association, as trustee for certificateholders of Bear Stearns Asset
Backed Securities, Inc., Asset-Backed Certificates, Series 2001-3
without recourse," and showing to the extent available, all intervening
endorsements that show a complete chain of endorsement from the
originator to the seller or, if the original mortgage note is
unavailable to the depositor, a photocopy thereof, if available,
together with a lost note affidavit;
S-33
(b) the original recorded mortgage or a photocopy
thereof;
(c) a duly executed assignment of the mortgage to
"LaSalle Bank National Association, as trustee for certificateholders
of Bear Stearns Asset Backed Securities, Inc., Asset-Backed
Certificates, Series 2001-3, without recourse" in recordable form, as
described in the pooling and servicing agreement;
(d) all interim recorded assignments of such mortgage, if
any and if available to the depositor;
(e) the original or duplicate original lender's title
policy or, in the event such original title policy has not been
received from the insurer, such original or duplicate original lender's
title policy shall be delivered within one year of the closing date or,
in the event such original lender's title policy is unavailable, a
photocopy of such title policy or, in lieu thereof, a current lien
search on the related property; and
(f) the original or a copy of all available assumptions,
modification or substitution agreements, if any.
Assignments of the mortgage loans provided to the trustee will be
recorded in the appropriate public office for real property records, except in
states as to which an opinion of counsel is delivered to the effect that such
recording is not required to protect the trust's interests in the mortgage loan
against the claim of any subsequent transferee or any successor to or creditor
of the depositor or the seller, or as to which the rating agencies advise that
the omission to record therein will not affect their ratings of the offered
certificates.
The trustee will perform a limited review of the mortgage loan
documents on or prior to the closing date or in the case of any document
permitted to be delivered after the closing date, promptly after the trustee's
receipt of such documents and will hold such documents in trust for the benefit
of the holders of the certificates.
In addition, the seller will make certain representations and
warranties concerning the mortgage loans in the pooling and servicing agreement
as of the cut-off date. The depositor will file the pooling and servicing
agreement containing such representations and warranties with the Securities and
Exchange Commission in a report on Form 8-K.
S-34
After the closing date, if any document is found to be missing or
defective in any material respect, or if a representation or warranty with
respect to any mortgage loan is breached and such breach materially and
adversely affects the interests of the holders of the certificates in such
mortgage loan, the party discovering such breach is required to notify the
seller and the trustee, in writing. If the seller cannot or does not cure such
omission, defect or breach within 90 days of its receipt of such notice, the
seller is required to repurchase the related mortgage loan from the trust fund
at a price equal to 100% of the stated principal balance thereof as of the date
of repurchase plus accrued and unpaid interest thereon at the mortgage rate to
the first day of the month following the month of repurchase. Rather than
repurchase the mortgage loan as provided above, the seller may remove such
mortgage loan from the trust fund and substitute in its place another mortgage
loan of like characteristics; however, such substitution is only permitted
within two years after the closing date.
With respect to any repurchase or substitution of a mortgage loan that
is not in default or as to which a default is not imminent, the trustee must
have received a satisfactory opinion of counsel that such repurchase or
substitution will not cause the trust fund to lose the status of its REMIC
elections or otherwise subject the trust to a prohibited transaction tax. The
obligation to cure, repurchase or substitute as described above constitutes the
sole remedy available to the certificateholders, the trustee or the depositor
for omission of, or a material defect in, a mortgage loan document or for a
breach of representation or warranty by the seller with respect to a mortgage
loan.
Underwriting Guidelines
The mortgage loans were originated pursuant to underwriting standards
of various originators. Approximately 41.08% of the mortgage loans were
originated by United Companies and approximately 30.93% were originated by First
Union and subsequently acquired by EMC. The remaining mortgage loans were
originated at varying times, by many different originators, a number of which
may no longer be in existence.
United Companies
Set forth below is a description of the underwriting procedures
generally applied by United Companies.
The underwriting guidelines are primarily intended to evaluate the
value and adequacy of the mortgaged property as collateral and are also intended
to consider the mortgagor's credit standing and repayment ability. On a
case-by-case basis, the related originator may determine that, based upon
compensating factors, a prospective mortgagor not strictly qualifying under the
underwriting guidelines warrants an underwriting exception. Compensating factors
may include, but are not limited to, low loan-to-value ratio, low debt-to-income
ratio, good credit history, stable employment, pride of ownership and time in
residence at the applicant's current address. It is expected that a substantial
number of the mortgage loans will represent such underwriting exceptions.
The underwriting guidelines are less restrictive than the standards
generally acceptable to Fannie Mae and Freddie Mac with regard to the
mortgagor's credit standing and repayment ability. Mortgagors who qualify under
the underwriting guidelines, or under an underwriting exception thereto,
generally have payment histories and debt ratios which would not satisfy Fannie
Mae and Freddie Mac underwriting guidelines and may have a record of major
derogatory credit items such as outstanding judgments or prior bankruptcies. The
underwriting guidelines establish the maximum permitted loan-to-value ratio for
each loan type based upon these and other risk factors.
S-35
The underwriting guidelines are applied in accordance with a procedure
which complies with applicable federal and state laws and regulations and
requires (x) an appraisal of the mortgaged property (which conforms to Freddie
Mac and Fannie Mae standards generally) by qualified independent appraisers who
are approved by the related originator and (y) a review of such appraisal, which
review may be conducted by the related originator's staff appraiser or
representative and, depending upon the original principal balance and
loan-to-value ratio of the mortgaged property, may include a desk review of the
original appraisal or a drive-by review appraisal of the mortgaged property.
Generally, the maximum loan-to-value ratio is 85% for a loan with a
second mortgage on the property. With respect to rural properties, the maximum
loan-to-value ratio, utilizing only up to ten acres and the improvements
thereon, is 80%. The maximum loan-to-value ratio generally applicable to
non-owner occupied homes and owner occupied manufactured/mobile homes with land
is generally 80%.
Under the underwriting guidelines, the related originator reviews and
verifies the loan applicant's sources of income, calculates the amount of income
from all such sources indicated on the loan application, reviews the credit
history of the applicant, calculates the debt-to-income ratio to determine the
applicant's ability to repay the loan and reviews the mortgaged property for
compliance with the underwriting guidelines. Verification of personal financial
information for each applicant is required. The applicant's total monthly
obligations -- including principal and interest on each mortgage, tax
assessments, other loans, charge accounts and all scheduled indebtedness,
generally should not exceed 50% of a borrower's gross monthly income. In the
case of adjustable rate home equity loans, the debt ratio calculation is based
upon the principal and interest payment amount utilizing the maximum rate on the
second change date. Generally, the borrowers are required to have two years of
employment with their current employer or two years of like experience.
Applicants who are salaried employees must provide current employment
information in addition to recent employment history. Originators verify this
information for salaried borrowers based on written confirmation from employers,
or a combination of a telephone confirmation from the employer and the most
recent pay stub and the most recent W-2 tax form. A self-employed applicant is
generally required to provide copies of complete federal income tax returns,
including schedules, filed for the most recent two years.
A credit report by an independent, nationally recognized credit
reporting agency reflecting the applicant's credit history is required. The
credit report should reflect all delinquencies of 30 days or more,
repossessions, judgments, foreclosures, garnishments, bankruptcies and similar
instances of adverse credit that can be discovered by a search of public
records. Verification is required to be obtained of the first mortgage balance,
if any, its status and whether local taxes, interest, insurance and assessments
are included in the applicant's monthly payment. All taxes and assessments not
included in the payment are required to be verified as current. A borrower's
mortgage payment history generally should reflect no more than three payments
over 30 days delinquent in the last twelve months; however, in some cases, a
borrower is permitted to have more payments over 30 days delinquent in the last
twelve months. Credit analysis is subjective and subject to interpretation in
the underwriting process.
S-36
The borrower is required to obtain property insurance in an amount
sufficient to cover in the case of a first mortgage the new loan and in the case
of a fixed rate second mortgage, the new loan and any prior mortgage. If the sum
of an outstanding first mortgage, if any, and the fixed rate home equity loan
exceeds the lesser of replacement or insurable value, insurance equal to the
lesser of replacement or insurable value may be accepted. The originator
requires that its name and address are properly added to the "mortgagee clause"
of the insurance policy. In the event the originator's name is added to a "loss
payee clause" and the policy does not provide for written notice of policy
changes or cancellation, an endorsement adding such provision is required. The
borrower is required to obtain flood insurance to the extent such insurance is
available under the Flood Disaster Protection Act of 1973, as amended. The
underwriting guidelines also require that fire and extended coverage casualty
insurance be maintained on the secured property in an amount at least equal to
the principal balance of the related mortgage loan or the replacement cost of
the mortgaged property, whichever is less.
Under the underwriting guidelines, various risk categories are used to
grade the likelihood that the mortgagor will satisfy the repayment conditions of
the mortgage loan. These risk categories establish the maximum permitted
loan-to-value ratio and loan amount, given the occupancy status of the mortgaged
property and the mortgagor's credit history and debt ratio. In general, higher
credit risk mortgage loans are graded in categories which permit higher debt
ratios and more, or more recent, major derogatory credit items such as
outstanding judgments or prior bankruptcies; however, the underwriting
guidelines establish lower maximum loan-to-value ratios and maximum loan amounts
for loans graded in such categories.
First Union
Approximately 30.93% of the mortgage loans were originated or acquired
by First Union National Bank, Inc. ("First Union") and were acquired by the
seller in a privately negotiated transaction. First Union is a subsidiary of
First Union Corporation, which is headquartered in Charlotte, North Carolina,
and is the nation's sixth largest domestic banking company based on assets of
approximately $258 billion at June 30, 2000. These mortgage loans were intended
to be originated pursuant to underwriting guidelines that are generally
acceptable in the subprime mortgage industry; however, these mortgage loans
generally fall outside of the intended guidelines for a variety of reasons
including, among other things, borrower delinquencies, high loan-to-value ratios
and high debt-to-income ratios.
SERVICING OF THE MORTGAGE LOANS
General
EMC Mortgage Corporation, which we refer to in this section as "EMC,"
will act as master servicer of the mortgage loans and will be primarily
responsible for the servicing of the mortgage loans pursuant to the pooling and
servicing agreement. In the event of default by EMC as master servicer under
pooling and servicing agreement, the trustee will be obligated to replace EMC as
master servicer or to appoint another successor master servicer.
S-37
The Master Servicer
EMC is a Delaware corporation having its principal executive office at
909 Hidden Ridge Drive, Irving, Texas 75038 and is a wholly-owned subsidiary of
The Bear Stearns Companies Inc. EMC was established as a full-line mortgage
banking company to facilitate the purchase and servicing of whole loan
portfolios containing various levels of quality from "investment grade" to
varying degrees of "non-investment grade" up to and including mortgaged
properties acquired through foreclosure or deed-in-lieu of foreclosure (each
such mortgaged property). EMC was incorporated in the State of Delaware on
September 26, 1990 and commenced operation in Texas on October 9, 1990.
The principal business of EMC has been the resolution of non-performing
residential mortgage loan portfolios acquired from Resolution Trust Corporation,
from private investors and from the Department of Housing and Urban Development
through its auctions of defaulted Federal Housing Authority mortgage loans.
EMC's servicing portfolio consists primarily of two categories:
o performing investment-quality loans serviced for EMC's own
account or the account of Fannie Mae, Freddie Mac, private
mortgage conduits and various institutional investors; and
o non-investment grade, sub-performing loans, non-performing
loans and REO properties serviced for EMC's own account and
for the account of investors in securitized performing and
non-performing collateral transactions.
EMC's operations resemble those of most mortgage banking companies,
except that significant emphasis is placed on the collection and due diligence
areas, due to the nature of the mortgage portfolios purchased. As of August 31,
2001, EMC was servicing approximately $6.88 billion of mortgage loans and REO
property.
Delinquency and Foreclosure Experience of EMC
The following table sets forth the delinquency and foreclosure
experience of mortgage loans serviced by EMC as of the dates indicated. EMC's
portfolio of mortgage loans may differ significantly from the mortgage loans
backing the certificates in terms of interest 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
backing the certificates 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 borrowers to make
required payments.
S-38
Delinquency and Foreclosure Experience(1)
As of June 30, 2000 As of June 30, 2001
------------------------------------- -------------------------------------
% by % by
No. of Principal Principal No. of Principal Principal
Loans Balance (2) Balance Loans Balance(2) Balance
------ -------------- --------- ------- -------------- ---------
Current loans................... 40,957 $2,773,375,021 69.53% 79,311 $4,223,226,737 61.84%
Period of delinquency(3)
30-59 days................ 5,116 335,858,515 8.42 14,471 754,951,472 11.05
60-89 days................ 1,763 124,260,172 3.12 4,464 238,807,252 3.50
90 days or more........... 2,490 175,071,236 4.39 8,791 408,757,577 5.99
Foreclosure/
bankruptcies(4)............. 6,784 498,486,846 12.50 16,623 975,126,313 14.28
Real estate owned............... 1,045 81,915,418 2.05 3,986 228,805,987 3.35
------ -------------- ------ ------- -------------- ------
Total portfolio................. 58,155 $3,988,967,208 100.00% 127,646 $6,829,675,336 100.00%
====== ============== ====== ======= ============== ======
As of August 31, 2001
-------------------------------------
% by
No. of Principal Principal
Loans Balance (2) Balance
------- -------------- ---------
Current loans.................. 78,062 $4,165,872,298 60.54%
Period of delinquency(3)
30-59 days............... 13,595 725,545,570 10.54
60-89 days............... 4,349 239,786,924 3.48
90 days or more.......... 9,865 490,146 198 7.12
Foreclosure/
bankruptcies(4)............ 17,211 1,022,511,004 14.86
Real estate owned.............. 4,041 236,840,115 3.44
------- -------------- ------
Total portfolio................ 127,123 $6,880,702,109 100.00%
======= ============== ======
- ----------
(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 REO properties, the principal balance is at the time of
foreclosure.
(3) No mortgage loan is included in this table as delinquent until it is 30
days past due.
(4) Exclusive of the number of loans and principal balance shown in the
period of delinquency.
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Since the mortgage loans were originated by various originators at
different times, it is unlikely that the delinquency and foreclosure experience
set forth above will be representative of the actual delinquency and foreclosure
experience on the mortgage loans in the trust fund. In addition, a variety of
factors, including the appreciation of real estate values, historically have
limited the loss and delinquency experience on subprime mortgage loans. There
can be no assurance that factors beyond EMC's control, such as national or local
economic conditions or downturn in the real estate markets in which the
mortgaged properties are located, will not result in increased rates of
delinquencies and foreclosure losses in the future.
Collection and Other Servicing Procedures
The master servicer will use its reasonable efforts to ensure that all
payments required under the terms and provisions of the mortgage loans are
collected. The master servicer will follow collection procedures comparable to
the collection procedures of prudent mortgage lenders servicing mortgage loans
for their own account, to the extent such procedures are consistent with the
pooling and servicing agreement. Consistent with the foregoing, the master
servicer may in its discretion (1) waive or permit to be waived any late payment
or prepayment charge, assumption fee or any penalty interest in connection with
the prepayment of a mortgage loan and (2) suspend or temporarily reduce or
permit to be suspended or temporarily reduced regular monthly payments for a
period of up to six months or arrange or permit an arrangement with a borrower
for a schedule for the liquidation of delinquencies, if, in the good faith
judgment of the master servicer, that action would minimize the loss that might
otherwise be experienced with respect to a mortgage loan, or in the event that a
payment default with respect to a mortgage loan is reasonably foreseeable by the
master servicer. The master servicer may not, however, modify any mortgage loan
to extend its scheduled maturity date beyond the distribution date in October
2032, which is the last scheduled distribution date for any class of
certificates. In the event the master servicer consents to the deferment of due
dates for payments due on a mortgage note, the master servicer shall nonetheless
continue to make advances through liquidation of the mortgaged property as
described in this prospectus supplement to the same extent as if such
installment were due, owing and delinquent and had not been deferred, but the
obligation of the master servicer to advance shall apply only to the extent that
the master servicer believes, in good faith, that such advances are recoverable
from future payments on any mortgage loan.
In addition, if a material default occurs or a payment default is
reasonably foreseeable with respect to a mortgage loan, the master servicer may,
subject to any specific limitations set forth in the pooling and servicing
agreement, modify, waive or amend, or permit to be modified, waived or amended,
any term of that mortgage loan, including deferring payments, extending the
stated maturity date or otherwise adjusting the payment schedule, provided that
that modification, waiver or amendment would not result in a REMIC violation.
S-40
If a mortgagor has conveyed or is about to convey a mortgaged property
and the master servicer has knowledge of such conveyance, the master servicer
will accelerate the maturity of the mortgage loan to the extent permitted by the
terms of the related mortgage note and applicable law. If the master servicer
reasonably believes that the due-on-sale clause is unenforceable under
applicable law, the master servicer may enter into an assumption agreement with
the person to whom such property has been or is about to be conveyed. Pursuant
to the assumption agreement such person becomes liable under the mortgage note.
In addition, the mortgagor , to the extent permitted by applicable law, also
will remain liable under the mortgage note. The master servicer will retain any
fee collected for entering into an assumption agreement, as additional servicing
compensation. In regard to circumstances in which the master servicer may be
unable to enforce due-on-sale clauses, we refer you to "Material Legal Aspects
of the Loans--Due-on-Sale Clauses in Mortgage Loans" in the prospectus. In
connection with any such assumption, the interest rate borne by the related
mortgage note may not be changed. No person may assume a mortgage loan unless
coverage under any existing primary mortgage insurance policy continues as to
that mortgage loan after such assumption.
The master servicer will establish and maintain, in addition to the
protected accounts described below under "--Protected Accounts," one or more
accounts - each, a "servicing account" in a depository institution the deposits
of which are insured by the Federal Deposit Insurance Corporation ("FDIC"), to
the maximum extent permitted by law or such other account as may be acceptable
to the rating agencies. The master servicer will deposit and retain in the
servicing account all collections from the mortgagors for the payment of taxes,
assessments, insurance premiums, or comparable items as agent of the mortgagors
and in trust as provided in the pooling and servicing agreement. Each servicing
account and the investment of deposits therein shall comply with the
requirements of the Pooling and Servicing Agreement and the rating agencies for
the maintenance of the ratings on the certificates. Withdrawals of amounts from
the servicing accounts may be made only to effect timely payment of taxes,
assessments, insurance premiums, or comparable items, to reimburse the master
servicer for any advances made with respect to such items, to refund to any
mortgagors any sums as may be determined to be overages, to pay interest, if
required, to mortgagors on balances in the servicing accounts, to pay earnings
not required to be paid to mortgagors to the master servicer or to clear and
terminate the servicing accounts at or at any time after the termination of the
pooling and servicing agreement.
For each mortgage loan which as of the cut-off date was covered by a
primary mortgage insurance policy, the master servicer will maintain and keep,
or cause to be maintained and kept, with respect to each such mortgage loan, in
full force and effect a primary mortgage insurance policy with respect to the
portion of each such mortgage loan, if any, in excess at origination of the
percentage of value set forth in the pooling and servicing agreement, at least
until such excess has been eliminated. Pursuant to applicable law, the master
servicer may be required to permit the primary mortgage insurance policy to be
terminated if the ratio of the then outstanding principal balance of the
mortgage loan to the value of the mortgaged property declines below a prescribed
percentage.
The master servicer will maintain errors and omissions insurance and
fidelity bonds in certain specified amounts.
Pursuant to the pooling and servicing agreement, the master servicer
may enter into subservicing agreements with subservicers for the servicing and
administration of the mortgage loans subject, however, to the prior approval of
such subservicers by the rating agencies.
S-41
Hazard Insurance
The master servicer will maintain and keep, or cause to be maintained
and kept, with respect to each mortgage loan, in full force and effect for each
mortgaged property a hazard insurance policy with extended coverage customary in
the area where the mortgaged property is located in an amount equal, in general,
to at least the lesser of the outstanding principal balance of the mortgage loan
or the maximum insurable value of the improvements securing such mortgage loan
and containing a standard mortgagee clause; but no less than the amount
necessary to prevent loss due to the application of any co-insurance provision
of the related policy. Any amounts collected by the master servicer under any
such hazard insurance policy, other than amounts to be applied to the
restoration or repair of the mortgaged property or amounts released to the
mortgagor in accordance with normal servicing procedures, shall be deposited in
a protected account. Any cost incurred in maintaining any such hazard insurance
policy shall not be added to the amount owing under the mortgage loan for the
purpose of calculating monthly distributions to certificateholders,
notwithstanding that the terms of the mortgage loan so permit. Such costs shall
be recoverable by the master servicer out of related late payments by the
mortgagor or out of insurance proceeds or liquidation proceeds or any other
amounts in the related protected account. The right of the master servicer to
reimbursement for such costs incurred will be prior to the right of the trustee
to receive any related insurance proceeds or liquidation proceeds or any other
amounts in the related protected account.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property by
fire, lightning, explosion, smoke, windstorm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the mortgage loans will be
underwritten by different insurers and therefore will not contain identical
terms and conditions, the basic terms thereof are dictated by state law. Such
policies typically do not cover any physical damage resulting from the
following: war, revolution, terrorism, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides and mud
flows), nuclear reactions, wet or dry rot, vermin, rodents, insects or domestic
animals, theft and, in certain cases, vandalism and malicious mischief. The
foregoing list is merely indicative of certain kinds of uninsured risks and is
not intended to be all-inclusive.
Hazard insurance policies covering properties similar to the Mortgaged
Properties typically contain a clause which in effect requires the insured at
all times to carry insurance of a specified percentage generally at least 80% of
the full replacement value of the improvements on the property in order to
recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, such clause provides that the insurer's
liability in the event of partial loss does not exceed the greater of (i) the
replacement cost of the improvements less physical depreciation, or (ii) such
proportion of the loss as the amount of insurance carried bears to the specified
percentage of the full replacement cost of such improvements.
Since the amount of hazard insurance to be maintained on the
improvements securing the mortgage loans may decline as the principal balances
owing thereon decrease, and since residential properties have historically
appreciated in value over time, in the event of partial loss, hazard insurance
proceeds may be insufficient to restore fully the damaged property.
S-42
Where the property securing a mortgage loan is located at the time of
origination in a federally designated flood area, the master servicer will cause
with respect to such mortgage loan flood insurance to the extent available and
in accordance with industry practices to be maintained. Such flood insurance
will generally be in an amount equal to the lesser of (i) the outstanding
principal balance of the related mortgage loan, (ii) either (a) the minimum
amount required under the terms of coverage to compensate for any damage or loss
on a replacement cost basis, or (b) the maximum insurable value of the
improvements securing such mortgage loan, and (iii) the maximum amount of such
insurance available for the related mortgaged property under either the regular
or emergency programs of the National Flood Insurance Program, assuming that the
area in which such mortgaged property is located is participating in such
program.
The master servicer, on behalf of the trustee and certificateholders,
will present claims to the insurer under any applicable hazard insurance policy.
As set forth above, all collections under such policies that are not applied to
the restoration or repair of the related mortgaged property or released to the
mortgagor in accordance with normal servicing procedures are to be deposited in
a protected account. The master servicer is required to deposit in a protected
account the amount of any deductible under a blanket hazard insurance policy, if
applicable.
Realization Upon Defaulted Mortgage Loans
The master servicer will take such action either as the master servicer
deems to be in the best interest of the trust, or as is consistent with accepted
servicing practices or in accordance with established practices for other
mortgage loans serviced by the master servicer with respect to defaulted
mortgage loans and foreclose upon or otherwise comparably convert the ownership
of properties securing defaulted mortgage loans as to which no satisfactory
collection arrangements can be made. As provided in the pooling and servicing
agreement, the master servicer will service the property acquired by the trust
through foreclosure or deed-in-lieu of foreclosure in accordance with procedures
that the master servicer employs and exercises in servicing and administering
mortgage loans for its own account and which are in accordance with accepted
mortgage servicing practices of prudent lending institutions and Fannie Mae
guidelines. The master servicer generally will not be required to expend its own
moneys with respect to the restoration or to make servicing advances with
respect to such mortgaged properties unless the master servicer has determined
that (i) such amounts would be recovered, and (ii) it believes such restoration
will increase proceeds to the trust following the mortgaged property's eventual
liquidation.
Since insurance proceeds received in connection with a mortgage loan
cannot exceed deficiency claims and certain expenses incurred by the master
servicer, no insurance payments will result in a recovery to certificateholders
which exceeds the principal balance of the defaulted mortgage loan together with
accrued interest thereon at its applicable net mortgage rate.
S-43
Notwithstanding the foregoing, under the pooling and servicing agreement, the
master servicer may at its option, purchase any mortgage loan which as of the
first day of a calendar quarter is a defaulted mortgage loan, at a price equal
to 100% of the scheduled principal balance of that mortgage loan plus accrued
interest thereon at the applicable mortgage 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 that amount is to be distributed, provided that:
o the mortgage loan must still be delinquent in payment by 91
days or more as of the date of purchase by the master servicer
and
o that this limited purchase option, if not exercised, will
terminate on the last business day of that calendar quarter.
This purchase option, if not exercised, will not be reinstated as to any such
mortgage loan unless the delinquency is cured and the mortgage loan thereafter
again becomes delinquent in payment by 91 days or more. In that event, the
option shall again become exercisable on the first date of the subsequent
calendar quarter.
A "defaulted mortgage loan" is a mortgage loan that is, as of the date
of determination, delinquent in payment by 91 days or more.
Servicing Compensation and Payment of Expenses
EMC will receive a monthly master servicing fee on each distribution
date equal to 0.50% per annum of the stated principal balance of the mortgage
loans as of the beginning of the month immediately preceding the month in which
such distribution date occurs, and will also be entitled to investment earnings
on amounts in the protected accounts as additional master servicing
compensation. Interest shortfalls on the mortgage loans resulting from
prepayments in full or in part in any calendar month will be offset by the
master servicer on the distribution date in the following calendar month to the
extent of compensating interest payments as described herein.
In addition to the primary compensation described above, the master
servicer will retain all prepayment charges and penalties, if any, assumption
fees, tax service fees, fees for statements of account payoff and late payment
charges, all to the extent collected from mortgagors.
The master servicer will pay all related expenses incurred in
connection with its servicing responsibilities, subject to limited reimbursement
as described herein.
Protected Accounts
The master servicer will establish and maintain one or more custodial
accounts, each known as a "protected account," into which it will deposit daily
all collections of principal and interest on any mortgage loan, including
principal prepayments, insurance proceeds, liquidation proceeds, the repurchase
price for any mortgage loans repurchased, and advances made from the master
servicer's own funds (less servicing compensation). All protected accounts shall
be held in an eligible account (as defined in the pooling and servicing
agreement). The amount at any time credited to a protected account may be
invested in permitted investments meeting the requirements of the pooling and
servicing agreement and the rating agencies.
S-44
Prior to each distribution date the master servicer shall withdraw or
shall cause to be withdrawn from the protected accounts and any other permitted
accounts and shall deposit or cause to be deposited in the distribution account
amounts representing the following collections and payments (other than with
respect to principal of or interest on the mortgage loans due on or before the
cut-off date, except for principal on simple interest loans due on or before the
cut-off date but received after the cut-off date):
1. monthly payments on the mortgage loans received or advanced
which were due (or with respect to principal on simple
interest loans, received) on the related due date, net of the
portion of the servicing fees in excess of compensating
interest payments;
2. full or partial principal prepayments, insurance proceeds and
any liquidation proceeds received with respect to such
mortgage loans in the related prepayment period, with interest
to the date of prepayment or liquidation, net of the portion
of the servicing fees in excess of the related compensating
interest payments;
3. any compensating interest payments; and
4. the repurchase price with respect to any mortgage loans
repurchased pursuant to the terms of the pooling and servicing
agreement in the related prepayment period.
5. partial prepayments of principal received for such mortgage
loans in the related prepayment period.
To the extent provided in the pooling and servicing agreement, the
master servicer may withdraw certain amounts due to it directly from the
protected account and not deposit such sums into the distribution account if
such amounts would be only re-distributed by the trustee to the master servicer
on such distribution date.
Distribution Account
The trustee shall establish and maintain a segregated account, known as
the "distribution account," in the name of the trustee for the benefit of the
certificateholders. The trustee will deposit in the distribution account, as
received, the following amounts:
1. any amounts withdrawn from a protected account or other
permitted account;
2. all proceeds of any mortgage loans or REO Property acquired in
connection with the optional termination of the trust;
S-45
3. any amounts required to be deposited with respect to losses on
permitted investments; and
4. any other amounts received by the trustee or the master
servicer and required to be deposited in the distribution
account pursuant to the pooling and servicing agreement.
All amounts deposited to the distribution account shall be held by the
trustee in the name of the trustee in trust for the benefit of the
certificateholders in accordance with the terms and provisions of the pooling
and servicing agreement, subject to the right of the master servicer to require
the trustee to make withdrawals from the distribution account to reimburse it
for certain expenses or advances or to pay it amounts otherwise due to it under
the terms of the pooling and servicing agreement and not previously withdrawn
from a protected account. The amount at any time credited to the distribution
account may be invested in the name of the trustee in such permitted investments
as the trustee may select. The trustee will be entitled to any amounts earned on
permitted investments in the distribution account.
On each distribution date, and prior to any distributions to the
certificateholders, the trustee shall be entitled to pay itself the monthly
trustee fee from funds on deposit in the distribution account in an amount equal
to the product of (i) the trustee fee rate referred to in the pooling and
servicing agreement and (ii) the stated principal balance of the mortgage loans
as of the beginning of the month immediately preceding such distribution date
and to reimburse itself for any expenses and indemnification payable to it
pursuant to the pooling and servicing agreement.
On each Distribution Date, the trustee will withdraw the remaining
funds from the distribution account and make payments to the certificateholders
in accordance with the provisions set forth under "Description of the
Certificates--Distributions."
Prepayment Interest Shortfalls and Compensating Interest
When a borrower prepays all or a portion of a mortgage loan between due
dates, the borrower pays interest on the amount prepaid only to the date of
prepayment accordingly an interest shortfall will result equal to the difference
between the amount of interest collected and the amount of interest that would
have been due absent such prepayment. We refer to this interest shortfall as a
"Prepayment Interest Shortfall." In order to mitigate the effect of any such
shortfall in interest distributions to holders of the offered certificates on
any distribution date, generally, the amount of the servicing fee otherwise
payable to the master servicer for such month shall, to the extent of such
shortfall, be deposited by the master servicer in a protected account for
distribution to the trustee. We refer to such deposited amounts as "Compensating
Interest." Any such deposit by the master servicer will be reflected in the
distributions to holders of the offered certificates entitled thereto made on
the distribution date on which the principal prepayment received would be
distributed.
S-46
Advances
If the scheduled payment on a mortgage loan (including interest but not
principal of simple interest loans) which was due on a related due date is
delinquent other than as a result of application of the Relief Act, the master
servicer will remit to the trustee within the number of days prior to the
related distribution date set forth in the pooling and servicing agreement an
amount equal to such delinquency, net of the related servicing fee rate except
to the extent the master servicer determines any such advance to be
nonrecoverable from Liquidation Proceeds, Insurance Proceeds or from future
payments on the mortgage loan for which such advance was made (such advances are
referred to as "Monthly Advances"). Subject to the foregoing, such Monthly
Advances will be made by the master servicer until the liquidation of the
related mortgaged property. Failure by the master servicer to remit any required
Monthly Advance, which failure goes unremedied for the number of days specified
in the pooling and servicing agreement would constitute an event of default as
discussed herein under "Description of the Certificates--Events of Default".
Evidence as to Compliance
The pooling and servicing agreement will provide that on or before a
specified date in each year, a firm of independent public accountants will
furnish a statement to the trustee to the effect that, on the basis of the
examination by such firm conducted substantially in compliance with the Uniform
Single Attestation Program for Mortgage Bankers or the Audit Program for
Mortgages serviced for Freddie Mac, the servicing by or on behalf of the master
servicer of mortgage loans or private asset backed securities, or under pooling
and servicing agreements substantially similar to each other, including the
pooling and servicing agreement, was conducted in compliance with such
agreements, the Audit Program for Mortgages serviced for Freddie Mac, or the
Uniform Single Attestation Program for Mortgage Bankers, except for any
significant exceptions or errors in records that, in the opinion of the firm it
is required to report. In rendering its statement such firm may rely, as to
matters relating to the direct servicing of mortgage loans by subservicers, upon
comparable statements for examinations conducted substantially in compliance
with the Uniform Single Attestation Program for Mortgage Bankers or the Audit
Program for Mortgages serviced for Freddie Mac (rendered within one year of such
statement) of firms of independent public accountants with respect to the
related subservicer.
The pooling and servicing agreement will also provide for delivery to
the trustee, on or before a specified date in each year, of an annual statement
signed by officers of the master servicer to the effect that the master servicer
has fulfilled its obligations under the pooling and servicing agreement
throughout the preceding year.
Copies of the annual accountants' statement and the statement of
officers of the master servicer may be obtained by certificateholders without
charge upon written request to the master servicer at the address of the master
servicer set forth above.
S-47
Certain Matters Regarding the Master Servicer and the Depositor
The pooling and servicing agreement will provide that the master
servicer may not resign from its obligations and duties under the pooling and
servicing agreement except (a) upon a determination that its duties thereunder
are no longer permissible under applicable law or (b) upon compliance with the
following requirements:
o the master servicer has proposed a successor to the trustee
and the trustee has consented thereto, such consent not to be
withheld unreasonably,
o the proposed successor is qualified to service mortgage loans
on behalf of Fannie Mae or Freddie Mac, and
o the trustee has received written confirmation from each rating
agency that the appointment of such successor will not cause
that rating agency to reduce, qualify or withdraw its
then-current ratings assigned to any class of offered
certificates.
In addition, the master servicer may be removed from its obligations
and duties as set forth in the pooling and servicing agreement. No such
resignation will become effective until the trustee or a successor master
servicer has assumed the master servicer's obligations and duties under the
pooling and servicing agreement.
The pooling and servicing agreement will further provide that neither
the master servicer, nor the depositor nor any director, officer, employee, or
agent of the master servicer or the depositor will be under any liability to the
trust fund or certificateholders for any action taken or for refraining from the
taking of any action in good faith pursuant to the pooling and servicing
agreement, or for errors in judgment; provided, however, that neither the master
servicer nor the depositor, nor any such person will be protected against any
breach of its representations and warranties in the pooling and servicing
agreement or any liability which would otherwise be imposed by reason of willful
misfeasance, bad faith or gross negligence in the performance of duties
thereunder or by reason of reckless disregard of obligations and duties
thereunder. The pooling and servicing agreement will further provide that the
master servicer, the depositor and any director, officer, employee or agent of
the master servicer or the depositor will be entitled to indemnification by the
trust fund and will be held harmless against any loss, liability or expense
incurred in connection with any legal action relating to the pooling and
servicing agreement or the certificates, other than any loss, liability or
expense related to any specific mortgage loan or mortgage loans and any loss,
liability or expense incurred by reason of willful misfeasance, bad faith or
gross negligence in the performance of duties thereunder or by reason of
reckless disregard of obligations and duties thereunder.
In addition, the pooling and servicing agreement will provide that
neither the master servicer nor the depositor will be under any obligation to
appear in, prosecute or defend any legal action which is not incidental to its
respective responsibilities under the pooling and servicing agreement and which
in its respective opinion may involve it in any expense or liability. Either the
master servicer or the depositor may, however, in its respective discretion
undertake any such action which it may deem necessary or desirable with respect
to the pooling and servicing agreement and the rights and duties of the parties
thereto and the interests of the certificateholders thereunder. In such event,
the legal expenses and costs of such action and any liability resulting
therefrom will be expenses, costs and liabilities of the trust fund, and the
master servicer or the depositor, as the case may be, will be entitled to be
reimbursed therefor out of funds otherwise distributable to certificateholders.
S-48
Any person into which the master servicer may be merged or
consolidated, or any person resulting from any merger or consolidation to which
the master servicer is a party, or any person succeeding to the business of the
master servicer, will be the successor of the master servicer under the pooling
and servicing agreement, provided that such person is qualified to service
mortgage loans on behalf of Fannie Mae or Freddie Mac and further provided that
such merger, consolidation or succession does not adversely affect the
then-current ratings of any class of offered certificates.
DESCRIPTION OF THE CERTIFICATES
General
The trust will issue the certificates pursuant to the pooling and
servicing agreement. The certificates consist of the classes of certificates
reflected on the cover of this prospectus supplement, which we refer to as the
offered certificates, and the Class B-IO Certificates, which we are not offering
by this prospectus supplement. We refer to the Class A-1, Class A-2, Class A-3
and Class A-IO Certificates as the senior certificates, and we refer to the
Class M-1, Class M-2 and Class B Certificates, collectively, as the subordinated
offered certificates. We refer to the Class R-1, R-2 and Class R-3 Certificates,
collectively, as the Class R Certificates or the residual certificates. The
Class A-IO Certificates and Class B-IO Certificates are interest-only
certificates issued with notional principal balances.
The trust will issue the offered certificates, other than the residual
certificates, in book-entry form as described below, in minimum dollar
denominations of $25,000 and integral multiples of $1,000 in excess thereof,
except that one certificate of each class may be issued in the remainder of the
class. The trust will issue each residual certificate in a single physical
certificate each having a denomination of $50.
Book-Entry Registration
The offered certificates, other than the residual certificates, will be
issued in book-entry form. Persons acquiring beneficial ownership interests in
the book-entry securities will hold their securities through The Depository
Trust Company in the United States and through Clearstream, Luxembourg or the
Euroclear System in Europe, if they are participants of any of such systems, or
indirectly through organizations which are participants. The Depository Trust
Company is referred to as "DTC." Clearstream Luxembourg is referred to as
"Clearstream." The Euroclear System is referred to as "Euroclear." The
book-entry securities will be issued in one or more certificates that equal the
aggregate principal balance of the applicable class or classes of securities 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 that in turn
will hold such positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank N.A. will act as the relevant depositary for
Clearstream and The Chase Manhattan Bank will act as the relevant depositary for
Euroclear. Except as described below, no person acquiring a book-entry security
will be entitled to receive a physical certificate representing such security.
Unless and until physical securities are issued, it is anticipated that the only
"securityholder" with respect to a book-entry security will be Cede & Co., as
nominee of DTC. Beneficial owners are only permitted to exercise their rights
indirectly through participants and DTC.
S-49
An 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 such purpose. In turn, the Financial Intermediary's
ownership of such book-entry security will be recorded on the records of DTC (or
of a DTC participant that acts as agent for the Financial Intermediary, whose
interest will in turn be recorded on the records of DTC, if the beneficial
owner's Financial Intermediary is not a DTC participant and on the records of
Clearstream or Euroclear, as appropriate).
Beneficial owners will receive all distributions allocable to principal
and interest with respect to the book-entry securities from the trustee through
DTC and DTC participants. While the book-entry securities are outstanding
(except under the circumstances described below), under the rules, regulations
and procedures creating, governing 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 securities. DTC is required to receive
and transmit distributions allocable to principal and interest with respect to
the securities. Participants and Financial Intermediaries with whom beneficial
owners have accounts with respect to securities are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective beneficial owners. Accordingly, although beneficial owners will
not possess physical certificates, the Rules provide a mechanism by which
beneficial owners will receive distributions and will be able to transfer their
beneficial ownership interests in the securities.
Beneficial owners will not receive or be entitled to receive Definitive
Securities, except under the limited circumstances described below. Unless and
until Definitive Securities are issued, beneficial owners who are not
participants may transfer ownership of securities only through participants and
Financial Intermediaries by instructing such participants and Financial
Intermediaries to transfer beneficial ownership interests in the securities by
book-entry transfer through DTC for the account of the purchasers of such
securities, which account is maintained with their respective participants or
Financial Intermediaries. Under the Rules and in accordance with DTC's normal
procedures, transfers of ownership of securities will be executed through DTC
and the accounts of the respective participants at DTC will be debited and
credited. Similarly, the participants and Financial Intermediaries will make
debits or credits, as the case may be, on their records on behalf of the selling
and purchasing beneficial owners.
S-50
Because of time zone differences, credits of securities received in
Clearstream or Euroclear as a result of a transaction with a participant will be
made during subsequent securities settlement processing and dated the business
day following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or Clearstream participants on such business day. Cash received in
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.
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 relevant depositaries.
DTC is a New York-chartered limited purpose trust company that performs
services for its participants, some of which (and/or their representatives) own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC participant in the book-entry securities, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of book-entry securities will be subject to the Rules as in
effect from time to time.
Clearstream, has advised that it is incorporated under the laws of the
Grand Duchy of Luxembourg as a professional depository. Clearstream holds
securities for its participating organizations or participants. Clearstream
facilitates the clearance and settlement of securities transactions between
Clearstream participants through electronic book-entry changes in account of
Clearstream participants, eliminating the need for physical movement of
securities. Clearstream provides to Clearstream participants, among other
things, services for safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing.
Clearstream interfaces with domestic markets in several countries. As a
professional depository, Clearstream is subject to regulation by the Luxembourg
Commission for the Supervision of the Financial Sector (the "CSSF"). Clearstream
participants are recognized financial institutions around the world, including
underwriters, securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. Indirect access to Clearstream is
also available to others, such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Clearstream
participant, either directly or indirectly.
S-51
Distributions, to the extent received by the Relevant Depository for
Clearstream, with respect to the securities held beneficially through
Clearstream will be credited to cash accounts of Clearstream participants in
accordance with its rules and procedures.
Euroclear was created in 1968 to hold securities for its participants
and to clear and settle transactions between Euroclear participants through
simultaneous electronic book-entry delivery against payment, thereby eliminating
the need for movement of physical 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 provides
various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. Euroclear is
operated by Euroclear Bank S.A./NV under contract with Euroclear Clearance
Systems S.C., a Belgian cooperative corporation. Euroclear Bank S.A./NV conducts
all operations. All Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with Euroclear Bank S.A./NV, not Euroclear Clearance
Systems S.C. Euroclear Clearance Systems S.C. 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.
Euroclear Bank S.A./NV has advised us that it is licensed by the
Belgian Banking and Finance Commission to carry out banking activities on a
global basis. As a Belgian bank, it is regulated and examined by the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with Euroclear Bank
S.A./NV are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law. These terms and conditions, operating procedures and laws 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. Euroclear Bank
S.A./NV 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.
The trustee will make distributions on the book-entry securities on
each distribution date to DTC. DTC will be responsible for crediting the amount
of such payments to the accounts of the applicable DTC participants in
accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payments to the beneficial owners that it
represents and to each Financial Intermediary for which it acts as agent. Each
such Financial Intermediary will be responsible for disbursing funds to the
beneficial owners that it represents.
S-52
Under a book-entry format, beneficial owners may experience some delay
in their receipt of payments, since the trustee will forward such payments to
Cede & Co. Distributions with respect to securities held through Clearstream or
Euroclear will be credited to the cash accounts of Clearstream participants or
Euroclear participants in accordance with the relevant system's rules and
procedures, to the extent received by the relevant depositary. Such
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. Because DTC can only act on behalf of
DTC participants that in turn can only act on behalf of Financial
Intermediaries, the ability of an Owner to pledge book-entry securities to
persons or entities that do not participate in the DTC system, or otherwise take
actions in respect of such book-entry securities, may be limited due to the lack
of physical certificates for such book-entry securities. In addition, issuance
of the book-entry securities in book-entry form may reduce the liquidity of such
securities in the secondary market since certain potential investors may be
unwilling to purchase securities for which they cannot obtain physical
certificates.
Monthly and annual reports on the trust fund will be provided to Cede &
Co., as nominee of DTC, and Cede & Co may make such reports available to
beneficial owners upon request, in accordance with the Rules, and to the DTC
participants to whose DTC accounts the book-entry securities of such beneficial
owners are credited directly or are credited indirectly through Financial
Intermediaries.
DTC has advised the trustee that, unless and until Definitive
Securities are issued, DTC will take any action permitted to be taken by the
holders of the book-entry securities under the pooling and servicing agreement
only at the direction of one or more DTC participants to whose DTC accounts the
book-entry securities are credited, to the extent that such actions are taken on
behalf of such participants whose holdings include such book-entry securities.
Clearstream or Euroclear Bank S.A./NV, as the case may be, will take any other
action permitted to be taken by a holder 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 participants, with respect to
some securities which conflict with actions taken with respect to other
securities.
Except with respect to the residual certificates, physical certificates
representing a security will be issued to beneficial owners only upon the events
specified in the pooling and servicing agreement. Such events may include the
following:
o we advise the trustee in writing that DTC is no longer willing
or able to properly discharge its responsibilities as
depository with respect to the securities, and that we or the
trustee is unable to locate a qualified successor,
o at our option, we elect to terminate the book-entry system
through DTC, or
o after the occurrence of an event of default, securityholders
representing not less than 51% of the aggregate current
principal amount of the applicable securities advise the
trustee and DTC through participants in writing that the
continuation of a book-entry system through DTC (or a
successor thereto) is no longer in the best interest of the
securityholders.
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Upon the occurrence of any of the events specified in the pooling and
servicing agreement, DTC will be required to notify all participants of the
availability through DTC of physical certificates. Upon surrender by DTC of the
certificates representing the securities and instruction for re-registration,
the trustee will issue the securities in the form of physical certificates, and
thereafter the trustee will recognize the holders of such physical certificates
as securityholders. Thereafter, payments of principal of and interest on the
securities will be made by the trustee directly to securityholders in accordance
with the procedures listed in this prospectus and in the pooling and servicing
agreement. The final distribution of any security (whether physical certificates
or securities registered in the name of Cede & Co.), however, will be made only
upon presentation and surrender of such securities on the final distribution
date at such office or agency as is specified in the notice of final payment to
securityholders.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures to facilitate transfers of securities among participants of DTC,
Clearstream and Euroclear, they are under no obligation to perform or continue
to perform such procedures and such procedures may be discontinued at any time.
Neither the trust nor 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 securities held by Cede & Co., as nominee
for DTC, or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interests.
Distributions
General. On each distribution date, the trustee will make distributions
on the certificates to the persons in whose names such certificates are
registered at the related record date. Certain capitalized terms used in this
section are defined under "--Glossary" below.
The trustee will make distributions on each distribution date by wire
transfer in immediately available funds to the account of a certificateholder at
a bank or other depository institution having appropriate wire transfer
facilities as instructed by a certificateholder in writing in accordance with
the pooling and servicing agreement. If no such instructions are given to the
trustee, then the trustee will make such distributions by check mailed to the
address of the person entitled thereto as it appears on the certificate
register; provided, however, that the final distribution in retirement of the
certificates will be made only upon presentation and surrender of such
certificates at the offices of the trustee designated for such purposes. As of
the closing date, the trustee designates its offices located at 135 South
LaSalle Street, Suite 1625, Chicago, Illinois 60603, Attention: Asset-Backed
Securities Trust Services-BSABS 2001-3 for purposes of surrender, transfer and
exchange. On each distribution date, a holder of a certificate will receive such
holder's percentage interest of the amounts required to be distributed with
respect to the applicable class of certificates. The percentage interest
evidenced by a certificate will equal the percentage derived by dividing the
denomination of such certificate by the aggregate denominations of all
certificates of the applicable class.
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Allocation of Payments on the Mortgage Loans. On each distribution
date, the trustee will withdraw from the distribution account the Interest Funds
and Principal Funds for such distribution date and apply such amounts as
follows:
First, to pay accrued and unpaid interest on the offered certificates,
in the following order of priority:
1. From Interest Funds to the Class A-IO Certificates,
the Current Interest and any Interest Carry Forward Amount for such
class;
2. From remaining Interest Funds, to the Class A-1,
Class A-2 and Class A-3 Certificates, pro rata based on such amounts
due to each such class, the Current Interest and any Interest Carry
Forward Amount for such classes;
3. From remaining Interest Funds, to the Class M-1
Certificates, the Class M-2 Certificates and the Class B Certificates,
sequentially, in that order, the Current Interest for each such class;
4. Any Excess Spread to the extent necessary to meet a
level of overcollateralization equal to the Specified
Overcollateralization Amount will be the Extra Principal Distribution
Amount and will be included as part of the Principal Distribution
Amount; and
5. Any Remaining Excess Spread will be added to any
Excess Overcollateralization Amount and will be applied as Excess
Cashflow pursuant to clauses third through seventh below.
On any distribution date, any shortfalls resulting from the application
of the Relief Act and any Prepayment Interest Shortfalls to the extent not
covered by Compensating Interest will be allocated, first, in reduction of
amounts otherwise distributable to the Class B-IO Certificates and the Residual
Certificates, and thereafter, to the Current Interest payable to the offered
certificates on such distribution date, on a pro rata basis, based on the
respective amounts of interest accrued on such certificates for such
distribution date. The holders of the offered certificates will not be entitled
to reimbursement for any such interest shortfalls.
Notwithstanding the provisions of clauses first 4 and 5, above, on the
first distribution date, all Excess Spread will be paid to the holders of the
Class B-IO Certificates.
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Second, from Principal Funds, as principal on the offered certificates
entitled to payments of principal, in the following order of priority:
(A) For each distribution date (i) prior to the Stepdown Date or (ii) on
which a Trigger Event is in effect:
1. To the Class A-1, Class A-2 and Class A-3
Certificates, pro rata based upon their respective Certificate
Principal Balances, the Principal Distribution Amount until their
respective Certificate Principal Balances are reduced to zero;
2. To the Class M-1 Certificates, any remaining
Principal Distribution Amount until the Certificate Principal Balance
thereof is reduced to zero;
3. To the Class M-2 Certificates, any remaining
Principal Distribution Amount until the Certificate Principal Balance
thereof is reduced to zero; and
4. To the Class B Certificates, any remaining Principal
Distribution Amount until the Certificate Principal Balance thereof is
reduced to zero.
(B) For each distribution date on or after the Stepdown Date, so long as a
Trigger Event is not in effect:
1. To the Class A-1, Class A-2 and Class A-3
Certificates, pro rata based upon their respective Certificates
Principal Balances, from the Principal Distribution Amount, the Class A
Principal Distribution Amount until their respective Certificate
Principal Balances are reduced to zero;
2. To the Class M-1 Certificates, from any remaining
Principal Distribution Amount, the Class M-1 Principal Distribution
Amount, until the Certificate Principal Balance thereof is reduced to
zero;
3. To the Class M-2 Certificates, from any remaining
Principal Distribution Amount, the Class M-2 Principal Distribution
Amount, until the Certificate Principal Balance thereof is reduced to
zero; and
4. To the Class B Certificates, from any remaining
Principal Distribution Amount, the Class B Principal Distribution
Amount, until the Certificate Principal Balance thereof is reduced to
zero.
Third, from any Excess Cashflow, to the Class A-1, Class A-2 and Class
A-3 Certificates, pro rata based on their respective Certificate Principal
Balances, an amount equal to any Unpaid Applied Realized Loss Amounts for such
respective classes for such distribution date;
Fourth, from any remaining Excess Cashflow, to the Class M-1
Certificates an amount equal to (a) any Interest Carry Forward Amount, and then
(b) any Unpaid Applied Realized Loss Amount for such class for such distribution
date;
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Fifth, from any remaining Excess Cashflow, to the Class M-2
Certificates an amount equal to (a) any Interest Carry Forward Amount, and then
(b) any Unpaid Applied Realized Loss Amount for such class for such distribution
date;
Sixth, from any remaining Excess Cashflow, to the Class B Certificates
an amount equal to (a) any Interest Carry Forward Amount, and then (b) any
Unpaid Applied Realized Loss Amount for such class for such distribution date;
Seventh, from any remaining Excess Cashflow, to the Class B-IO
Certificates an amount specified in the pooling and servicing agreement; and
Eighth, any remaining amounts to the residual certificates.
On the initial distribution date, the trustee will pay to the holders
of the Class R certificates, pro rata, the amount of $150 as principal from an
amount to be deposited with the trustee by the depositor on the closing date.
Glossary
"Applied Realized Loss Amount," with respect to any class of
certificates (other than the Class A-IO, Class B-IO and the Class R
Certificates) and as to any distribution date, means the sum of the Realized
Losses with respect to the mortgage loans which have been applied in reduction
of the Certificate Principal Balance of such class which shall, on any such
distribution date, equal in the aggregate as to all such classes the amount, if
any, by which, (i) the aggregate Certificate Principal Balance of all of the
Certificates (after all distributions of principal on such distribution date)
exceeds (ii) the aggregate Stated Principal Balance of all of the mortgage loans
as of the last day of the related Due Period.
"Certificate Principal Balance," with respect to any class of offered
certificates (other than any Class A-IO Certificates) and any distribution date,
is the original certificate principal balance of such class as set forth on the
cover page of this prospectus supplement, less the sum of (i) all amounts in
respect of principal distributed to such class on previous distribution dates
and (ii) any Applied Realized Loss Amounts allocated to such class on previous
distribution dates.
"Class A Certificates" are the Class A-1, Class A-2 and Class A-3
Certificates in the aggregate.
"Class A Principal Distribution Amount," with respect to any applicable
distribution date, is an amount equal to the excess of
o the aggregate Certificate Principal Balance of the Class A Certificates
immediately prior to such distribution date, over
o the lesser of
(a) 73.00% of the aggregate Stated Principal Balance of the
mortgage loans as of the last day of the related Due Period,
and
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(b) the aggregate Stated Principal Balance of the mortgage loans
as of the last day of the related Due Period less the
Overcollateralization Floor.
"Class B Principal Distribution Amount," with respect to any applicable
distribution date, is an amount equal to the excess, if any, of
o the sum of
(a) the Certificate Principal Balances of the Class A-1, Class
A-2, Class A-3, Class M-1 and Class M-2 Certificates (after
taking into account the payment of the Class A Principal
Distribution Amount, the Class M-1 Principal Distribution
Amount and the Class M-2 Principal Distribution Amount on such
distribution date), and
(b) the Certificate Principal Balance of the Class B Certificates
immediately prior to such distribution date, over
o the lesser of
(a) 94.00% of the aggregate Stated Principal Balance of the
mortgage loans as of the last day of the related Due Period,
and
(b) the aggregate Stated Principal Balance of the mortgage loans
as of the last day of the related Due Period less the
Overcollateralization Floor.
"Class M-1 Principal Distribution Amount," with respect to any
applicable distribution date, is an amount equal to the excess, if any, of
o the sum of
(a) the Certificate Principal Balances of the Class A-1, Class
A-2, Class A-3 Certificates (after taking into account the
payment of the Class A Principal Distribution Amount on such
distribution date), and
(b) the Certificate Principal Balance of the Class M-1
Certificates immediately prior to such distribution date, over
o the lesser of
(a) 84.50% of the aggregate Stated Principal Balance of the
mortgage loans as of the last day of the related Due Period,
and
(b) the aggregate Stated Principal Balance of the mortgage loans
as of the last day of the related Due Period less the
Overcollateralization Floor.
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"Class M-2 Principal Distribution Amount," with respect to any
applicable distribution date, is an amount equal to the excess, if any, of
o the sum of
(a) the Certificate Principal Balances of the Class A-1, Class
A-2, Class A-3 and Class M-1 Certificates (after taking into
account the payment of the Class A Principal Distribution
Amount and the Class M-1 Principal Distribution Amount on such
distribution date), and
(b) the Certificate Principal Balance of the Class M-2
Certificates immediately prior to such distribution date, over
o the lesser of
(a) 91.00% of the aggregate Stated Principal Balance of the
mortgage loans as of the last day of the related Due Period,
and
(b) the aggregate Stated Principal Balance of the mortgage loans
as of the last day of the related Due Period less the
Overcollateralization Floor.
"Current Interest," with respect to each class of the offered
certificates and each distribution date, is the interest accrued at the
applicable pass-through rate for the applicable accrual period on the
Certificate Principal Balance or notional balance of such class plus any amount
previously distributed with respect to interest for such class that is recovered
as a voidable preference by a trustee in bankruptcy reduced by any Prepayment
Interest Shortfall to the extent not covered by Compensating Interest and any
shortfalls resulting from the application of the Relief Act, in each case to the
extent allocated to such class of offered certificates described under clause
first in "-- Distributions -- Allocations of Payments on the Mortgage Loans" in
this prospectus supplement.
"Due Period" with respect to any distribution date is the period
commencing on the second day of the month preceding the calendar month in which
such distribution date occurs and ending at the close of business on the first
day of the month in which such distribution date occurs.
"Excess Cashflow," with respect to any distribution date, is the sum of
(a) the Excess Overcollateralization Amount and (b) the Remaining Excess Spread,
in each case for such distribution date.
"Excess Overcollateralization Amount," with respect to any distribution
date, is the lesser of (1) Principal Funds and (2) the excess, if any, of (a)
the Overcollateralization Amount over (b) the Specified Overcollateralization
Amount, in each case for such distribution date.
S-59
"Excess Spread," with respect to any distribution date, is the excess,
if any, of the Interest Funds for such distribution date over the sum of Current
Interest on the offered certificates and Interest Carry Forward Amounts on the
Class A Certificates on such distribution date.
"Extra Principal Distribution Amount," with respect to any distribution
date, is the lesser of (a) the excess, if any, of the Specified
Overcollateralization Amount for such distribution date over the
Overcollateralization Amount for such distribution date (after giving effect to
distributions of principal on the certificates other than any Extra Principal
Distribution Amount) and (b) the Excess Spread for such distribution date.
"Insurance Proceeds," are all proceeds of any insurance policies, to
the extent such proceeds are not applied to the restoration of the property or
released to the mortgagor in accordance with the master servicer's normal
servicing procedures, other than proceeds that represent reimbursement of the
master servicer's costs and expenses incurred in connection with presenting
claims under the related insurance policies.
"Interest Carry Forward Amount," with respect to each class of the
offered certificates (other than the Class R Certificates) and each distribution
date, is the sum of
o the excess of
(a) Current Interest for such class with respect to prior
distribution dates over
(b) the amount actually distributed to such class with
respect to interest on such prior distribution dates
and
o interest on such excess (to the extent permitted by applicable
law) at the applicable pass-through rate for the related
interest accrual period including the interest accrual period
relating to such distribution date.
"Interest Funds" with respect to a distribution date are equal to the
sum, without duplication, of
o all scheduled interest, less the master servicing fee and the
trustee fee,
o all advances relating to interest,
o all Compensating Interest,
o Liquidation Proceeds, to the extent such Liquidation Proceeds
relate to interest, less all non-recoverable advances relating
to interest and certain expenses reimbursed during the related
Prepayment Period,
o the interest portion of proceeds of the repurchase of any
mortgage loans, and
o the interest portion of the purchase price of the assets of
the trust upon exercise by the master servicer of its optional
termination right.
S-60
"Liquidation Proceeds" are all net proceeds, other than Insurance
Proceeds, received in connection with the partial or complete liquidation of
mortgage loans, whether through trustee's sale, foreclosure sale or otherwise,
or in connection with any condemnation or partial release of a mortgaged
property, together with the net proceeds received with respect to any mortgaged
properties acquired by the master servicer by foreclosure or deed in lieu of
foreclosure in connection with defaulted mortgage loans, other than the amount
of such net proceeds representing any profit realized by the master servicer in
connection with the disposition of any such properties.
"Overcollateralization Amount," with respect to any distribution date,
is the excess, if any, of (a) the aggregate Stated Principal Balance of the
mortgage loans as of the last day of the related Due Period over (b) the sum of
the Certificate Principal Balances of the offered certificates (after taking
into account the payment of principal) on such distribution date.
"Overcollateralization Floor" means 0.50% of the aggregate cut-off date
principal balance of the mortgage loans.
"Prepayment Period" with respect to a distribution date is the
immediately preceding calendar month.
"Principal Distribution Amount," with respect to each distribution
date, is equal to
o the Principal Funds for such distribution date, plus
o any Extra Principal Distribution Amount for such distribution
date, less
o any Excess Overcollateralization Amount for such distribution
date.
"Principal Funds" are equal to the sum, without duplication, of
o the scheduled principal (or with respect to simple interest
loans, actual principal) collected during the related Due
Period or advanced (except with respect to simple interest
loans) by the master servicer,
o prepayments, exclusive of any prepayment charges, collected in
the related prepayment period,
o the Stated Principal Balance of each mortgage loan that was
repurchased by the seller or the master servicer,
o the amount, if any, by which the aggregate unpaid principal
balance of any replacement mortgage loans is less than the
aggregate unpaid principal balance of any deleted mortgage
loans delivered by the master servicer in connection with a
substitution of a mortgage loan,
o all Liquidation Proceeds collected during the related
prepayment period, to the extent such Liquidation Proceeds
relate to principal, less all non-recoverable advances
relating to principal reimbursed during the related due
period, and
S-61
o the principal portion of the purchase price of the assets of
the trust upon the exercise by the master servicer of its
optional termination rights.
"Realized Loss" is, in general, the excess of the Stated Principal
Balance of a defaulted mortgage loan over the net Liquidation Proceeds with
respect thereto that are allocated to principal.
"Relief Act" means the Soldiers' and Sailors' Civil Relief Act of 1940,
as amended.
"Remaining Excess Spread," with respect to any distribution date, is
the Excess Spread less any Extra Principal Distribution Amount, in each case for
such distribution date.
"Specified Overcollateralization Amount" means 3.00% of the aggregate
cut-off date principal balance of the mortgage loans.
"Stated Principal Balance" of any mortgage loan (other than a simple
interest loan) with respect to any distribution date, means the cut-off date
principal balance thereof, minus the sum of:
(i) the principal portion of the scheduled monthly payments due
from mortgagors with respect to such mortgage loan during each
Due Period ending prior to such distribution date (and
irrespective of any delinquency in their payment);
(ii) all prepayments of principal with respect to such mortgage
loan received prior to or during the related Prepayment
Period, and all liquidation proceeds to the extent applied by
the master servicer as recoveries of principal in accordance
with the pooling and servicing agreement that were received by
the master servicer as of the close of business on the last
day of the Prepayment Period related to such distribution
date; and
(iii) any Realized Loss thereon incurred during the related
Prepayment Period;
and with respect to simple interest loans, the Stated Principal Balance thereof
with respect to any distribution date, means the actual principal balance of
that mortgage loan as of the cut-off date, less the sum of:
(i) the principal portion of the monthly payments actually made by
the related mortgagor with respect to such mortgage loan
during each Due Period ending prior to such distribution date;
(ii) all prepayments of principal with respect to such mortgage
loan received prior to or during the related Prepayment
Period, and all liquidation proceeds to the extent applied by
the master servicer as recoveries of principal in accordance
with the pooling and servicing agreement that were received by
the master servicer as of the close of business on the last
day of the Prepayment Period related to such distribution
date, and
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(iii) any Realized Loss thereon incurred during the related
Prepayment Period.
The Stated Principal Balance of any liquidated mortgage loan is zero.
"Stepdown Date" means the earlier to occur of
o the distribution date on which the aggregate Certificate
Principal Balances of the Class A-1, Class A-2 and Class A-3
Certificates have been reduced to zero and
o the later to occur of
(x) the distribution date occurring in December 2004 and
(y) the first distribution date for which the sum of the
aggregate Certificate Principal Balance of the
subordinated certificates plus the
Overcollateralization Amount for such distribution
date divided by the sum of the Stated Principal
Balances of the mortgage loans as of the end of the
related Due Period is greater than or equal to
approximately 27.00%.
A "Trigger Event," with respect to a distribution date after the
Stepdown Date, exists if
o the three-month rolling average of the percent equivalent of a
fraction, the numerator of which is the sum of the Stated
Principal Balances of the mortgage loans that are 60 days or
more delinquent or are in bankruptcy or foreclosure or are REO
properties, and the denominator of which is the sum of the
Stated Principal Balances of all of the mortgage loans as of
the last day of the related due period, equals or exceeds
o 50% of the percentage equivalent of a fraction, the numerator
of which is the sum of the Certificate Principal Balances of
the subordinated certificates and the Overcollateralization
Amount, in each case after taking into account the
distribution of the related Principal Distribution Amounts on
such distribution date, and the denominator of which is the
sum of the Stated Principal Balances of the mortgage loans as
of the last day of the related Due Period.
"Unpaid Applied Realized Loss Amount," with respect to any class of
certificates other than the Class A-IO, Class B-IO and the Class R Certificates
and as to any distribution date, is the excess of
o the Applied Realized Loss Amount with respect to such class
over
o the sum of all distributions in reduction of the Applied
Realized Loss Amount on all previous distribution dates.
Any amounts distributed to a class of certificates in respect of any Unpaid
Applied Realized Loss Amount will not be applied to reduce the Certificate
Principal Balance of such class.
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Excess Spread and Overcollateralization Provisions
Excess Spread will be required to be applied as an Extra Principal
Distribution Amount with respect to the offered certificates whenever the
Overcollateralization Amount is less than the Specified Overcollateralization
Amount. If on any distribution date, after giving effect to allocations of
Principal Distribution Amounts, the aggregate Certificate Principal Balances of
the offered certificates exceed the Stated Principal Balances of the mortgage
loans, the Certificate Principal Balances of the subordinated certificates will
be reduced, in inverse order of seniority (beginning with the Class B
Certificates) by an amount equal to such excess. Any such reduction is an
Applied Realized Loss Amount.
If, on any distribution date, the Excess Overcollateralization Amount
is, or after taking into account all other distributions to be made on such
distribution date, would be, greater than zero (i.e., the Overcollateralization
Amount is or would be greater than the Specified Overcollateralization Amount),
then such Excess Overcollateralization Amount together with any Remaining Excess
Spread will be paid as provided in clauses third through seventh under
" -- Distributions -- Allocations of Payments on the Mortgage Loans," above.
Allocation of Realized Losses
On any distribution date on which the aggregate stated principal
balance of the mortgage loans is less than the aggregate certificate principal
balance of the Certificates, the certificate principal balances of one or more
classes of certificates will be written down, up to the amount of such
deficiency. The principal portion of Realized Losses on a mortgage loan
occurring during the related Prepayment Period will not be allocated to the
Class A-1, Class A-2 or Class A-3 Certificates until the date on which the
aggregate certificate principal balances of the subordinated certificates have
been reduced to zero. Prior to such date any such Realized Losses will be
allocated among the outstanding classes of subordinated certificates in inverse
order of priority, commencing with the Class B Certificates, until the
certificate principal balance of each such class has been reduced to zero. After
the certificate principal balances of all of the subordinated certificates have
been reduced to zero, the principal portion of Realized Losses will be
allocated, pro rata, to the Class A-1, Class A-2 and Class A-3 Certificates
based on their respective certificate principal balances; provided, however,
that for so long as the Class A-3 Certificates are outstanding, any Realized
Losses that would otherwise be allocated to the Class A-2 Certificates will
instead be applied in reduction of the certificate principal balance of the
Class A-3 Certificates.
No reduction of the certificate principal balance of any class shall be
made on any distribution date on account of Realized Losses to the extent that
such a reduction would have the effect of reducing the aggregate certificate
principal balance of all of the classes of Certificates as of that distribution
date to an amount less than the aggregate principal balance of all mortgage
loans as of the related due date.
All allocations of Realized Losses will be accomplished on a
distribution date by reducing the certificate principal balance of the
applicable classes of certificates by their appropriate shares of any such
losses occurring during the month preceding the month of that distribution date
and, accordingly, will be taken into account in determining the distributions of
principal and interest on the applicable certificates commencing on the
following distribution date.
S-64
Pass-Through Rates
Fixed Rate Certificates
The pass-through rate per annum for the Class A-IO Certificates is the
per annum fixed rate set forth and described on the cover of this prospectus
supplement. On any distribution date, including after the optional termination
date, the pass-through rate for the Class A-IO Certificates will be subject to
the applicable Interest Rate Cap.
The "Interest Rate Cap" for all classes of interest bearing offered
certificates, other than the Class A-IO Certificates, is equal to: for so long
as the Class A-IO Certificates are outstanding, the weighted average of the net
mortgage rates of all of the mortgage loans minus the interest payable to the
Class A-IO Certificates with respect to the related accrual period (expressed as
a per annum rate calculated based on the aggregate mortgage loan balance), and
after the Class A-IO Certificates are no longer outstanding, the weighted
average of the net mortgage rates of all of the mortgage loans, in each case
adjusted to an effective rate reflecting the accrual of interest on an
actual/360 basis. The Interest Rate Cap for the Class A-IO Certificates is equal
to the weighted average of the net mortgage rates of all of the mortgage loans.
Adjustable Rate Certificates
The pass-through rate per annum for each class of offered certificates
(other than the Class A-IO certificates and the Class R certificates) will be an
adjustable rate, which on any distribution date will be equal to the lesser of
o the London interbank offered rate for one month United States
dollar deposits, which we refer to as One-Month LIBOR,
calculated as described below under "--Calculation of
One-Month LIBOR" plus the pass-through margin for such class;
and
o the applicable Interest Rate Cap.
The "pass-through margin" for each class of offered certificates (other
than the Class A-IO Certificates and the Class R Certificates) is:
o for the Class A-1 Certificates, (a) for any distribution date
on or prior to the optional termination date, 0.45%, and (b)
for any distribution date after the optional termination date,
0.90%,
o for the Class A-2 Certificates, (a) for any distribution date
on or prior to the optional termination date, 0.40%, and (b)
for any distribution date after the optional termination date,
0.80%,
S-65
o for the Class A-3 Certificates, (a) for any distribution date
on or prior to the optional termination date, 0.65%, and (b)
for any distribution date after the optional termination date,
1.30%,
o for the Class M-1 Certificates, (a) for any distribution date
on or prior to the optional termination date, 1.00%, and (b)
for any distribution date after the optional termination date,
1.50%,
o for the Class M-2 Certificates, (a) for any distribution date
on or prior to the optional termination date, 1.50%, and (b)
for any distribution date after the optional termination date,
2.25%, and
o for the Class B Certificates, (a) for any distribution date on
or prior to the optional termination date, 2.50%, and (b) for
any distribution date after the optional termination date,
3.75%.
Calculation of One-Month LIBOR
On the second LIBOR business day preceding the commencement of each
accrual period for the offered certificates bearing interest at an adjustable
rate, which date we refer to as an interest determination date, the trustee will
determine One-Month LIBOR for such accrual period on the basis of such rate as
it appears on Telerate Screen Page 3750, as of 11:00 a.m. London time on such
interest determination date. 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 reasonably selected by the trustee, One-Month LIBOR for the applicable
accrual period will be the Reference Bank Rate. If no such quotations can be
obtained and no Reference Bank Rate is available, One-Month LIBOR will be the
One-Month LIBOR applicable to the preceding accrual period.
The Reference Bank Rate with respect to any accrual period, means the
arithmetic mean, rounded upwards, if necessary, to the nearest whole multiple of
0.03125%, of the offered rates for United States dollar deposits for one month
that are quoted by the Reference Banks, as described below, as of 11:00 a.m.,
New York City time, on the related interest determination date to prime banks in
the London interbank market for a period of one month in amounts approximately
equal to the aggregate certificate principal balance of all classes of offered
certificates bearing interest at an adjustable rate for such accrual period,
provided that at least two such Reference Banks provide such rate. If fewer than
two offered rates appear, the Reference Bank Rate will be the arithmetic mean,
rounded upwards, if necessary, to the nearest whole multiple of 0.03125%, of the
rates quoted by one or more major banks in New York City, selected by the
trustee, 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 all classes of
offered certificates bearing interest at an adjustable rate for such accrual
period. As used in this section, "LIBOR business day" means a day on which banks
are open for dealing in foreign currency and exchange in London and New York
City; and "Reference Banks" means leading banks selected by the trustee and
engaged in transactions in Eurodollar deposits in the international Eurocurrency
market
o with an established place of business in London,
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o which have been designated as such by the trustee and
o which are not controlling, controlled by, or under common
control with, the depositor, the seller or either master
servicer.
The establishment of One-Month LIBOR on each interest determination
date by the trustee and the trustee's calculation of the rate of interest
applicable to the classes of offered certificates bearing interest at an
adjustable rate for the related accrual period shall, in the absence of manifest
error, be final and binding.
Reports to Certificateholders
On each distribution date, the trustee will make available to each
certificateholder, the master servicer and the depositor a statement, based on
information provided to the trustee by the master servicer, generally setting
forth, among other information:
1. the amount of the related distribution to holders of
the offered certificates allocable to principal, separately identifying
(A) the aggregate amount of any principal prepayments included therein,
(B) the aggregate of all scheduled payments of principal included
therein and (C) any Extra Principal Distribution Amount included
therein;
2. the amount of such distribution to holders of the
offered certificates allocable to interest;
3. the Interest Carry Forward Amounts for each class of
offered certificates (if any);
4. the Certificate Principal Balance or notional balance
of the offered certificates before and after giving effect to the
distribution of principal and allocation of Applied Realized Loss
Amounts on such distribution date;
5. the Stated Principal Balance of all the mortgage
loans in the aggregate for the following distribution date;
6. the amount of the master servicing fee paid to or
retained by the master servicer for the related due period and the
amount of the trustee fee paid to the trustee;
7. the pass-through rate for each class of offered
certificates for such distribution date and whether such rate was based
on the applicable interest rate cap;
8. the amount of Monthly Advances included in the
distribution on such distribution date;
9. the number and aggregate principal amounts of the
mortgage loans (A) delinquent, exclusive of mortgage loans in
foreclosure, (1) 31-60 days, (2) 61-90 days and (3) 91 or more days,
and (B) in foreclosure and delinquent (1) 31-60 days, (2) 61-90 days
and (3) 91 or more days, in each case as of the close of business on
the last day of the calendar month preceding such distribution date;
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10. with respect to any mortgage loan that was liquidated
during the preceding calendar month, the loan number and stated
principal balance of, and Realized Loss on, such mortgage loan as of
the end of the related prepayment period;
11. whether a Trigger Event exists;
12. the total number and principal balance of any real
estate owned, or REO properties as of the end of the related prepayment
period;
13. the cumulative Realized Losses through the end of the
preceding month; and
14. the three-month rolling average of the percent
equivalent of a fraction, the numerator of which is the aggregate
Stated Principal Balance of the mortgage loans that are 60 days or more
delinquent or are in bankruptcy or foreclosure or are REO properties,
and the denominator of which is the Stated Principal Balances of all of
the mortgage loans.
The trustee will make the monthly statement and, at its option, any
additional files containing the same information in an alternative format,
available each month to certificateholders via the trustee's internet website.
The trustee's internet website shall initially be located at "www.etrustee.net."
Assistance in using the website service can be obtained by calling the trustee's
customer service desk at (312) 904-7992. Parties that are unable to use the
above distribution option are entitled to have a paper copy mailed to them via
first class mail by calling the customer service desk and indicating such. The
trustee may change the way monthly statements are distributed in order to make
such distributions more convenient or more accessible to the above parties.
In addition, within a reasonable period of time after the end of each
calendar year, the trustee will prepare and deliver to the master servicer and
to each certificateholder 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.
Amendment
The pooling and servicing agreement may be amended by the depositor,
the master servicer, the seller and the trustee, without the consent of
certificateholders,
o to cure any ambiguity,
o to correct or supplement any provision therein which may be
defective or inconsistent with any other provision therein, or
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o to make any other revisions with respect to matters or
questions arising under the pooling and servicing agreement
which are not inconsistent with the provisions thereof,
provided that such action will not adversely affect in any material respect the
interests of any certificateholder. An amendment will be deemed not to adversely
affect in any material respect the interests of the certificateholders if the
person requesting such amendment obtains a letter from each rating agency
stating that such amendment will not result in the downgrading or withdrawal of
the respective ratings then assigned to any class of certificates. The pooling
and servicing agreement may also be amended without the consent of any of the
certificateholders, to change the manner in which any of the accounts are
maintained, provided that any such change does not adversely affect the then
current rating on any class of certificates as evidenced by a letter from each
rating agency. In addition, the pooling and servicing agreement may be amended
without the consent of certificateholders to modify, eliminate or add to any of
its provisions to such extent as may be necessary to maintain the qualification
of the trust fund's REMIC elections, provided that the trustee has received an
opinion of counsel to the effect that such action is necessary or helpful to
maintain such qualification.
In addition, the pooling and servicing agreement may be amended by the
depositor, master servicer, the seller and the trustee with the consent of the
holders of a majority in interest of each class of certificates affected thereby
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the pooling and servicing agreement or of
modifying in any manner the rights of the certificateholders; provided, however,
that no such amendment may
(a) reduce in any manner the amount of, or delay the
timing of, payments required to be distributed on any certificate
without the consent of the holder of such certificate;
(b) cause any trust REMIC to fail to qualify as a REMIC
for federal tax purposes;
(c) reduce the aforesaid percentage of aggregate
outstanding principal amounts of certificates of each class, the
holders of which are required to consent to any such amendment, without
the consent of the holders of all certificates of such class.
The trustee will not be entitled to consent to any amendment to the
pooling and servicing agreement without having first received an opinion of
counsel to the effect that such amendment is permitted under the terms of the
pooling and servicing agreement and will not cause the trust fund's REMIC
elections to fail to qualify.
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Voting Rights
As of any date of determination,
o holders of the offered certificates, other than the Class A-IO
Certificates, will be allocated 94% of all voting rights,
allocated among such offered certificates in proportion to
their respective outstanding certificate principal balances,
o holders of the Class A-IO Certificates will be allocated 1% of
all voting rights,
o holders of the Class B-IO Certificates will be allocated 2% of
all voting rights until the Class A-IO Certificates have been
paid in full and then 3%, and
o holders of each class of Class R Certificates will be
allocated 1% of all voting rights.
Voting rights will be allocated among the certificates of each such
class in accordance with their respective percentage interests.
Optional Termination
The master servicer will have the right to purchase all remaining
mortgage loans, REO properties and thereby effect early retirement of all the
certificates, subject to the stated principal balance of the mortgage loans and
REO properties at the time of repurchase being less than or equal to 10% of
cut-off date stated principal balance of the mortgage loans. We refer to such
date as the optional termination date. In the event that the master servicer,
exercises such option, it will effect such repurchase at a price equal to the
sum of:
o 100% of the stated principal balance of each mortgage loan,
but other than in respect of REO Property, plus accrued
interest thereon at the applicable mortgage rate,
o the appraised value of any REO property, up to the stated
principal balance of the related mortgage loan, and
o any unreimbursed out-of-pocket costs and expenses of the
trustee and the master servicer, and the principal portion of
any unreimbursed advances previously incurred by the master
servicer in the performance of its servicing obligations.
Proceeds from such purchase will be distributed to the certificateholders in the
priority described above in "Description of the Certificates--Distributions."
The proceeds from any such distribution may not be sufficient to distribute the
full amount to which each class of certificates is entitled if the purchase
price is based in part on the appraised value of any REO property and such
appraised value is less than the stated principal balance of the related
mortgage loan. Any purchase of the mortgage loans and REO properties will result
in an early retirement of the certificates.
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Optional Purchase of Defaulted Loans
As to any mortgage loan which as of the first day of a calendar quarter
is delinquent in payment by 91 days or more, the master servicer may, at its
option, purchase such mortgage loan at a price equal to 100% of the stated
principal balance thereof plus accrued interest thereon at the applicable
mortgage 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; provided that such mortgage loan is still delinquent in payment
by 91 days or more as of the date of such purchase and provided further, that
this limited purchase option, if not theretofore exercised, shall terminate on
the last business day of such calendar quarter. Such option, if not exercised,
shall not thereafter be reinstated as to any such mortgage loan unless the
delinquency is cured and the mortgage loan thereafter again becomes delinquent
in payment 91 days or more. In that event, the option shall again become
exercisable on the first date of the subsequent calendar quarter.
Events of Default
Events of default under the pooling and servicing agreement include:
o any failure by the master servicer to remit to the trustee any
payment, including an advance required to be made under the
terms of the pooling and servicing agreement, which continues
unremedied for five business days after written notice of such
failure shall have been given to the master servicer by the
trustee or the depositor, or to the master servicer and the
trustee by the holders of certificates evidencing not less
than 25% of the voting rights evidenced by the certificates;
o any failure by the master servicer to observe or perform in
any material respect any other of its covenants or agreements,
or any breach of a representation or warranty made by the
master servicer, in the pooling and servicing agreement, which
continues unremedied for 60 days after the giving of written
notice of such failure to the master servicer by the trustee
or the depositor, or to the master servicer and the trustee by
the holders of certificates evidencing not less than 25% of
the voting rights evidenced by the certificates; or
o insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings, and certain actions by or
on behalf of the master servicer indicating its insolvency or
inability to pay its obligations.
Rights Upon Event of Default
So long as an event of default under the pooling and servicing
agreement remains unremedied, the trustee shall, but only upon the receipt of
written instructions from the holders of certificates having not less than 25%
of the voting rights evidenced by the certificates, terminate all of the rights
and obligations of the master servicer under the pooling and servicing agreement
and in and to the mortgage loans, whereupon the trustee or a successor appointed
by the trustee will succeed, after a transition period not exceeding 90 days, to
all of the responsibilities and duties of the master servicer under the pooling
and servicing agreement, including the limited obligation to make Monthly
Advances and payments of Compensating Interest. No assurance can be given that
termination of the rights and obligations of the master servicer under the
pooling and servicing agreement would not adversely affect the servicing of the
mortgage loans, including the delinquency experience of the mortgage loans. The
costs and expenses of the trustee in connection with the termination of the
master servicer, appointment of a successor master servicer and the transfer of
servicing, to the extent not paid by the terminated master servicer, will be
paid by the trust fund.
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No certificateholder, solely by virtue of such holder's status as a
certificateholder, will have any right under the pooling and servicing agreement
to institute any proceeding with respect thereto, unless such holder previously
has given to the trustee written notice of the continuation of an event of
default and unless the holders of certificates having not less than 25% of the
voting rights evidenced by the certificates have made written request to the
trustee to institute such proceeding in its own name as trustee thereunder and
have offered to the trustee reasonable indemnity and the trustee for 60 days has
neglected or refused to institute any such proceeding.
The Trustee
LaSalle Bank National Association will be the trustee under the pooling
and servicing agreement. The depositor and the master servicer may maintain
other banking relationships in the ordinary course of business with the trustee.
The trustee's corporate trust office located at 135 South LaSalle Street, Suite
1625, Chicago, Illinois 60603, Attention: Asset-Backed Securities Trust Services
- -- BSABS 2001-3 or at such other address as the trustee may designate from time
to time.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
General
The weighted average life of, and the yield to maturity on, each class
of offered certificates generally will be directly related to the rate of
payment of principal, including prepayments, of the mortgage loans. The actual
rate of principal prepayments on pools of mortgage loans is influenced by a
variety of economic, tax, geographic, demographic, social, legal and other
factors and has fluctuated considerably in recent years. In addition, the rate
of principal prepayments may differ among pools of mortgage loans at any time
because of specific factors relating to the mortgage loans in the particular
pool, including, among other things, the age of the mortgage loans, the
geographic locations of the properties securing the loans, the extent of the
mortgagors' equity in such properties, and changes in the mortgagors' housing
needs, job transfers and employment status. The rate of principal prepayments
may also be affected by whether the mortgage loans impose prepayment penalties.
Approximately 31.74% of the mortgage loans, by cut-off date principal balance
currently provide for the payment by the borrower of a prepayment charge on
voluntary prepayments. The requirement to pay prepayment penalties typically
relates to prepayments made within a period of up to five years from the date of
the execution of the related mortgage note. These penalties, if enforced by the
master servicer, would typically discourage prepayments on the mortgage loans.
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The timing of changes in the rate of prepayments may significantly
affect the actual yield to investors who purchase the offered certificates at
prices other than par, even if the average rate of principal prepayments is
consistent with the expectations of investors. In general, the earlier the
payment of principal of the mortgage loans the greater the effect on an
investor's yield to maturity. As a result, the effect on an investor's yield of
principal prepayments occurring at a rate higher or lower than the rate
anticipated by the investor during the period immediately following the issuance
of the offered certificates may not be offset by a subsequent like reduction or
increase in the rate of principal prepayments.
Certain of the mortgage loans are considered subprime mortgage loans.
The prepayment behavior of subprime mortgage loans may differ from that of prime
mortgage loans in that the prepayment rate may be influenced more by the rate of
defaults and liquidations than by voluntary refinancings. Subprime mortgage
loans may experience greater defaults in a rising interest rate environment as
the borrower's resources are stretched, thereby producing prepayments at a time
when prepayments would normally be expected to decline. Alternatively, some
mortgagors may be able to re-establish or improve their credit rating thereby
permitting them to refinance into a lower cost mortgage loan. Investors must
make their own decisions as to the appropriate prepayment assumptions to be used
in deciding whether to purchase any of the offered certificates. The depositor
does not make any representations or warranties as to the rate of prepayment or
the factors to be considered in connection with such determination.
The weighted average life and yield to maturity of each class of
offered certificates will also be influenced by the amount of Excess Spread
generated by the mortgage loans and applied in reduction of the certificate
principal balances of such certificates. The level of Excess Spread available on
any distribution date to be applied in reduction of the certificate principal
balances of the offered certificates will be influenced by, among other factors,
o the overcollateralization level of the assets in the mortgage
pool at such time, i.e., the extent to which interest on the
mortgage loans is accruing on a higher stated principal
balance than the certificate principal balance of the offered
certificates,
o the delinquency and default experience of the mortgage loans,
and
o the provisions of the pooling and servicing agreement that
permit principal collections to be distributed to the Class
B-IO Certificates and the residual certificates in each case
as provided in the pooling and servicing agreement when
required overcollateralization levels have been met.
To the extent that greater amounts of Excess Spread are distributed in
reduction of the certificate principal balance of a class of offered
certificates, the weighted average life thereof can be expected to shorten. No
assurance, however, can be given as to the amount of Excess Spread to be
distributed at any time or in the aggregate.
We refer you to "Description of the Certificates -- Distributions" and
" -- Excess Spread and Overcollateralization Provisions" in this prospectus
supplement.
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The yields to maturity of the offered certificates and, in particular
the subordinated certificates, in the order of payment priority, will be
progressively more sensitive to the rate, timing and severity of Realized Losses
on the mortgage loans. If an Applied Realized Loss Amount is allocated to a
class of certificates, that class will thereafter accrue interest on a reduced
certificate principal balance. Although the Applied Realized Loss Amount so
allocated may be recovered on future distribution dates to the extent Excess
Cashflow is available for that purpose, there can be no assurance that those
amounts will be available or sufficient.
Prepayments and Yields of Offered Certificates
The extent to which the yield to maturity of an offered certificate may
vary from the anticipated yield will depend upon the degree to which it is
purchased at a discount or premium and, correspondingly, the degree to which the
timing of payments thereon is sensitive to prepayments, liquidations and
purchases of the mortgage loans. In particular, in the case of an offered
certificate purchased at a discount, an investor should consider the risk that a
slower than anticipated rate of principal payments, liquidations and purchases
of the mortgage loans could result in an actual yield to such investor that is
lower than the anticipated yield and, in the case of an offered certificate
purchased at a premium, the risk that a faster than anticipated rate of
principal payments, liquidations and purchases of such mortgage loans could
result in an actual yield to such investor that is lower than the anticipated
yield.
The effective yield to the holders of the Class A-IO certificates which
bear interest at a fixed rate will be lower than the yield otherwise produced by
the applicable rate at which interest is passed through to such holders and the
purchase price of such certificates because monthly distributions will not be
payable to such holders until the 25th day or, if such day is not a business
day, the following business day, of the month following the month in which the
interest accrues on the related mortgage loans, without any additional
distribution of interest or earnings thereon in respect of such delay.
Approximately 48.94% of the mortgage loans bear fixed rates. In
general, if prevailing interest rates fall significantly below the interest
rates on the fixed rate mortgage loans, these fixed rate mortgage loans are
likely to be subject to higher prepayment rates than if prevailing rates remain
at or above the interest rates on the fixed rate mortgage loans. Conversely, if
prevailing interest rates rise appreciably above the interest rates on the fixed
rate mortgage loans, the fixed rate mortgage loans are likely to experience a
lower prepayment rate than if prevailing rates remain at or below the interest
rates on such fixed rate mortgage loans.
Mortgage loans with higher mortgage rates may prepay faster than
mortgage loans with relatively lower mortgage rates in response to a given
change in market interest rates. Any such disproportionate prepayment of
mortgage loans may reduce the applicable interest rate cap. To the extent that
the pass-through rate on a class of certificates is limited by the applicable
interest rate cap, the difference between (x) the interest amount payable to
such class at the applicable pass-through rate without regard to the applicable
interest rate cap, and (y) the Current Interest payable to such class on an
applicable distribution date will create a shortfall. In such event, no amounts
will be distributable on the applicable distribution date or on any future
distribution date in respect of the foregone interest amounts.
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The "last scheduled distribution date" for each class of the offered
certificates, other than the Class A-IO Certificates, is the distribution date
in the month following the latest maturing mortgage loan plus 12 months, which
is the distribution date in October, 2032. The actual final distribution date
with respect to such class of offered certificates could occur significantly
earlier than its last scheduled distribution date because
o prepayments are likely to occur which will be applied to the
payment of the certificate principal balances thereof,
o Excess Spread to the extent available will be applied as an
accelerated payment of principal on the offered certificates
to the extent described herein, and
o the master servicer may purchase all the mortgage loans when
the aggregate Stated Principal Balance thereof has declined to
10% or less of the cut-off date stated principal balance of
the mortgage loans and may purchase mortgage loans in certain
other circumstances as described herein.
The "last scheduled distribution date" for the Class A-IO Certificates
is the distribution date in May 2004.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this prospectus supplement,
which we refer to as the prepayment model, is a prepayment assumption which
represents a constant assumed rate of prepayment, which we abbreviate as CPR,
each month relative to the then outstanding principal balance of a pool of
mortgage loans similar to the mortgage loans in the mortgage loan pool for the
life of such mortgage loans. For example, 25% CPR assumes a constant prepayment
rate of 25% per annum.
There is no assurance, however, that prepayments on the mortgage loans
will conform to any level of the prepayment model, and no representation is made
that the mortgage loans will prepay at the prepayment rates shown or any other
prepayment rate. The rate of principal payments on pools of mortgage loans is
influenced by a variety of economic, geographic, social and other factors,
including the level of interest rates. Other factors affecting prepayment of
mortgage loans include changes in obligors, housing needs, job transfers and
unemployment. In the case of mortgage loans in general, if prevailing interest
rates fall significantly below the interest rates on such mortgage loans, the
mortgage loans are likely to be subject to higher prepayment rates than if
prevailing interest rates remain at or above the rates borne by such mortgage
loans. Conversely, if prevailing interest rates rise above the interest rates on
such mortgage loans, the rate of prepayment would be expected to decrease.
The following tables have been prepared on the basis of the following
assumptions, which we refer to, collectively, as modeling assumptions:
o the mortgage loans prepay at the indicated percentages of CPR;
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o distributions on the offered certificates are received, in
cash, on the 25th day of each month, commencing in December
2001, in accordance with the payment priorities defined
herein;
o no defaults or delinquencies in, or modifications, waivers or
amendments respecting, the payment by the mortgagors of
principal and interest on the mortgage loans occur;
o scheduled payments are assumed to be received on the first day
of each month commencing in December 2001, there are no
shortfalls in the payment of interest to certificateholders
and prepayments represent payment in full of individual
mortgage loans and are assumed to be received on the last day
of each month, commencing in November 2001 and include 30 days
interest thereon;
o each index for the adjustable rate mortgage loans remains
constant at the following levels:
Index Rate
----- ----
1-year CMT 2.428%
6-month LIBOR 2.22125%
11th Dist. COFI 3.974%
o the mortgage rate on each adjustable rate mortgage loan will
be adjusted on each interest adjustment date to a rate equal
to the applicable related index (as described above) plus the
applicable gross margin, subject to maximum lifetime mortgage
rates, minimum lifetime mortgage rates and periodic caps (as
applicable),
o other than mortgage loans that are balloon mortgage loans
scheduled monthly payments of principal and interest on each
adjustable rate mortgage loan will be adjusted on each payment
adjustment date to equal a fully amortizing payment, subject
to periodic payment caps, as applicable.
o other than mortgage loans that are balloon loans, scheduled
monthly payments of principal and interest on the mortgage
loans are calculated on their respective principal balances
(prior to giving effect to prepayments received thereon during
the preceding calendar month), mortgage rate and remaining
terms to stated maturity such that the mortgage loans will
fully amortize by their stated maturities;
o the closing date for the Certificates is November 30, 2001;
o except as indicated with respect to the weighted average
lives, the master servicer does not exercise its right to
purchase the assets of the trust fund on the optional
termination date;
o the level of One-Month LIBOR remains constant at 2.10813% per
annum; and
o the Mortgage Loans have the following approximate
characteristics:
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Assumed Mortgage Loans
Remaining Remaining
Mortgage Loan Current Gross Net Mortgagae Balloon Term Amortization Term
Number Balance Mortgage Rate Rate (in months) (in months)
- ------------------------------------------------------------------------------------------------------------------------
1 $28,491,570.54 11.203% 10.683% 168 348
2 28,194.34 11.394 10.874 19 19
3 979,447.74 9.820 9.300 53 53
4 4,898,746.37 10.894 10.374 142 142
5 4,607,268.42 10.918 10.398 209 209
6 765,938.09 11.415 10.895 268 268
7 33,327,935.78 10.433 9.913 334 334
8 5,694,649.82 12.802 12.282 168 337
9 8,694.78 14.000 13.480 39 39
10 721,127.64 12.663 12.143 62 62
11 4,536,875.18 12.803 12.283 139 139
12 4,180,046.17 12.550 12.030 227 227
13 210,735.84 13.817 13.297 270 270
14 580,230.61 11.741 11.221 326 326
15 6,743,547.19 8.346 7.826 295 295
16 2,074,962.23 8.733 8.213 280 280
17 1,414,944.32 8.743 8.223 309 309
18 726,319.52 9.089 8.569 311 311
19 1,213,982.10 10.694 10.174 324 324
20 1,082,728.70 11.728 11.208 337 337
21 685,079.62 7.722 7.202 297 297
22 566,580.81 7.737 7.217 279 279
23 967,183.14 8.900 8.380 278 278
24 88,420.59 8.875 8.355 278 278
25 126,821.91 11.000 10.480 297 297
26 5,934,571.67 9.339 8.819 292 292
27 3,529,947.56 10.335 9.815 286 286
28 11,181,601.34 10.218 9.698 286 286
29 17,605,829.37 10.326 9.806 269 269
30 30,055,955.38 10.837 10.317 268 268
31 8,904,840.56 12.064 11.544 306 306
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Assumed Mortgage Loans
Number of Months
Mortgage Loan to Next Rate Months Between
Number Index Gross Margin Adjustment Date Rate Adjustments
- --------------------------------------------------------------------------------------------------------------------
1 -- -- -- --
2 -- -- -- --
3 -- -- -- --
4 -- -- -- --
5 -- -- -- --
6 -- -- -- --
7 -- -- -- --
8 -- -- -- --
9 -- -- -- --
10 -- -- -- --
11 -- -- -- --
12 -- -- -- --
13 -- -- -- --
14 -- -- -- --
15 1-year CMT 3.543% 14 12
16 1-year CMT 3.776 5 12
17 1-year CMT 3.025 14 12
18 1-year CMT 3.829 8 12
19 1-year CMT 6.617 10 12
20 1-year CMT 7.280 13 12
21 11th Dist. COFI 3.562 1 1
22 11th Dist. COFI 2.921 4 6
23 6-month LIBOR 3.633 3 6
24 6-month LIBOR 3.125 1 6
25 6-month LIBOR 5.750 3 6
26 6-month LIBOR 4.243 4 6
27 6-month LIBOR 5.894 5 6
28 6-month LIBOR 5.243 4 6
29 6-month LIBOR 5.168 4 6
30 6-month LIBOR 5.637 4 6
31 6-month LIBOR 6.962 8 6
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Assumed Mortgage Loans
Mortgage Loan Initial Periodic Subsequent Periodic Maximum Interest Minimum Interest
Number Rate Cap Rate Cap Rate Rate
- --------------------------------------------------------------------------------------------------------------------
1 -- -- -- --
2 -- -- -- --
3 -- -- -- --
4 -- -- -- --
5 -- -- -- --
6 -- -- -- --
7 -- -- -- --
8 -- -- -- --
9 -- -- -- --
10 -- -- -- --
11 -- -- -- --
12 -- -- -- --
13 -- -- -- --
14 -- -- -- --
15 3.870% 1.958% 14.136% 4.838%
16 2.549 2.000 13.767 7.272
17 3.501 2.000 14.419 8.568
18 2.716 2.000 14.740 9.237
19 2.746 2.000 16.524 10.524
20 3.000 2.000 17.728 11.728
21 0.000 0.000 13.045 3.562
22 1.000 1.000 11.536 3.705
23 1.000 1.000 13.620 3.633
24 1.000 1.000 14.750 8.750
25 1.000 1.000 16.400 10.400
26 2.813 1.035 14.699 5.691
27 2.584 1.316 15.047 7.597
28 1.923 1.114 14.862 8.605
29 2.352 1.049 15.736 9.628
30 2.678 1.010 16.578 10.529
31 2.598 1.065 17.943 11.693
S-79
While it is assumed that each of the mortgage loans prepays at the
indicated percentages of the CPR, this is not likely to be the case.
Discrepancies will exist between the characteristics of the actual
mortgage loans which will be delivered to the trustee and characteristics of the
mortgage loans assumed in preparing the tables. To the extent that the mortgage
loans have characteristics which differ from those assumed in preparing the
tables, the certificates may mature earlier or later than indicated by the
tables.
Based on the foregoing assumptions, the tables below indicate the
weighted average life of each class of offered certificates (other than the
Class R Certificates) and set forth the percentages of the initial current
principal amount of each such class that would be outstanding after the
distribution date in November of each of the years indicated, assuming that the
mortgage loans prepay at the indicated percentages of CPR. Neither CPR 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 mortgage loans, including the mortgage loans securitized in
connection with the issuance of the certificates. Variations in the actual
prepayment experience and the balance of the mortgage loans that prepay may
increase or decrease the percentage of initial current principal amount (and
weighted average life) shown in the following tables. These variations may occur
even if the average prepayment experience of all such mortgage loans equals any
of the specified percentages of CPR.
S-80
Percent of Initial Class A-1, Class A-2 and Class A-3 Certificate Principal
Balance
at the Respective Percentages of CPR
Distribution Date Class A-1, Class A-2 and Class A-3 Certificates
- ----------------- --------------------------------------------------
0% 15% 20% 25% 30% 35% 40%
-- --- --- --- --- --- ---
Initial Percentage ............................................. 100% 100% 100% 100% 100% 100% 100%
November, 2002 ................................................. 95 79 73 68 62 57 51
November, 2003 ................................................. 94 63 54 46 38 31 24
November, 2004 ................................................. 92 51 40 30 22 14 8
November, 2005 ................................................. 90 40 31 24 18 14 8
November, 2006 ................................................. 88 33 25 18 13 9 6
November, 2007 ................................................. 85 28 19 13 9 6 3
November, 2008 ................................................. 83 23 15 10 6 4 2
November, 2009 ................................................. 80 19 12 7 4 2 1
November, 2010 ................................................. 77 16 9 5 3 1 *
November, 2011 ................................................. 74 13 7 4 2 1 0
November, 2012 ................................................. 71 10 5 3 1 * 0
November, 2013 ................................................. 67 9 4 2 1 0 0
November, 2014 ................................................. 63 7 3 1 * 0 0
November, 2015 ................................................. 42 4 2 * 0 0 0
November, 2016 ................................................. 39 3 1 * 0 0 0
November, 2017 ................................................. 36 3 1 0 0 0 0
November, 2018 ................................................. 33 2 * 0 0 0 0
November, 2019 ................................................. 29 2 * 0 0 0 0
November, 2020 ................................................. 25 1 0 0 0 0 0
November, 2021 ................................................. 22 1 0 0 0 0 0
November, 2022 ................................................. 17 * 0 0 0 0 0
November, 2023 ................................................. 13 0 0 0 0 0 0
November, 2024 ................................................. 9 0 0 0 0 0 0
November, 2025 ................................................. 7 0 0 0 0 0 0
November, 2026 ................................................. 5 0 0 0 0 0 0
November, 2027 ................................................. 3 0 0 0 0 0 0
November, 2028 ................................................. 1 0 0 0 0 0 0
November, 2029 ................................................. 0 0 0 0 0 0 0
Weighted Average Life (in years)(1) ............................ 14.00 4.57 3.53 2.81 2.28 1.86 1.52
Weighted Average Life (in years)(1)(2) ......................... 13.84 4.31 3.27 2.59 2.09 1.70 1.39
- ---------------
(1) The weighted average life of the offered certificates is determined by (i)
multiplying the amount of each principal payment by the number of years from
the date of issuance to the related distribution date, (ii) adding the
results, and (iii) dividing the sum by the initial respective certificate
principal balance for such class of offered certificates.
(2) To the optional termination date.
* Less than 0.50% but greater than 0%.
S-81
Percent of Initial Class M-1 Certificate Principal Balance
at the Respective Percentages of CPR
Distribution Date Class M-1 Certificates
- ----------------- --------------------------------------------------
0% 15% 20% 25% 30% 35% 40%
-- --- --- --- --- --- ---
Initial Percentage ............................................. 100% 100% 100% 100% 100% 100% 100%
November, 2002 ................................................. 100 100 100 100 100 100 100
November, 2003 ................................................. 100 100 100 100 100 100 100
November, 2004 ................................................. 100 100 100 100 100 100 100
November, 2005 ................................................. 100 98 77 59 45 33 54
November, 2006 ................................................. 100 82 60 44 31 21 14
November, 2007 ................................................. 100 68 47 32 21 14 8
November, 2008 ................................................. 100 56 37 23 14 9 3
November, 2009 ................................................. 100 47 29 17 10 4 0
November, 2010 ................................................. 100 38 22 12 7 0 0
November, 2011 ................................................. 100 31 17 9 2 0 0
November, 2012 ................................................. 100 26 13 6 0 0 0
November, 2013 ................................................. 100 21 10 2 0 0 0
November, 2014 ................................................. 100 17 8 0 0 0 0
November, 2015 ................................................. 100 10 2 0 0 0 0
November, 2016 ................................................. 95 8 0 0 0 0 0
November, 2017 ................................................. 88 7 0 0 0 0 0
November, 2018 ................................................. 80 3 0 0 0 0 0
November, 2019 ................................................. 71 * 0 0 0 0 0
November, 2020 ................................................. 62 0 0 0 0 0 0
November, 2021 ................................................. 53 0 0 0 0 0 0
November, 2022 ................................................. 43 0 0 0 0 0 0
November, 2023 ................................................. 31 0 0 0 0 0 0
November, 2024 ................................................. 23 0 0 0 0 0 0
November, 2025 ................................................. 16 0 0 0 0 0 0
November, 2026 ................................................. 11 0 0 0 0 0 0
November, 2027 ................................................. 7 0 0 0 0 0 0
November, 2028 ................................................. 0 0 0 0 0 0 0
November, 2029 ................................................. 0 0 0 0 0 0 0
Weighted Average Life (in years)(1) ............................ 20.35 8.66 6.73 5.51 4.79 4.43 4.35
Weighted Average Life (in years)(1)(2) ......................... 19.98 8.13 6.19 5.05 4.40 4.09 4.07
- ---------------
(1) The weighted average life of the offered certificates is determined by (i)
multiplying the amount of each principal payment by the number of years from
the date of issuance to the related distribution date, (ii) adding the
results, and (iii) dividing the sum by the initial respective certificate
principal balance for such class of offered certificates.
(2) To the optional termination date.
* Less than 0.50% but greater than 0%.
S-82
Percent of Initial Class M-2 Certificate Principal Balance
at the Respective Percentages of CPR
Distribution Date Class M-2 Certificates
- ----------------- --------------------------------------------------
0% 15% 20% 25% 30% 35% 40%
-- --- --- --- --- --- ---
Initial Percentage ............................................. 100% 100% 100% 100% 100% 100% 100%
November, 2002 ................................................. 100 100 100 100 100 100 100
November, 2003 ................................................. 100 100 100 100 100 100 100
November, 2004 ................................................. 100 100 100 100 100 100 100
November, 2005 ................................................. 100 98 77 59 45 33 24
November, 2006 ................................................. 100 82 60 44 31 21 14
November, 2007 ................................................. 100 68 47 32 21 14 5
November, 2008 ................................................. 100 56 37 23 14 5 0
November, 2009 ................................................. 100 47 29 17 8 0 0
November, 2010 ................................................. 100 38 22 12 1 0 0
November, 2011 ................................................. 100 31 17 6 0 0 0
November, 2012 ................................................. 100 26 13 * 0 0 0
November, 2013 ................................................. 100 21 9 0 0 0 0
November, 2014 ................................................. 100 17 3 0 0 0 0
November, 2015 ................................................. 100 10 0 0 0 0 0
November, 2016 ................................................. 95 4 0 0 0 0 0
November, 2017 ................................................. 88 * 0 0 0 0 0
November, 2018 ................................................. 80 0 0 0 0 0 0
November, 2019 ................................................. 71 0 0 0 0 0 0
November, 2020 ................................................. 62 0 0 0 0 0 0
November, 2021 ................................................. 53 0 0 0 0 0 0
November, 2022 ................................................. 43 0 0 0 0 0 0
November, 2023 ................................................. 31 0 0 0 0 0 0
November, 2024 ................................................. 23 0 0 0 0 0 0
November, 2025 ................................................. 16 0 0 0 0 0 0
November, 2026 ................................................. 11 0 0 0 0 0 0
November, 2027 ................................................. 2 0 0 0 0 0 0
November, 2028 ................................................. 0 0 0 0 0 0 0
November, 2029 ................................................. 0 0 0 0 0 0 0
Weighted Average Life (in years)(1) ............................ 20.29 8.52 6.64 5.38 4.62 4.16 3.91
Weighted Average Life (in years)(1)(2) ......................... 19.98 8.13 6.19 5.03 4.31 3.90 3.70
- ---------------
(1) The weighted average life of the offered certificates is determined by (i)
multiplying the amount of each principal payment by the number of years from
the date of issuance to the related distribution date, (ii) adding the
results, and (iii) dividing the sum by the initial respective certificate
principal balance for such class of offered certificates.
(2) To the optional termination date.
* Less than 0.50% but greater than 0%.
S-83
Percent of the Initial Class B Certificate Principal Balance
at the Respective Percentages of CPR
Distribution Date Class B Certificates
- ----------------- --------------------------------------------------
0% 15% 20% 25% 30% 35% 40%
-- --- --- --- --- --- ---
Initial Percentage ............................................. 100% 100% 100% 100% 100% 100% 100%
November, 2002 ................................................. 100 100 100 100 100 100 100
November, 2003 ................................................. 100 100 100 100 100 100 100
November, 2004 ................................................. 100 100 100 100 100 100 100
November, 2005 ................................................. 100 98 77 59 45 33 24
November, 2006 ................................................. 100 82 60 44 31 21 10
November, 2007 ................................................. 100 68 47 32 21 7 0
November, 2008 ................................................. 100 56 37 23 10 0 0
November, 2009 ................................................. 100 47 29 17 0 0 0
November, 2010 ................................................. 100 38 22 4 0 0 0
November, 2011 ................................................. 100 31 17 0 0 0 0
November, 2012 ................................................. 100 26 6 0 0 0 0
November, 2013 ................................................. 100 21 0 0 0 0 0
November, 2014 ................................................. 100 17 0 0 0 0 0
November, 2015 ................................................. 100 0 0 0 0 0 0
November, 2016 ................................................. 95 0 0 0 0 0 0
November, 2017 ................................................. 88 0 0 0 0 0 0
November, 2018 ................................................. 80 0 0 0 0 0 0
November, 2019 ................................................. 71 0 0 0 0 0 0
November, 2020 ................................................. 62 0 0 0 0 0 0
November, 2021 ................................................. 53 0 0 0 0 0 0
November, 2022 ................................................. 43 0 0 0 0 0 0
November, 2023 ................................................. 31 0 0 0 0 0 0
November, 2024 ................................................. 23 0 0 0 0 0 0
November, 2025 ................................................. 16 0 0 0 0 0 0
November, 2026 ................................................. 1 0 0 0 0 0 0
November, 2027 ................................................. 0 0 0 0 0 0 0
November, 2028 ................................................. 0 0 0 0 0 0 0
November, 2029 ................................................. 0 0 0 0 0 0 0
Weighted Average Life (in years)(1) ............................ 20.16 8.40 6.45 5.21 4.45 3.98 3.70
Weighted Average Life (in years)(1)(2) ......................... 19.98 8.13 6.19 5.01 4.28 3.83 3.58
- ---------------
(1) The weighted average life of the offered certificates is determined by (i)
multiplying the amount of each principal payment by the number of years from
the date of issuance to the related distribution date, (ii) adding the
results, and (iii) dividing the sum by the initial respective certificate
principal balance for such class of offered certificates.
(2) To the optional termination date.
S-84
Additional Information
The depositor intends to file certain additional yield tables and other
computational materials with respect to the certificates with the Securities and
Exchange Commission in a report on Form 8-K. Such tables and materials were
prepared by 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 modeling assumptions. Accordingly, such tables
and other materials may not be relevant to or appropriate for investors other
than those specifically requesting them.
USE OF PROCEEDS
The depositor will apply the net proceeds of the sale of the offered
certificates against the purchase price of the mortgage loans.
FEDERAL INCOME TAX CONSEQUENCES
The pooling and servicing agreement provides that three REMIC elections
will be made with respect to the assets in the trust fund, creating a tiered
REMIC structure.
Upon the issuance of the offered certificates, Stroock & Stroock &
Lavan LLP ("Tax Counsel") will deliver its opinion concluding that for federal
income tax purposes and assuming compliance with the pooling and servicing
agreement, each REMIC comprising the trust fund will qualify as a REMIC within
the meaning of Section 860D of the Internal Revenue Code of 1986, as amended
(the "Code") and the offered certificates, other than the Class R Certificates,
will represent regular interests in a REMIC and the Class R Certificates will
each represent the residual interest in a REMIC.
Taxation of Regular Interests
A holder of an offered certificate, other than the Class R
Certificates, will be treated for federal income tax purposes as owning a
regular interest in a REMIC and a holder of a Class R Certificate will be
treated for federal income tax purposes as owning a residual interest in a
REMIC.
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 original issue discount, known as OID. The Class A-IO
Certificates will be issued with OID. We refer you to "Material Federal Income
Tax Considerations - Taxation of Debt Securities" in the prospectus. The
prepayment assumption that will be used in determining the accrual of OID,
market discount, or bond premium, if any, will be a rate equal to 25% CPR as
described above. No representation is made that the mortgage loans will prepay
at such rate or at any other rate. OID must be included in income as it accrues
on a constant yield method, regardless of whether the holder receives currently
the cash attributable to such OID.
S-85
Status of the offered certificates
The offered certificates will be treated as assets described in Section
7701(a)(19)(C) of the Code, and as "real estate assets" under Section
856(c)(5)(B) of the Code, generally, in the same proportion that the assets of
the trust fund would be so treated. In addition, to the extent a regular
interest represents real estate assets under Section 856(c)(5)(B) of the Code,
the interest derived from that regular interest would be interest on obligations
secured by interests in real property for purposes of section 856(c)(3) of the
Code.
For further information regarding the federal income tax consequences
of investing in the offered certificates, we refer you to "Material Federal
Income Tax Considerations" in the prospectus.
STATE TAXES
None of the depositor, the master servicer or the trustee makes any
representations regarding the tax consequences of purchase, ownership or
disposition of the offered certificates under the tax laws of any state.
Investors considering an investment in the offered certificates should consult
their own tax advisors regarding such tax consequences.
All investors should consult their own tax advisors regarding the
federal, state, local or foreign income tax consequences of the purchase,
ownership and disposition of the offered certificates.
ERISA CONSIDERATIONS
Fiduciaries of employee benefit plans subject to Title I of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA") should
consider the ERISA fiduciary investment standards before authorizing an
investment by a plan in the certificates. In addition, fiduciaries of employee
benefit plans subject to Title I of ERISA, as well as certain plans or other
retirement arrangements not subject to ERISA, but which are subject to Section
4975 of the Code (such as individual retirement accounts and Keogh plans
covering only a sole proprietor, or partners), or any entity whose underlying
assets include plan assets by reason of a plan or account investing in such
entity, including an insurance company general account (collectively, "Plan(s),"
should consult with their legal counsel to determine whether an investment in
the certificates will cause the assets of the trust to be considered plan assets
pursuant to the plan asset regulations set forth at 29 C.F.R. ss. 2510.3-101
(the "Plan Asset Regulations"), thereby subjecting the Plan to the prohibited
transaction rules with respect to such assets and the trustee or the master
servicer to the fiduciary investments standards of ERISA, or cause the excise
tax provisions of Section 4975 of the Code to apply to such assets, unless an
exemption granted by the Department of Labor applies to the purchase, sale,
transfer or holding of the certificates.
S-86
Prohibited Transaction Exemption ("PTE") 90-30 (the "Exemption"), as
recently amended by PTE 2000-58, will not be met with respect to the offered
certificates because the loan-to-value ratios of certain mortgage loans are in
excess of 100%. See "ERISA Considerations" in the prospectus. However, the
offered certificates may be acquired for or on behalf of a purchaser which is
acquiring such certificates directly or indirectly for or on behalf of a Plan,
provided that neither the proposed transfer and/or holding of a certificate nor
the servicing, management and operation of the trust (i) will result in a
prohibited transaction under Section 406 of ERISA or Section 4975 of the Code
which will not be covered under an individual or class prohibited transaction
exemption including but not limited to Department of Labor Prohibited
Transaction Exemption ("PTE") 84-14 (class exemption for plan asset transaction
determined by independent qualified professional asset managers); PTE 91-38
(class exemption for certain transactions involving bank collective investment
funds); PTE 90-1 (class exemption for certain transactions involving insurance
company pooled separate accounts); PTE 95-60 (class exemption for certain
transactions involving insurance company general accounts); and PTCE 96-23
(class exemption for plan asset transactions determined by in-house asset
managers) ("Investor-Based Exemptions") nor (ii) will give rise to any
additional fiduciary duties under ERISA on the part of the master servicer or
the trustee, which will be deemed represented by an owner of a book-entry
certificate and will be evidenced by a representation to such effect by or on
behalf of a holder of a physical certificate.
Any Plan fiduciary which proposes to cause a Plan to purchase offered
certificates should consult with its own counsel with respect to the potential
consequences under ERISA and the Code of the Plan's acquisition and ownership of
the offered certificates. Assets of a Plan should not be invested in offered
certificates unless it is clear that an Investor-Based Exemption will apply and
exempt all potential prohibited transactions.
A governmental plan as defined in Section 3(32) of ERISA is not subject
to ERISA, or Code Section 4975. However, such governmental plan may be subject
to Federal, state and local law, which is, to a material extent, similar to the
provisions of ERISA or Code Section 4975. A fiduciary of a governmental plan
should make its own determination as to the propriety of such investment under
applicable fiduciary or other investment standards, and the need for and the
availability of any exemptive relief under any such similar law.
RESTRICTIONS ON PURCHASE AND TRANSFER
OF THE RESIDUAL CERTIFICATES
The residual certificates are not offered for sale to any investor that
is a "disqualified organization" as described in "Material Federal Income Tax
Considerations--Taxation of Holders of Residual Interest
Securities--Restrictions on Transfer of Residual Interest Securities" in the
prospectus.
As a prerequisite to any transfer of a residual certificate, the
proposed transferee must provide an affidavit that the proposed transferee is
not a disqualified organization or publicly traded partnership and an affidavit
that it is a U.S. Person. In the event that legislation is enacted which would
subject the trust fund to tax (or disqualify any REMIC as a REMIC) on the
transfer of an interest in a residual certificate to any other person or
persons, the pooling and servicing agreement may be amended, without
certificateholder consent, to restrict or prohibit prospectively such transfer.
A transfer in violation of the restrictions set forth herein may subject a
holder of a residual certificate to taxation. Moreover, certain transfers of a
residual certificate that are effective to transfer legal ownership may
nevertheless be ineffective to transfer ownership for federal income tax
purposes, if at the time of the transfer a residual certificate represents a
"noneconomic residual interest" as defined in the REMIC Regulations and if
avoiding or impeding the assessment or collection of tax is a significant
purpose of the transfer. See "Material Federal Income Tax
Considerations--Taxation of Holders of Residual Interest
Securities--Restrictions on Transfer of Residual Interest Securities" in the
Prospectus. Further, unless permitted under the pooling and servicing agreement,
a residual certificate (including a beneficial interest therein) may not be
purchased by or transferred to any person who is not a "United States person,"
as such term is defined in Section 7701(a)(30) of the Code (a "U.S. Person").
S-87
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the underwriting
agreement, dated November 27, 2001, among the depositor, Bear, Stearns & Co.
Inc., as an underwriter, and Countrywide Securities Corporation, as an
underwriter (collectively, the "underwriters"), the depositor has agreed to sell
all of the offered certificates to Bear, Stearns & Co. Inc., except for
$3,750,000 initial principal amount of the Class A-1 Certificates, which will be
purchased by Countrywide Securities Corporation, and the underwriters have
severally and not jointly agreed to purchase such amounts of offered
certificates from the depositor.
The offered certificates will be offered by the underwriters when, as
and if issued and sold by the depositor to the underwriters, subject to the
underwriters' right to reject any subscription, in whole or in part.
Distribution of the offered certificates will be made by the underwriters from
time to time in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. In connection with the sale of the offered
certificates, the underwriters may be deemed to have received compensation from
the depositor in the form of underwriting discounts. It is expected that the
proceeds to the depositor from the sale of the offered certificates will be
approximately $185,139,000 plus accrued interest, before deducting issuance
expenses payable by the depositor, estimated to be approximately $525,000.
The depositor has been advised by the underwriters they intend to make
a market in the offered certificates, but the underwriters have no obligation to
do so. There can be no assurance that a secondary market for the offered
certificates, or any particular class thereof, will develop or, if it does
develop, that it will continue or that such market will provide sufficient
liquidity to certificateholders.
The depositor has agreed to indemnify the underwriters against, or make
contributions to the underwriters with respect to, certain liabilities,
including liabilities under the Securities Act of 1933, as amended. The Bear,
Stearns & Co. Inc. is an affiliate of the depositor and EMC. From time to time
the underwriters or their affiliates may perform investment banking and advisory
services for, and may provide general financing and banking services to, the
depositor and other affiliates of the depositor.
S-88
LEGAL MATTERS
The validity of the certificates, including certain federal income tax
consequences with respect thereto, will be passed upon for the depositor by
Stroock & Stroock & Lavan LLP, New York, New York. Stroock & Stroock & Lavan
LLP, New York, New York, will also pass upon certain legal matters on behalf of
the seller, EMC and the underwriters.
RATINGS
It is a condition of the issuance of the offered certificates that each class of
offered certificates be assigned the ratings designated below by Moody's and
Standard & Poor's.
Rating
---------------------------------------
Class Moody's Standard and Poor's
--------- ------------ -----------------------
A Aaa AAA
A-2 Aaa AAA
A-3 Aaa AAA
A-IO Aaa AAA
M-1 Aa2 AA
M-2 A2 A
B Baa2 BBB
R-1 -- AAA
R-2 -- AAA
R-3 -- AAA
The security ratings assigned to the offered certificates should be
evaluated independently from similar ratings on other types of securities. A
security rating is not a recommendation to buy, sell or hold securities and may
be subject to revision or withdrawal at any time by the respective rating
agency. The ratings on the offered certificates do not, however, constitute
statements regarding the likelihood or frequency of prepayments on the mortgage
loans or the anticipated yields in light of prepayments.
The ratings do not reflect the likelihood of payment of any basis risk
shortfall to the adjustable rate certificates.
The depositor has not requested ratings of the offered certificates by
any rating agency other than Moody's and Standard & Poor's. However, there can
be no assurance as to whether any other rating agency will rate the offered
certificates or, if it does, what ratings would be assigned by such other rating
agency. The ratings assigned by such other rating agency to the offered
certificates could be lower than the respective ratings assigned by the rating
agencies.
S-89
INDEX OF DEFINED TERMS
1-Year CMT..................................................................S-32
6-month LIBOR...............................................................S-32
Applied Realized Loss Amount................................................S-57
balloon loans...............................................................S-20
Certificate Principal Balance...............................................S-57
Certificates.................................................................S-4
Class A Principal Distribution Amount.......................................S-57
Class B Principal Distribution Amount.......................................S-58
Class M-1 Principal Distribution Amount.....................................S-58
Class M-2 Principal Distribution Amount.....................................S-59
Clearstream.................................................................S-49
Closing Date.................................................................S-5
Code........................................................................S-85
Collateral Value............................................................S-30
Compensating Interest.......................................................S-46
credit life insurance.......................................................S-23
Current Interest............................................................S-59
Cut-Off Date.................................................................S-5
defaulted mortgage loan.....................................................S-44
Depositor....................................................................S-4
distribution account........................................................S-45
Distribution Dates...........................................................S-7
DTC.........................................................................S-49
Due Period..................................................................S-59
EMC.........................................................................S-37
ERISA.......................................................................S-86
ERISA Considerations........................................................S-10
Euroclear...................................................................S-49
Excess Cashflow.............................................................S-59
Excess Overcollateralization Amount.........................................S-59
Excess Spread...............................................................S-60
Exemption...................................................................S-86
Extra Principal Distribution Amount.........................................S-60
FDIC........................................................................S-41
First Union.................................................................S-29
high cost loans.............................................................S-23
Insurance Proceeds..........................................................S-60
interest adjustment date....................................................S-31
Interest Carry Forward Amount...............................................S-60
Interest Funds..............................................................S-60
Interest Payments............................................................S-8
Interest Rate Cap...........................................................S-65
S-90
Last Scheduled Distribution Date............................................S-75
LIBOR.......................................................................S-32
LIBOR business day..........................................................S-66
Liquidation Proceeds........................................................S-61
Master Servicer..............................................................S-4
Monthly Advances............................................................S-47
Moody's.....................................................................S-10
Mortgage Loans...............................................................S-5
Optional Termination........................................................S-10
Originators..................................................................S-4
Overcollateralization Amount................................................S-61
Overcollateralization Floor.................................................S-61
pass-through margin.........................................................S-65
Pass-Through Rates...........................................................S-7
Plan Asset Regulations......................................................S-86
Plan(s).....................................................................S-86
Pooling and Servicing Agreement..............................................S-5
Prepayment Interest Shortfall...............................................S-46
Prepayment Period...........................................................S-61
Principal Distribution Amount...............................................S-61
Principal Funds.............................................................S-61
Principal Payments...........................................................S-8
protected account...........................................................S-44
PTE.........................................................................S-86
Realized Loss...............................................................S-62
Record Date..................................................................S-6
Reference Banks.............................................................S-66
Relief Act..................................................................S-62
Remaining Excess Spread.....................................................S-62
Seller.......................................................................S-4
Senior Certificates..........................................................S-9
servicing account...........................................................S-41
simple interest loans.......................................................S-30
Specified Overcollateralization Amount......................................S-62
Standard & Poor's...........................................................S-10
Stated Principal Balance....................................................S-62
Stepdown Date...............................................................S-63
Subordinated Certificates....................................................S-9
Tax Counsel.................................................................S-85
Trigger Event...............................................................S-63
Trustee......................................................................S-4
underwriters................................................................S-88
United Companies............................................................S-17
Unpaid Applied Realized Loss Amount.........................................S-63
S-91
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Schedule A
Mortgage Loan Statistical Data
The following information sets forth in tabular format certain
information, as of the cut-off date, about the mortgage loans. Other than with
respect to rates of interest, percentages are approximate and are stated by
cut-off date principal balance of the mortgage loans. The sum of the respective
columns may not equal the total indicated due to rounding.
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Mortgage Rates of the Mortgage Loans as of the Cut-Off Date
Aggregate
Scheduled Balance
Number of Outstanding as of % of
Mortgage Interest Rate Mortgage Loans Cut-Off Date Mortgage Pool
- ---------------------- -------------- ------------ -------------
5.001% - 5.500% ............................................. 1 $ 36,524 0.02%
6.001% - 6.500% ............................................. 5 431,955 0.24
6.501% - 7.000% ............................................. 7 652,832 0.36
7.001% - 7.500% ............................................. 21 2,061,790 1.13
7.501% - 8.000% ............................................. 53 6,196,581 3.41
8.001% - 8.500% ............................................. 65 5,286,987 2.91
8.501% - 9.000% ............................................. 80 8,373,797 4.60
9.001% - 9.500% ............................................. 100 8,545,863 4.70
9.501% - 10.000% ............................................. 226 16,544,898 9.09
10.001% - 10.501% ............................................. 347 30,703,219 16.88
10.501% - 11.000% ............................................. 490 32,100,472 17.64
11.001% - 11.500% ............................................. 323 20,958,097 11.52
11.501% - 12.000% ............................................. 316 21,245,423 11.68
12.001% - 12.500% ............................................. 210 12,345,439 6.79
12.501% - 13.000% ............................................. 172 7,604,335 4.18
13.001% - 13.500% ............................................. 111 3,945,797 2.17
13.501% - 14.000% ............................................. 90 2,530,371 1.39
14.001% - 14.500% ............................................. 49 1,351,171 0.74
14.501% - 15.000% ............................................. 26 702,466 0.39
15.001% - 15.500% ............................................. 3 135,407 0.07
15.501% - 16.000% ............................................. 3 72,454 0.04
16.001% - 16.500% ............................................. 2 70,660 0.04
17.501% - 18.000% ............................................. 1 14,861 0.01
18.001% or Greater 1 23,381 0.01
----- ------------ ------
Total ........................................................ 2,702 $181,934,777 100.00%
===== ============ ======
As of the Cut-off Date, the weighted average Mortgage Rate of the Mortgage Loans
was approximately 10.731% per annum.
Original Loan-to-Value Ratio in Total Pool
Aggregate
Scheduled Balance
Number of Outstanding as of % of
Loan-to-Value Ratios Mortgage Loans Cut-Off Date Mortgage Pool
- -------------------- -------------- ------------ -------------
Not Available 16 $ 799,389 0.44%
10.01% - 20.00% ............................................. 5 66,689 0.04
20.01% - 30.00% ............................................. 19 506,771 0.28
30.01% - 40.00% ............................................. 18 598,418 0.33
40.01% - 50.00% ............................................. 46 6,711,473 3.69
50.01% - 60.00% ............................................. 105 4,689,456 2.58
60.01% - 70.00% ............................................. 269 17,380,900 9.55
70.01% - 80.00% ............................................. 657 45,097,460 24.79
80.01% - 90.00% ............................................. 980 69,206,587 38.04
90.01% - 100.00% ............................................. 547 34,115,007 18.75
100.01% - 110.00% ............................................. 18 1,425,053 0.78
Greater than 110% ............................................. 22 1,337,575 0.74
----- ------------ ------
Total ........................................................ 2,702 $181,934,777 100.00%
===== ============ ======
As of the Cut-off Date, the weighted average Original Loan-to-Value ratio of the
Mortgage Loans was approximately 82.18%.
A-1
Scheduled Principal Balances of the Mortgage Loans as of the Mortgage Loan
Cut-Off Date
Aggregate
Scheduled Balance
Number of Outstanding as of % of
Scheduled Principal Balance Mortgage Loans Cut-Off Date Mortgage Pool
- --------------------------- -------------- ------------ -------------
$ 0.01 - $ 50,000 ........................................... 1,308 $ 38,223,337 21.01%
$ 50,001 - $100,000 ........................................... 930 65,262,968 35.87
$100,001 - $150,000 ........................................... 301 36,097,472 19.84
$150,001 - $200,000 ........................................... 80 13,783,101 7.58
$200,001 - $250,000 ........................................... 37 8,206,645 4.51
$250,001 - $300,000 ........................................... 15 3,979,956 2.19
$300,001 - $350,000 ........................................... 13 4,265,231 2.34
$350,001 - $400,000 ........................................... 6 2,225,486 1.22
$400,001 - $450,000 ........................................... 4 1,740,421 0.96
$450,001 - $500,000 ........................................... 3 1,476,974 0.81
$550,001 - $600,000 ........................................... 2 1,150,332 0.63
$600,001 - $650,000 ........................................... 1 642,816 0.35
$750,001 - $800,000 ........................................... 1 783,266 0.43
$800,001 or Greater ........................................... 1 4,096,772 2.25
----- ------------ ------
Total ........................................................ 2,702 $181,934,777 100.00%
===== ============ ======
As of the Cut-off Date, the average Principal Balance of the Mortgage Loans was
approximately $67,333.
Credit Score for the Mortgage Loans
Aggregate
Scheduled Balance
Number of Outstanding as of % of
Credit Score Range Mortgage Loans Cut-Off Date Mortgage Pool
- ------------------ -------------- ------------ -------------
No Fico Available ............................................. 46 $ 3,318,442 1.82%
1 - 500 ..................................................... 307 20,014,750 11.00
501 - 520 ..................................................... 254 17,861,023 9.82
521 - 540 ..................................................... 272 16,999,369 9.34
541 - 560 ..................................................... 292 18,415,918 10.12
561 - 580 ..................................................... 245 19,806,518 10.89
581 - 600 ..................................................... 236 15,929,106 8.76
601 - 620 ..................................................... 189 12,790,054 7.03
621 - 640 ..................................................... 207 12,885,017 7.08
641 - 660 ..................................................... 196 12,893,932 7.09
661 - 680 ..................................................... 169 10,710,738 5.89
681 - 700 ..................................................... 108 7,866,665 4.32
701 - 720 ..................................................... 59 4,190,850 2.30
721 - 740 ..................................................... 34 2,583,069 1.42
741 - 760 ..................................................... 39 2,966,942 1.63
761 - 780 ..................................................... 28 1,592,683 0.88
781 - 800 ..................................................... 13 908,803 0.50
Greater than 801 .............................................. 8 200,898 0.11
----- ------------ ------
Total ........................................................ 2,702 $181,934,777 100.00%
===== ============ ======
As of the Cut-off Date, the weighted average Credit Score of the Mortgage Loans
for which Credit Scores are available is approximately 586.
A-2
Geographic Distribution of the Mortgaged Properties
Aggregate
Scheduled Balance
Number of Outstanding as of % of
State Mortgage Loans Cut-Off Date Mortgage Pool
- ----- -------------- ------------ -------------
Alabama ....................................................... 39 $ 1,811,248 1.00%
Arizona ....................................................... 23 946,627 0.52
Arkansas ...................................................... 29 1,952,195 1.07
California .................................................... 222 26,304,682 14.46
Colorado ...................................................... 26 1,886,647 1.04
Connecticut ................................................... 25 2,211,275 1.22
District of Columbia .......................................... 3 335,314 0.18
Delaware ...................................................... 4 293,916 0.16
Florida ....................................................... 207 13,352,137 7.34
Georgia ....................................................... 93 11,670,485 6.41
Hawaii ........................................................ 9 1,762,114 0.97
Iowa .......................................................... 38 1,978,700 1.09
Idaho ......................................................... 5 474,940 0.26
Illinois ...................................................... 102 7,519,580 4.13
Indiana ....................................................... 117 5,689,898 3.13
Kansas ........................................................ 30 1,375,756 0.76
Kentucky ...................................................... 44 2,632,045 1.45
Louisiana ..................................................... 97 3,971,020 2.18
Massachusetts ................................................. 21 1,722,119 0.95
Maryland ...................................................... 55 4,702,281 2.58
Maine ......................................................... 29 1,718,122 0.94
Michigan ...................................................... 114 6,871,486 3.78
Minnesota ..................................................... 53 2,697,570 1.48
Missouri ...................................................... 65 3,445,654 1.89
Mississippi ................................................... 40 2,294,109 1.26
North Carolina ................................................ 158 9,436,133 5.19
Nebraska ...................................................... 14 621,483 0.34
New Hampshire ................................................. 22 1,440,109 0.79
New Jersey .................................................... 28 2,597,365 1.43
New Mexico .................................................... 8 612,236 0.34
Nevada ........................................................ 11 862,616 0.47
New York ...................................................... 127 6,673,785 3.67
Ohio .......................................................... 217 11,222,488 6.17
Oklahoma ...................................................... 66 3,320,807 1.83
Oregon ........................................................ 27 2,462,392 1.35
Pennsylvania .................................................. 123 7,018,871 3.86
Rhode Island .................................................. 11 784,481 0.43
South Carolina ................................................ 58 3,449,380 1.90
South Dakota .................................................. 2 48,467 0.03
Tennessee ..................................................... 69 3,970,894 2.18
Texas ......................................................... 75 4,596,757 2.53
Utah .......................................................... 18 1,145,083 0.63
Virginia ...................................................... 58 4,563,233 2.51
Vermont ....................................................... 10 597,156 0.33
Washington .................................................... 33 2,756,776 1.52
Wisconsin ..................................................... 56 3,157,472 1.74
West Virginia ................................................. 18 809,715 0.45
Wyoming ....................................................... 3 167,160 0.09
----- ------------ ------
Total ........................................................ 2,702 $181,934,777 100.00%
===== ============ ======
A-3
Property Types of Mortgaged Properties
Aggregate
Scheduled Balance
Number of Outstanding as of % of
Property Type Mortgage Loans Cut-Off Date Mortgage Pool
- ------------- -------------- ------------ -------------
2 - 4 Family .................................................. 134 $ 9,100,108 5.00%
Co-op ......................................................... 1 19,628 0.01
Commercial .................................................... 1 303,757 0.17
Condo ......................................................... 65 4,445,021 2.44
Mixed Use ..................................................... 1 213,986 0.12
Mobile/Manufactured Home ...................................... 71 3,940,207 2.17
Multifamily ................................................... 1 40,798 0.02
Pud ........................................................... 34 3,896,340 2.14
Single Family ................................................. 2,361 158,360,188 87.04
Townhouse ..................................................... 32 1,499,224 0.82
Unknown ....................................................... 1 115,520 0.06
----- ------------ ------
Total ........................................................ 2,702 $181,934,777 100.00%
===== ============ ======
Occupancy Status of Mortgaged Properties
Aggregate
Scheduled Balance
Number of Outstanding as of % of
Occupancy Status Mortgage Loans Cut-Off Date Mortgage Pool
- ---------------- -------------- ------------ -------------
Investor ...................................................... 11 $ 1,081,936 0.59%
Primary ....................................................... 2,564 172,269,963 94.69
Second Home ................................................... 23 1,114,057 0.61
Vacant ........................................................ 1 32,878 0.02
Unknown ....................................................... 103 7,435,943 4.09
----- ------------ ------
Total ........................................................ 2,702 $181,934,777 100.00%
===== ============ ======
Based upon representation of the related mortgagors at the time of origination.
Remaining Terms to Stated Maturity for the Mortgage Loans
Aggregate
Scheduled Balance
Stated Remaining Number of Outstanding as of % of
Term to Maturity Mortgage Loans Cut-Off Date Mortgage Pool
- ---------------- -------------- ------------ -------------
1 - 48 Months .............................................. 109 $ 1,450,546 0.80%
49 - 60 Months .............................................. 13 279,389 0.15
61 - 120 Months .............................................. 332 10,114,101 5.56
121 - 180 Months .............................................. 769 44,769,443 24.61
181 - 240 Months .............................................. 192 8,251,272 4.54
241 - 300 Months .............................................. 796 65,636,370 36.08
301 - 360 Months .............................................. 491 51,433,656 28.27
----- ------------ ------
Total ........................................................ 2,702 $181,934,777 100.00%
===== ============ ======
As of the Cut-off Date, the weighted average Remaining Months to Scheduled
Maturity of the Mortgage Loans was approximately 258 months.
A-4
Loan Purpose for the Mortgage Loans
Aggregate
Scheduled Balance
Number of Outstanding as of % of
Loan Purpose Mortgage Loans Cut-Off Date Mortgage Pool
- ------------ -------------- ------------ -------------
Cash-Out Refinancing .......................................... 1,383 $ 92,791,696 51.00%
Purchase ...................................................... 550 42,858,092 23.56
Rate/Term Refinancing ......................................... 736 44,104,907 24.24
Unknown ....................................................... 33 2,180,083 1.20
----- ------------ ------
Total ........................................................ 2,702 $181,934,777 100.00%
===== ============ ======
Fixed Period/Indices for the Adjustable Rate Loans as of the Cut-off Date
Aggregate
Scheduled Balance
Number of Outstanding as of % of
Fixed Period/Index Mortgage Loans Cut-Off Date Mortgage Pool
- ------------------ -------------- ------------ -------------
One-Month 11th District Cost of Funds Index ................... 4 $ 685,080 0.74%
Six-Month 11th District Cost of Funds Index ................... 6 566,581 0.61
One-Year U.S. Treasury ........................................ 83 8,355,955 8.99
Six-Month LIBOR ............................................... 1,001 70,347,245 75.72
Two-Year Fixed/Six-Month LIBOR ................................ 64 5,750,648 6.19
Three-Year Fixed/Six-Month LIBOR .............................. 23 2,297,278 2.47
Three-Year Fixed/One-Year U.S. Treasury ....................... 32 3,115,073 3.35
Five-Year Fixed/One-Year U.S. Treasury ........................ 5 1,575,008 1.70
Ten-Year Fixed/One-Year U.S. Treasury ......................... 1 210,449 0.23
----- ----------- ------
Total ........................................................ 1,219 $92,903,316 100.00%
===== =========== ======
Maximum Mortgage Rates for the Adjustable Rate Mortgage Loans as of the Cut-
Off Date
Aggregate
Scheduled Balance
Number of Outstanding as of % of Adjustable
Maximum Mortgage Interest Rate Mortgage Loans Cut-Off Date Mortgage Loans
- ------------------------------ -------------- ------------ --------------
11.000% or Less ............................................. 6 $ 1,010,649 1.09%
11.001% - 11.500% ........................................... 1 78,220 0.08
11.501% - 12.000% ........................................... 4 623,518 0.67
12.001% - 12.500% ........................................... 12 1,100,832 1.18
12.501% - 13.000% ........................................... 15 1,942,823 2.09
13.001% - 13.500% ........................................... 9 1,128,860 1.22
13.501% - 14.000% ........................................... 28 3,270,704 3.52
14.001% - 14.500% ........................................... 62 6,335,281 6.82
14.501% - 15.000% ........................................... 103 11,148,895 12.00
15.001% - 15.500% ........................................... 88 7,529,308 8.10
15.501% - 16.000% ........................................... 205 13,212,710 14.22
16.001% - 16.500% ........................................... 287 18,228,945 19.62
16.501% - 17.000% ........................................... 253 15,036,092 16.18
17.001% - 17.500% ........................................... 61 5,369,485 5.78
17.501% - 18.000% ........................................... 34 2,920,565 3.14
18.001% or Greater .......................................... 51 3,966,430 4.27
----- ----------- ------
Total ...................................................... 1,219 $92,903,316 100.00%
===== =========== ======
As of the Cut-off Date, the weighted average Maximum Mortgage Rate of the
Adjustable Rate Mortgage Loans was approximately 15.800% per annum.
A-5
Minimum Mortgage Rates for the Adustable Rate Mortgage Loans as of the Cut-Off
Date
Aggregate
Scheduled Balance
Number of Outstanding as of % of Adjustable
Minimum Mortgage Interest Rate Mortgage Loans Cut-Off Date Mortgage Loans
- ------------------------------ -------------- ------------ --------------
3.000% or Less ............................................. 27 $ 3,496,099 3.76%
3.001% - 3.500% ........................................... 7 912,572 0.98
3.501% - 4.000% ........................................... 2 310,778 0.33
4.001% - 4.500% ........................................... 7 837,672 0.90
4.501% - 5.000% ........................................... 7 632,635 0.68
5.001% - 5.500% ........................................... 8 1,268,784 1.37
6.001% - 6.500% ........................................... 14 1,887,741 2.03
6.001% - 6.500% ........................................... 26 3,031,465 3.26
6.501% - 7.000% ........................................... 27 3,109,511 3.35
7.001% - 7.500% ........................................... 17 2,351,667 2.53
7.501% - 8.000% ........................................... 29 2,663,943 2.87
8.001% - 8.500% ........................................... 48 4,446,375 4.79
8.501% - 9.000% ........................................... 81 8,536,071 9.19
9.001% - 9.500% ........................................... 87 6,924,343 7.45
9.501% - 10.000% ........................................... 193 11,885,601 12.79
10.001% - 10.500% ........................................... 274 16,632,842 17.90
10.501% - 11.000% ........................................... 250 14,466,711 15.57
11.001% or Greater .......................................... 115 9,508,506 10.23
----- ----------- ------
Total ...................................................... 1,219 $92,903,316 100.00%
===== =========== ======
As of the Cut-off Date, the weighted average Minimum Mortgage Rate of the
Adjustable Rate Mortgage Loans was approximately 9.139% per annum.
Gross Margins for the Adjustable Rate Loans as of the Cut-Off Date
Aggregate
Scheduled Balance
Number of Outstanding as of % of Adjustable
Gross Margin Mortgage Loans Cut-Off Date Mortgage Loans
- ------------ -------------- ------------ --------------
2.500% or Less ............................................. 5 $ 604,683 0.65%
2.501% - 3.000% ........................................... 54 6,362,189 6.85
3.001% - 3.500% ........................................... 28 3,756,198 4.04
3.501% - 4.000% ........................................... 43 4,007,665 4.31
4.001% - 4.500% ........................................... 192 13,095,323 14.10
4.501% - 5.000% ........................................... 105 6,535,727 7.03
5.001% - 5.500% ........................................... 298 22,286,802 23.99
5.501% - 6.000% ........................................... 257 14,572,180 15.69
6.001% - 6.500% ........................................... 86 8,089,425 8.71
6.501% - 7.000% ........................................... 73 6,396,253 6.88
7.001% - 7.500% ........................................... 50 4,477,879 4.82
7.501% - 8.000% ........................................... 20 2,009,904 2.16
8.001% or Greater 8 709,089 0.76
----- ----------- ------
Total ...................................................... 1,219 $92,903,316 100.00%
===== =========== ======
As of the Cut-off Date, the weighted average Gross Margin of the Adjustable Rate
Mortgage Loans was approximately 5.278% per annum.
A-6
Next Mortgage Rate Adjustment Date for the Adjustable Rate Mortgage Loans as
of the Cut-Off Date
Aggregate
Scheduled Balance
Number of Outstanding as of % of Adjustable
Next Mortgage Rate Adjustment Date Mortgage Loans Cut-Off Date Mortgage Loans
- ---------------------------------- -------------- ------------ --------------
December 1, 2001 ............................................ 153 $12,677,039 13.65%
December 8, 2001 ............................................ 1 54,594 0.06
December 15, 2001 ........................................... 2 245,359 0.26
January 1, 2002 ............................................. 168 12,206,816 13.14
February 1, 2002 ............................................ 177 11,949,928 12.86
February 12, 2002 ........................................... 1 103,593 0.11
February 16, 2002 ........................................... 1 126,822 0.14
March 1, 2002 ............................................... 229 15,747,787 16.95
March 6, 2002 ............................................... 1 995 0.00
March 27, 2002 .............................................. 1 65,402 0.07
April 1, 2002 ............................................... 200 15,362,212 16.54
April 15, 2002 .............................................. 1 85,487 0.09
May 1, 2002 ................................................. 144 10,252,740 11.04
May 22, 2002 ................................................ 1 46,501 0.05
June 1, 2002 ................................................ 16 1,346,010 1.45
July 1, 2002 ................................................ 18 1,460,770 1.57
July 23, 2002 ............................................... 1 123,666 0.13
August 1, 2002 .............................................. 21 1,535,761 1.65
September 1, 2002 ........................................... 16 1,595,917 1.72
September 20, 2002 .......................................... 1 61,159 0.07
September 27, 2002 .......................................... 1 61,962 0.07
October 1, 2002 ............................................. 11 1,836,643 1.98
November 1, 2002 ............................................ 7 620,081 0.67
December 1, 2002 ............................................ 8 445,480 0.48
January 1, 2003 ............................................. 4 290,290 0.31
February 1, 2003 ............................................ 3 305,442 0.33
March 1, 2003 ............................................... 2 293,833 0.32
April 1, 2003 ............................................... 1 84,591 0.09
May 1, 2003 ................................................. 5 469,229 0.51
July 1, 2003 ................................................ 2 216,210 0.23
August 1, 2003 .............................................. 3 256,036 0.28
September 1, 2003 ........................................... 4 202,880 0.22
October 1, 2003 ............................................. 1 88,916 0.10
November 1, 2003 ............................................ 2 330,732 0.36
December 12, 2003 ........................................... 1 79,725 0.09
January 1, 2004 ............................................. 3 213,122 0.23
February 1, 2004 ............................................ 1 67,467 0.07
June 1, 2004 ................................................ 1 206,663 0.22
October 1, 2004 ............................................. 1 783,266 0.84
March 1, 2005 ............................................... 1 360,496 0.39
July 1, 2005 ................................................ 1 210,449 0.23
October 1, 2005 ............................................. 2 95,172 0.10
December 1, 2005 ............................................ 1 336,074 0.36
----- ----------- ------
Total ...................................................... 1,219 $92,903,316 100.00%
===== =========== ======
A-7
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Prospectus
Mortgage-Backed/Asset-Backed Securities (Issuable in Series)
Bear Stearns Asset Backed Securities, Inc.
Depositor
The Securities
Each issue of securities will have its own series designation and will evidence
either the ownership of assets in the related trust fund or debt obligations
secured by assets of the related trust fund.
o Each series of securities will consist of one or more classes
of mortgage-backed or asset-backed certificates or notes.
o Each class of securities will represent the entitlement to a
specified portion of interest payments and a specified portion
of principal payments on the trust assets.
o A series may include classes of securities that are senior in
right of payment to other classes. Classes of securities may
be entitled to receive distributions of principal, interest or
both prior to other classes or before or after specified
events.
o No market will exist for the securities of any series before
they are issued. In addition, even after the securities of a
series have been issued and sold, there can be no assurance
that a resale market for them will develop.
Offers of the securities will be made through Bear, Stearns & Co. Inc. and the
other underwriters listed in the related prospectus supplement.
The Trust Fund and Its Assets
As specified in the related prospectus supplement, each trust fund will consist
primarily of assets from one of the following categories:
o mortgage loans secured by senior or junior liens on one- to
four-family residential properties;
o closed-end and/or revolving home equity loans secured by
senior or junior liens on one- to four-family residential or
mixed-use properties;
o home improvement installment sales contracts and loan
agreements that are either unsecured or secured by senior or
junior liens on one- to four-family residential or mixed-use
properties or by purchase money security interests in the
related home improvements;
o installment sales contracts and installment loan agreements
secured by senior or junior liens on manufactured homes or by
mortgages on the related real estate;
o mortgage-backed securities issued or guaranteed by Ginnie Mae,
Freddie Mac or Fannie Mae; and
- --------------------------------------------------------------------------------
Consider carefully the risk factors beginning on page 4 of this prospectus.
The securities represent obligations of the trust only and do not represent an
interest in or obligation of the depositor, the seller, the master servicer or
any of their affiliates.
This prospectus may be used to offer and sell the securities only if accompanied
by a prospectus supplement
- --------------------------------------------------------------------------------
o private label mortgage-backed or asset-backed securities.
Neither the Securities and Exchange Commission nor any state securities
commission has approved these securities or determined that this prospectus is
accurate or complete. Any representation to the contrary is a criminal offense.
Bear, Stearns & Co. Inc.
November 27, 2001
Important Notice About Information in This Prospectus
and Each Accompanying Prospectus Supplement
Information about each series of securities is contained in two separate
documents:
o this prospectus, which provides general information, some of
which may not apply to a particular series; and
o the accompanying prospectus supplement for a particular
series, which describes the specific terms of the securities
of that series.
Although the accompanying prospectus supplement cannot contradict the
information contained in this prospectus, insofar as the prospectus supplement
contains specific information about a particular series of securities that
differs from the more general information contained in this prospectus, you
should rely on the information in the prospectus supplement.
You should rely only on the information contained in this prospectus and the
accompanying prospectus supplement. We have not authorized anyone to provide you
with information that is different from that contained in this prospectus and
the accompanying prospectus supplement.
Each prospectus supplement generally will include the following information with
respect to the related series of securities:
o the principal amount, interest rate and authorized
denominations of each class of securities;
o information concerning the mortgage loans, home equity loans,
home improvement contracts, manufactured housing contracts,
mortgage backed securities and/or private securities in the
related trust fund;
o information concerning the seller or sellers of the mortgage
loans, home equity loans, home improvement contracts,
manufactured housing contracts, mortgage backed securities
and/or private securities and information concerning any
servicer;
o the terms of any credit enhancement with respect to particular
classes of the securities;
o information concerning other trust fund assets, including any
reserve fund;
o the final scheduled distribution date for each class of
securities;
o the method for calculating the amount of principal to be paid
to each class of securities, and the timing and order of
priority of principal payments;
o information about any REMIC or FASIT tax elections for some or
all of the trust fund assets; and
o particulars of the plan of distribution for the securities.
---------------------
We include cross-references in this prospectus and the accompanying prospectus
supplement to captions in these materials where you can find further related
discussions. The Table of Contents included in the accompanying prospectus
supplement lists the pages on which these captions are located.
There is also a Glossary of Terms beginning on page 106 where you will find
definitions of certain capitalized terms used in this prospectus.
If you require additional information, the mailing address of our principal
executive offices is Bear Stearns Asset Backed Asset Securities, Inc., 245 Park
Avenue, New York, New York 10167 and our telephone number is (212) 272-4095. For
other means of acquiring additional information about us or a series of
securities, see "Incorporation of Certain Information by Reference" beginning on
page 104 of this prospectus.
2
Risk Factors
You should consider carefully the following information, together with
the information set forth under "Risk Factors" in the accompanying prospectus
supplement, since it identifies the principal risk factors associated with an
investment in the securities.
You may have
difficulty selling
your securities or
obtaining your desired
price.................... No market will exist for the securities before they
are issued. In addition, we cannot give you any
assurance that a resale market will develop following
the issuance and sale of any series of the
securities. Even if a resale market does develop, you
may not be able to sell your securities when you wish
or at the price you want.
Only the assets of the
related trust fund are
available to pay your
securities............... The securities of each series will be payable solely
from the assets of the related trust fund, including
any applicable credit enhancement, and will not have
a claim against the assets of any other trust. In the
case of securities that are in the form of notes, the
related indenture will require that noteholders
proceed only against the assets of the related trust
fund. We cannot give you any assurance that the
market value of the assets in any trust fund will be
equal to or greater than the total principal amount
of the related securities then outstanding, plus
accrued interest. Moreover, if the assets of a trust
fund are ever sold, the sale proceeds will be applied
first to reimburse any related trustee, servicer and
credit enhancement provider for their unpaid fees and
expenses before any remaining amounts are distributed
to securityholders.
In addition, at the times specified in the related
prospectus supplement, assets of the trust fund and
the related security accounts may be released to the
depositor, the servicer, the credit enhancement
provider or other persons, if
o all payments then due on the
related securities have been made,
and
o any other payments specified in the
related prospectus supplement have
been made.
Once released, such assets will no longer be
available to make payments to securityholders.
3
You will have no recourse against the depositor or
any other person if any required distribution on the
securities is not made or for any other default. The
only obligations of the depositor with respect to a
trust fund or the related securities would result
from a breach of the representations and warranties
that the depositor may make concerning the trust
assets. However, because of the depositor's very
limited assets, even if the depositor should be
required to repurchase a loan from a particular trust
fund because of the breach of a representation or
warranty, its sole source of funds for the repurchase
would be:
o funds obtained from enforcing any
similar obligation of the
originator of the loan, or
o monies from any reserve fund
established to pay for loan
repurchases.
Credit enhancement may
be insufficient to
provide against
particular risks......... Although credit enhancement is intended to reduce the
effect of delinquent payments or loan losses on
particular classes of securities, the amount of any
credit enhancement is subject to the limits described
in the related prospectus supplement. In addition,
the amount of credit enhancement may decline or be
depleted before the related securities are paid in
full. As a result, securityholders may suffer losses.
Principal payments on
the loans may
adversely affect the
average life of, and
rate of return on,
your securities.......... You may be unable to reinvest the principal payments
on your securities at a rate of return equal to the
rate on your securities. The timing of principal
payments on the securities of a series will be
affected by a number of factors, including the
following:
o the extent of prepayments on the
underlying loans in the trust fund
or, if the trust fund contains
underlying securities, on the loans
backing the underlying securities;
o how payments of principal are
allocated among the classes of
securities of that series as
specified in the related prospectus
supplement;
o if any party has an option to
terminate the related trust early,
the effect of the exercise of the
option;
o the rate and timing of defaults and
losses on the assets in the related
trust fund;
4
o repurchases of assets in the
related trust fund as a result of
material breaches of
representations and warranties made
by the depositor or a seller; and
o in the case of a trust fund that
contains revolving credit line
loans, any provisions for
non-amortization, early
amortization or scheduled
amortization periods described in
the related prospectus supplement.
All the above factors may affect the yield to
maturity of the securities.
The interest accrual
period may reduce the
effective yield on
your securities.......... Interest payable on the securities on any given
distribution date will include all interest accrued
during the related interest accrual period. Each
prospectus supplement will specify the interest
accrual period for the related securities. If
interest accrues during the calendar month before the
related distribution date, your effective yield will
be less than it would be if the interest accrual
period ended the day before the distribution date. As
a result, your effective yield at par may be less
than the indicated coupon rate.
Loans with balloon
payments may increase
your risk of
loss..................... Certain underlying loans may not be fully amortizing
over their terms to maturity and may require a
substantial principal payment (a "balloon" payment)
at their stated maturity. Loans of this type involve
greater risk than fully amortizing loans since the
borrower generally must be able to refinance the loan
or sell the related property prior to the loan's
maturity date. The borrower's ability to do so will
depend on such factors as the level of available
mortgage rates at the time of sale or refinancing,
the relative strength of the local housing market,
the borrower's equity in the property, the borrower's
general financial condition and tax laws.
Adjustable rate loans
may be underwritten to
less stringent
standards than fixed
rate
loans.................... A trust fund may include adjustable rate loans that
were underwritten on the assumption that the
borrowers would be able to make higher monthly
payments in a relatively short period of time. In
fact, however, the borrowers' income may not be
sufficient to meet their loan payments as payment
amounts increase, thus increasing the risk of
default.
5
Junior lien loans
generally are riskier
than senior lien
loans.................... If the mortgage or home equity loans in a trust fund
are primarily in a junior lien position, any proceeds
from liquidations, insurance recoveries or
condemnations must be used first to satisfy the
claims of the related senior lien loans (and related
foreclosure expenses) before being available to
satisfy the junior lien loans. In addition, a junior
mortgage lender may only foreclose subject to the
related senior mortgage. As a result, the junior
mortgage lender must either pay the related senior
mortgage lender in full, at or before the foreclosure
sale, or agree to make the regular payments on the
senior mortgage. The trust will not have a source of
funds to satisfy any senior mortgages or to continue
making payments on them. As a result, the trust's
ability, as a practical matter, to foreclose on any
junior mortgage loan will be quite limited.
A decline in property
values could reduce
the amount and delay
the timing of
recoveries on
defaulted mortgage
loans.................... The following factors, among others, could adversely
affect property values in such a way that the
outstanding balance of the related loans, together
with any senior financing on the same properties,
would equal or exceed those values:
o an overall decline in the
residential real estate markets
where the properties are located;
o failure of borrowers to maintain
their properties adequately; and
o natural disasters that may not be
covered by hazard insurance, such
as earthquakes and floods.
If property values decline, actual rates of
delinquencies, foreclosures and losses on the
underlying loans could be higher than those currently
experienced by the mortgage lending industry in
general.
Some mortgaged
properties may not be
owner occupied........... The mortgaged properties in the trust fund may not be
owner occupied. Rates of delinquencies, foreclosures
and losses on mortgage loans secured by non-owner
occupied properties may be higher than those on
mortgage loans secured by the borrower's primary
residence.
6
Home improvement
contracts and other
loans may not have
sufficient security...... A trust fund may include home improvement contracts
that are not secured by an interest in real estate or
otherwise. A trust fund may also include mortgage or
home equity loans with original loan-to-value ratios
(or combined loan-to-value ratios in the case of
junior loans) greater than 100%. In these cases, the
trust fund could be treated as a general unsecured
creditor for the unsecured portion of these loans.
If a loan of this type goes into default, the trust
fund will have recourse only against the borrower's
assets generally for the unsecured portion of the
loan, along with the borrower's other general
unsecured creditors. In a bankruptcy proceeding, the
unsecured portion of the loan may be discharged, even
if the value of the borrower's assets available to
the trust fund would be insufficient to pay the
remaining amounts owing on the loan.
Home improvement
contracts will not be
stamped.................. The depositor will ensure that a UCC-1 financing
statement is filed that identifies as collateral the
home improvement contracts included in a trust fund.
However, unless the related prospectus supplement
provides otherwise, the home improvement contracts
themselves will not be stamped or marked to reflect
their assignment to the trust fund. Thus, if as a
result of negligence, fraud or otherwise, a
subsequent purchaser were able to take physical
possession of the contracts without notice of the
assignment to the trust fund, the interests of the
related securityholders in those contracts could be
defeated.
If amounts in any
pre-funding account
are not used to
purchase trust assets,
you will receive a
prepayment on the
related securities....... The related prospectus supplement may provide that
the depositor or seller will deposit a specified
amount in a pre-funding account on the date the
securities are issued. In this case, the deposited
funds may be used only to acquire additional assets
for the trust during a specified period after the
initial issuance of the securities. Any amounts
remaining in the account at the end of that period
will be distributed as a prepayment of principal to
the holders of the related securities. The resulting
prepayment could adversely affect the yield to
maturity on those securities.
7
Bankruptcy laws may
result in adverse
claims against trust
fund assets.............. The federal bankruptcy code and state debtor relief
laws may adversely affect the ability of the trust
fund, as a secured lender, to realize upon its
security. For example, in a federal bankruptcy
proceeding, a lender may not foreclose on mortgaged
property without the bankruptcy court's permission.
Similarly, the debtor may propose a rehabilitation
plan, in the case of mortgaged property that is not
his principal residence, that would reduce the amount
of the lender's secured indebtedness to the value of
the property as of the commencement of the
bankruptcy. As a result, the lender would be treated
as a general unsecured creditor for the reduced
amount, the amount of the monthly payments due on the
loan could be reduced, and the interest rate and loan
payment schedule could be changed.
Any such actions could result in delays in receiving
payments on the loans underlying the securities and
result in the reduction of total payments.
Environmental risks
may adversely affect
trust fund assets........ Federal, state and local laws and regulations impose
a wide range of requirements on activities that may
affect the environment, health and safety. In certain
circumstances, these laws and regulations impose
obligations on owners or operators of residential
properties such as those that secure the loans.
Failure to comply with these laws and regulations can
result in fines and penalties that could be assessed
against the trust fund as owner of the related
property.
In some states, a lien on the property due to
contamination has priority over the lien of an
existing mortgage. Further, a mortgage lender may be
held liable as an "owner" or "operator" for costs
associated with the release of petroleum from an
underground storage tank under certain circumstances.
If the trust fund is considered the owner or operator
of a property, it will suffer losses as a result of
any liability imposed for environmental hazards on
the property.
Consumer protection
laws may adversely
affect trust fund
assets................... The loans and contracts in each trust fund also may
be subject to federal laws relating to loan
origination and underwriting. These laws
o require certain disclosures to the
borrowers regarding the terms of
the loans;
8
o prohibit discrimination on the
basis of age, race, color, sex,
religion, marital status, national
origin, receipt of public
assistance or the exercise of any
right under the consumer credit
protection act, in the extension of
credit;
o regulate the use and reporting of
information related to the
borrower's credit experience; and
o require additional application
disclosures, limit changes that may
be made to the loan documents
without the borrower's consent and
restrict a lender's ability to
declare a default or to suspend or
reduce a borrower's credit limit to
certain enumerated events.
Loans may also be subject to federal laws that impose
additional disclosure requirements on creditors with
respect to non-purchase money mortgage loans with
high interest rates or high up-front fees and
charges. These laws can impose specific liabilities
upon creditors that fail to comply and may affect the
enforceability of the related loans. In addition, the
trust fund, as assignee of the creditor, would
generally be subject to all claims and defenses that
the borrower could assert against the creditor,
including the right to rescind the loan.
Home improvement contracts may be subject to federal
laws that protect the borrower from defective or
incomplete work by a contractor. These laws permit
the borrower to withhold payment if the work does not
meet the quality and durability standards agreed to
between the borrower and the contractor. These laws
have the effect of subjecting the trust fund, as
assignee of the creditor, to all claims and defenses
which the borrower in a sale transaction could assert
against the seller of defective goods.
If certain provisions of these federal laws are
violated, the servicer may be unable to collect all
or part of the principal or interest on the loans.
The trust fund also could be subject to damages and
administrative enforcement.
Subordinate securities
are subject to
additional risk.......... If you invest in any class of subordinate securities,
your rights as an investor to receive payments
otherwise due you will be subordinate to the rights
of the servicer and the holders of the related senior
securities. As a result, before investing in any
subordinate securities, you must be prepared to bear
the risk that payments on your securities may be
delayed and that you might not recover all of your
initial investment.
9
Any credit support
provided by financial
instruments may be
insufficient to
protect against
particular risks......... As described under "Credit Enhancement--Financial
Instruments" in this properties, a trust fund may
include financial instruments to protect against
certain risks or to provide certain cash flow
characteristics for particular classes of the
securities of a series. If you invest in one of these
classes and the issuer of the financial instruments
fails to perform its obligations, the yield to
maturity, market price and liquidity of your
securities could be materially adversely affected. In
addition, if the issuer of the related financial
instruments experiences a credit rating downgrade,
the market price and liquidity of your securities
could be reduced. Finally, if the financial
instruments are intended to provide an approximate or
partial hedge for certain risks or cashflow
characteristics, the yield to maturity, market price
and liquidity of your securities could be adversely
affected to the extent that the financial instrument
does not provide a perfect hedge.
REMIC residual
securities are subject
to additional risk....... If you invest in any class of securities that
represent the "residual interest" in a real estate
mortgage investment conduit (REMIC), you will be
required to report as ordinary income your pro rata
share of the REMIC's taxable income, whether or not
you actually received any cash. Thus, as the holder
of a REMIC residual interest security, you could have
taxable income and tax liabilities in a year that are
in excess of your ability to deduct servicing fees
and any other REMIC expenses. In addition, because of
their special tax treatment, your after-tax yield on
a REMIC residual interest security may be
significantly less than that of a corporate bond with
similar cash-flow characteristics and pre-tax yield.
Transfers of REMIC residual interest securities are
also restricted.
FASIT ownership
securities are subject
to additional risk....... If you are a fully taxable domestic corporation that
invests in any class of securities representing the
"ownership interest" in a financial asset
securitization investment trust (FASIT), you will be
required to report as ordinary income your pro rata
share of the FASIT's taxable income, whether or not
you actually received any cash. Thus, as the holder
of a FASIT ownership interest security, you could
have taxable income and tax liabilities in a year
that are in excess of your ability to deduct
servicing fees and any other FASIT expenses. In
addition, because of their special tax treatment,
your after-tax yield on a FASIT ownership interest
security may be significantly less than that of a
corporate bond with similar cash-flow characteristics
and pre-tax yield. Transfers of FASIT ownership
interest securities are also restricted.
10
Book-entry
registration may limit
your ability to sell
securities and delay
your receipt of
payments................. Limit on Liquidity of Securities. Securities issued
in book-entry form may have only limited liquidity in
the resale market, since investors may be unwilling
to purchase securities for which they cannot obtain
physical instruments.
Limit on Ability to Transfer or Pledge. Transactions
in book-entry securities can be effected only through
The Depository Trust Company, its participating
organizations, its indirect participants and certain
banks. As a result, your ability to transfer or
pledge securities issued in book-entry form may be
limited.
Delays in Distributions. You may experience some
delay in the receipt of distributions on book-entry
securities since the distributions will be forwarded
by the trustee to DTC for DTC to credit to the
accounts of its participants. In turn, these
participants will credit the distributions to your
account either directly or indirectly through
indirect participants.
Ratings of the
securities do not
address all investment
risks and must be
viewed with caution...... Any class of securities issued under this prospectus
and the accompanying prospectus supplement will be
rated in one of the four highest rating categories of
a nationally recognized rating agency. A rating is
based on the adequacy of the value of the trust fund
assets and any credit enhancement for that class and
reflects the rating agency's assessment of the
likelihood that holders of the class of securities
will receive the payments to which they are entitled.
A rating is not an assessment of the likelihood that
principal prepayments on the underlying loans will be
made, the degree to which the rate of prepayments
might differ from that originally anticipated or the
likelihood of an early termination of the securities.
You should not view a rating as a recommendation to
purchase, hold or sell securities because it does not
address the market price or suitability of the
securities for any particular investor.
There is no assurance that any rating will remain in
effect for any given period or that the rating agency
will not lower or withdraw the rating in the future.
The rating agency could lower or withdraw its rating
due to:
o any decrease in the adequacy of the
value of the trust fund assets or
any related credit enhancement, or
o an adverse change in the financial
or other condition of a credit
enhancement provider.
11
Description of the Securities
General
Bear Stearns Asset Backed Securities, Inc., as depositor, will
establish a trust fund for each series of its securities. A particular series of
certificates will consist of mortgage-backed or asset-backed certificates or
notes or both certificates and notes.
Each series of certificates will be issued under a pooling and
servicing agreement or a trust agreement among the depositor, the trustee and,
if the trust fund includes loans, the related servicer. A form of pooling and
servicing agreement has been filed as an exhibit to the registration statement
of which this prospectus forms a part.
Each series of notes will be issued under an indenture between the
related trust fund and the trustee named in the prospectus supplement for that
series. A form of indenture has been filed as an exhibit to the registration
statement of which this prospectus forms a part. If the trust fund includes
loans, the trust fund and the servicer of the loans will also enter into a
servicing agreement.
Each seller named in the related prospectus supplement, from which the
depositor will have purchased assets to be included in the trust fund, may agree
to reimburse the depositor for certain fees and expenses that the depositor
incurs in connection with the offering of the securities.
The following summaries describe the material provisions which may
appear in each pooling and servicing agreement or trust agreement, in the case
of a series of certificates, and in each indenture and servicing agreement, in
the case of a series of notes. The prospectus supplement for each series of
securities will describe any provision of the pooling and servicing agreement or
trust agreement, in the case of a series of certificates, and of the indenture
and servicing agreement, in the case of a series of notes, which materially
differs from the description contained in this prospectus. The summaries do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all of the provisions of the prospectus supplement and the
governing agreements for that series.
Each series of securities will consist of one or more classes which may
be compound interest securities, variable interest securities, planned balance
(PAC) securities, zero coupon securities, principal only securities, interest
only securities or participating securities. A series may also include one or
more classes of subordinated securities. The securities of each series will be
issued only in fully registered form, without coupons, in the authorized
denominations for each class specified in the related prospectus supplement.
Upon satisfaction of any conditions applicable to a particular class as
described in the related prospectus supplement, the transfer of the securities
may be registered, and the securities may be exchanged, at the office of the
trustee without the payment of any service charge, other than any tax or
governmental charge payable in connection with the registration of transfer or
exchange. If specified in the related prospectus supplement, one or more classes
of a series may be available in book-entry form only.
Unless otherwise provided in the related prospectus supplement,
payments of principal of and interest on a series of securities will be made on
each distribution date specified in the prospectus supplement by check mailed to
holders of that series, registered as such at the close of business on the
record date specified in the prospectus supplement that is applicable to that
distribution date, at their addresses appearing on the security register.
However, payments may be made by wire transfer (at the expense of the holder
requesting payment by wire transfer) in circumstances described in the
prospectus supplement. However, final payments of principal in retirement of
each security will be made only upon presentation and surrender of the security
at the office of the related trustee. Notice of the final payment on a security
will be mailed to each holder before the distribution date on which the final
principal payment is expected to be made.
12
Payments of principal of and interest on the securities will be made by
the trustee, or a paying agent on behalf of the trustee, as specified in the
related prospectus supplement. Unless otherwise provided in the related
prospectus supplement, the following amounts will be deposited directly into the
collection account established for a particular series of securities with the
trustee (or with the servicer in the name of the trustee):
o all payments with respect to the primary assets for that
series (see, "--The Primary Assets and Their Valuation"
below), together with reinvestment income thereon;
o amounts withdrawn from any cash, letters of credit, short-term
investments or other instruments acceptable to the rating
agencies identified in the prospectus supplement as rating
that series and deposited in each reserve fund for the series
established in the name of the trustee; and
o amounts available pursuant to any other credit enhancement for
the series.
If provided in the related prospectus supplement, the deposits may be
net of certain amounts payable to the servicer and any other person specified in
the prospectus supplement. These amounts thereafter will be deposited into the
separate distribution account established for the series and will be available
to make payments on the related securities on the next distribution date. See
"The Trust Funds--Collection and Distribution Accounts" in this prospectus.
The Primary Assets and Their Valuation
The primary assets of each trust fund may include one or more pools of
the following:
o Residential Loans,
o Home Equity Loans,
o Home Improvement Contracts,
o Manufactured Housing Contracts,
o Agency Securities, and
o Private Label Securities.
When we use the term "loans" in this prospectus, we include Residential
Loans, Home Equity Loans, Home Improvement Contracts and Manufactured Housing
Contracts. The residential or mixed-use properties that secure the loans are
collectively referred to in this prospectus as the "mortgaged properties."
If specified in the related prospectus supplement for a series of
notes, each primary asset included in the related trust fund will be assigned an
initial Asset Value. Unless otherwise specified in the related prospectus
supplement, the initial Asset Value of the primary assets of the trust fund will
be at least equal to the principal amount of the related notes on the date of
issuance.
13
Payments of Interest
The securities of each class that by their terms are entitled to
receive interest will bear interest (calculated, unless otherwise specified in
the related prospectus supplement, on the basis of a 360-day year of twelve
30-day months) from the date and at the rate specified in the prospectus
supplement, or will be entitled to receive interest payment amounts calculated
in the method described in the prospectus supplement. Interest on the
interest-bearing securities of a series will be payable on the distribution date
specified in the related prospectus supplement. The rate of interest on
securities of a series may be variable or may change with changes in the annual
interest rates of the loans (or underlying loans) included in the related trust
fund and/or as prepayments occur with respect to the loans (or underlying
loans). Principal only securities may not be entitled to receive any interest
distributions or may be entitled to receive only nominal interest distributions.
Any interest on zero coupon securities that is not paid on the related
distribution date will accrue and be added to principal on that date.
Interest payable on the securities on a distribution date will include
all interest accrued during the period specified in the related prospectus
supplement. In the event interest accrues during the calendar month preceding a
distribution date, the effective yield to holders will be reduced from the yield
that would otherwise be obtainable if interest payable on the securities were to
accrue through the day immediately preceding that distribution date.
Payments of Principal
On each distribution date for a series, principal payments will be made
to the holders of the securities on which principal is then payable, to the
extent set forth in the prospectus supplement. The payments will be made in a
total amount determined as specified in the prospectus supplement and will be
allocated among the respective classes of the series in the manner, at the times
and in the priority (which may include allocation by random lot) set forth in
the prospectus supplement.
Final Scheduled Distribution Date
The final scheduled distribution date with respect to each class of a
series of notes is the date no later than which the total principal balance of
the class will be fully paid, and the final scheduled distribution date with
respect to each class of a series of certificates is the date on which the
principal balance of the class is expected to be reduced to zero, in each case
calculated on the basis of the assumptions applicable to that series described
in the related prospectus supplement. The final scheduled distribution date for
each class of a series will be specified in the related prospectus supplement.
Since payments on the primary assets of each trust fund will be used to
make distributions that reduce the outstanding principal amount of the related
securities, it is likely that the actual final distribution date of any class
will occur earlier, and may occur substantially earlier, than its final
scheduled distribution date. Furthermore, with respect to a series of
certificates, unless otherwise specified in the related prospectus supplement,
the actual final distribution date of any certificate may occur later than its
final scheduled distribution date as a result of delinquencies, defaults and
liquidations of the primary assets of the related trust fund. No assurance can
be given as to the actual prepayment experience with respect to any series. See
"--Weighted Average Lives of the Securities" below.
Special Redemption
If so specified in the prospectus supplement relating to a series of
securities having other than monthly distribution dates, one or more classes of
the securities may be subject to special redemption, in whole or in part, on the
special redemption date specified in the related prospectus supplement if, as a
consequence of prepayments on the loans (or underlying loans) or low yields then
available for reinvestment, the entity specified in the prospectus supplement
determines, based on assumptions set forth in the applicable agreement, that the
available interest amount that will have accrued on the securities through the
designated interest accrual date specified in the related prospectus supplement
is less than the amount of interest that will have accrued on the securities to
that date. In this event and as further described in the related prospectus
supplement, the trustee will redeem a principal amount of outstanding securities
of the series sufficient to cause the available interest amount to equal the
amount of interest that will have accrued through the designated interest
accrual date for the securities outstanding immediately after the redemption.
14
Optional Redemption, Purchase or Termination
The depositor or the servicer or any other entity that may be
designated in the related prospectus supplement will have the option, on any
distribution date, to purchase one or more classes of certificates of any series
or redeem, in whole or in part, one or more classes of notes of any series under
the circumstances, if any, specified in the related prospectus supplement.
Alternatively, if the prospectus supplement for a series of certificates so
provides, the depositor, the servicer or another entity designated in the
prospectus supplement will have the option to cause an early termination of the
related trust fund by repurchasing all of the primary assets from the trust fund
on or after a date specified in the prospectus supplement, or on or after such
time as the total outstanding principal amount of the certificates or primary
assets (as specified in the prospectus supplement) is equal to or less than the
amount or percentage specified in the prospectus supplement. Notice of the
redemption, purchase or termination must be given by the depositor or the
trustee prior to the related date. The redemption, purchase or repurchase price
will be set forth in the prospectus supplement. If specified in the prospectus
supplement, in the event that a REMIC election has been made, the trustee shall
receive a satisfactory opinion of counsel that the optional redemption, purchase
or termination will be conducted so as to constitute a "qualified liquidation"
under Section 860F of the Internal Revenue Code of 1986, as amended.
In addition, the prospectus supplement may provide other circumstances
under which holders of securities of a series could be fully paid significantly
earlier than would otherwise be the case if payments or distributions were
solely based on the activity of the related primary assets.
Weighted Average Lives of the Securities
Weighted average life refers to the average amount of time that will
elapse from the date of issue of a security until each dollar of principal of
the security will be repaid to the investor. Unless otherwise specified in the
related prospectus supplement, the weighted average life of the securities of a
class will be influenced by the rate at which the amount financed under the
loans (or underlying loans relating to the Agency Securities or Private Label
Securities, as applicable), included in the trust fund for a series is paid,
whether in the form of scheduled amortization or prepayments.
Prepayments on loans and other receivables can be measured relative to
a prepayment standard or model. The prospectus supplement for each series of
securities will describe the prepayment standard or model, if any, that is used
and may contain tables setting forth the projected weighted average life of each
class of securities of the series and the percentage of the original principal
amount of each class of securities of the series that would be outstanding on
specified distribution dates based on the assumptions stated in the prospectus
supplement, including assumptions that prepayments on the loans (or underlying
loans relating to the Agency Securities or Private Label Securities, as
applicable) included in the related trust fund are made at rates corresponding
to various percentages of the prepayment standard or model specified in the
prospectus supplement.
15
There is, however, no assurance that prepayment of the loans (or
underlying loans relating to the Agency Securities or Private Label Securities,
as applicable) included in the related trust fund will conform to any level of
any prepayment standard or model specified in the related prospectus supplement.
The rate of principal prepayments on pools of loans may be influenced by a
variety of factors, including job-related factors such as transfers, layoffs or
promotions and personal factors such as divorce, disability or prolonged
illness. Economic conditions, either generally or within a particular geographic
area or industry, also may affect the rate of principal prepayments. Demographic
and social factors may influence the rate of principal prepayments in that some
borrowers have greater financial flexibility to move or refinance than do
others. The deductibility of mortgage interest payments, servicing decisions and
other factors also can affect the rate of principal prepayments. As a result,
there can be no assurance as to the rate or timing of principal prepayments of
the loans (or underlying loans) either from time to time or over the lives of
the loans (or underlying loans).
The rate of prepayments of conventional housing loans and other
receivables has fluctuated significantly in recent years. In general, however,
if prevailing interest rates fall significantly below the interest rates on the
loans (or underlying loans) for a series, the loans are likely to prepay at
rates higher than if prevailing interest rates remain at or above the interest
rates borne by the loans. In this regard, it should be noted that the loans (or
underlying loans) for a series may have different interest rates. In addition,
the weighted average life of a class of securities may be affected by the
varying maturities of the loans (or underlying loans). If any loans (or
underlying loans) for a series have actual terms to stated maturity that are
less than those that were assumed in calculating the final scheduled
distribution date of the related securities, one or more classes of the series
may be fully paid prior to their respective final scheduled distribution date,
even in the absence of prepayments and a reinvestment return higher than the
Assumed Reinvestment Rate established by the rating agencies named in the
related prospectus supplement.
The Trust Funds
General
The notes of each series will be secured by the pledge of the assets of
the related trust fund, and the certificates of each series will represent
interests in the assets of the related trust fund. The trust fund of each series
will include assets purchased by the depositor from the seller composed of:
o the primary assets of the trust fund;
o amounts available from the reinvestment of payments on the
primary assets at any Assumed Reinvestment Rate that may be
established by the rating agencies specified in the related
prospectus supplement;
o any credit enhancement in the form of an irrevocable letter of
credit, surety bond, insurance policy or other form of credit
support;
o REO property consisting of any mortgaged property or home
improvement that secured a loan but which is acquired by
foreclosure or deed in lieu of foreclosure or repossession;
and
o the amount, if any, initially deposited into the collection
account or distribution account(s) for the series as specified
in the related prospectus supplement.
The securities will be non-recourse obligations of the related trust
fund. Unless the prospectus supplement indicates otherwise, the assets of the
trust fund specified in the related prospectus supplement will serve as
collateral only for that series of securities. Holders of a series of notes may
only proceed against the collateral securing that series in the case of a
default with respect to the notes and may not proceed against any assets of the
depositor or the related trust fund not pledged to secure the notes.
16
The primary assets for a series will be sold by the seller to the
depositor or purchased by the depositor in the open market or in privately
negotiated transactions (which may include transactions with affiliates) and
will be transferred by the depositor to the related trust fund. Loans relating
to a series will be serviced by the servicer (which may be the seller) that is
specified in the related prospectus supplement. The servicer will service the
loans pursuant to a pooling and servicing agreement with respect to a series of
certificates, or a servicing agreement between the trust fund and servicer with
respect to a series of notes.
If the prospectus supplement so provides, a trust fund relating to a
series of securities may be a business trust formed under the laws of the state
specified in the prospectus supplement pursuant to a trust agreement between the
depositor and the trustee.
Each trust fund, prior to the initial offering of the related series of
securities, will have no assets or liabilities. No trust fund is expected to
engage in any activities other than:
o to acquire, manage and hold the related primary assets and
other assets contemplated in this prospectus and in the
related prospectus supplement, and the proceeds thereof,
o to issue the related securities,
o to make payments and distributions on the securities, and
o to perform certain related activities.
No trust fund is expected to have any source of capital other than its assets
and any related credit enhancement.
Primary assets included in the trust fund for a series may consist of
any combination of loans, Agency Securities and Private Label Securities, as and
to the extent the related prospectus supplement specifies.
The Loans
General. Loans in each trust fund may consist of Residential Loans,
Home Equity Loans, Home Improvement Contracts or Manufactured Housing Contracts.
If specified in the related prospectus supplement, the loans in the related
trust fund may include cooperative apartment loans secured by security interests
in shares issued by private, non-profit, cooperative housing corporations and in
the related proprietary leases or occupancy agreements granting exclusive rights
to occupy specific dwelling units in the cooperatives' buildings. As more fully
described in the related prospectus supplement, the loans may be either
"conventional" loans or loans that are insured or guaranteed by a governmental
agency like the FHA or VA. The loans will have been originated in accordance
with the underwriting criteria specified in the related prospectus supplement.
17
In general, the loans in a pool will have monthly payments due on the
first day of each month. However, as described in the related prospectus
supplement, the loans in a pool may have payments due more or less frequently
than monthly. In addition, payments may be due on any day during a month. The
payment terms of the loans to be included in a trust fund will be described in
the related prospectus supplement and may include any of the following features,
all as described in this prospectus or in the related prospectus supplement:
o Interest may be payable at
- a fixed rate,
- a rate that adjusts from time to time in relation to
an index that will be specified in the related
prospectus supplement,
- a rate that is fixed for a period of time or under
certain circumstances and is followed by an
adjustable rate,
- a rate that otherwise varies from time to time, or
- a rate that is convertible from an adjustable rate to
a fixed rate.
Changes to an adjustable rate may be subject to periodic limitations,
maximum rates, minimum rates or a combination of these limitations. As
specified in the related prospectus supplement, the loans may provide
for payments in level monthly installments, for balloon payments, or
for payments that are allocated to principal and interest according to
the "sum of the digits" or "Rule of 78s" methods. Accrued interest may
be deferred and added to the principal of a loan for the periods and
under the circumstances as may be specified in the related prospectus
supplement. Loans may provide for the payment of interest at a rate
lower than the specified loan rate for a period of time or for the life
of the loan, and the amount of any difference may be contributed from
funds supplied by the seller of the property or another source.
o Principal may be
- payable on a level debt service basis to fully
amortize the loan over its term,
- calculated on the basis of an assumed amortization
schedule that is significantly longer than the
original term to maturity or on an interest rate that
is different from the loan rate, or
- nonamortizing during all or a portion of the original
term.
Payment of all or a substantial portion of the principal may be due on
maturity in the form of a balloon payment. Principal may include
interest that has been deferred and added to the principal balance of
the loan.
o Monthly payments of principal and interest may
- be fixed for the life of the loan,
- increase over a specified period of time or
- change from period to period.
Loans may include limits on periodic increases or decreases in the
amount of monthly payments and may include maximum or minimum amounts
of monthly payments.
18
Prepayments of principal may be conditioned on payment of a prepayment
fee, which may be fixed for the life of the loan or may decline over time, and
may be prohibited for the life of the loan or for particular lockout periods.
Some loans may permit prepayments after expiration of the applicable lockout
period and may require the payment of a prepayment fee in connection with any
subsequent prepayment. Other loans may permit prepayments without payment of a
fee unless the prepayment occurs during specified time periods. The loans may
include "due on sale" clauses which permit the mortgagee to demand payment of
the entire loan in connection with the sale or transfers of the related
property. Other loans may be assumable by persons meeting the then applicable
underwriting standards of the related seller.
A trust fund may contain buydown loans that include provisions for a
third party to subsidize partially the monthly payments of the borrowers on
those loans during the early years of those loans, the difference to be made up
from a buydown fund contributed by that third party at the time of origination
of the loan. A buydown fund will be in an amount equal either to the discounted
value or full aggregate amount of future payment subsidies. The underlying
assumption of buydown plans is that the income of the borrower will increase
during the buydown period as a result of normal increases in compensation and
inflation, so that the borrower will be able to meet the full loan payments at
the end of the buydown period. If assumption of increased income is not
fulfilled, the possibility of defaults on buydown loans is increased. The
related prospectus supplement will contain information with respect to any
buydown loan concerning limitations on the interest rate paid by the borrower
initially, on annual increases in the interest rate and on the length of the
buydown period.
When we use the term "mortgaged property" in this prospectus, we mean
the real property which secures repayment of the related loan. Home Improvement
Contracts and Manufactured Housing Contracts may, and the other loans will, be
secured by mortgages or deeds of trust or other similar security instruments
creating a lien on a mortgaged property. In the case of Home Equity Loans, the
related liens may be subordinated to one or more senior liens on the related
mortgaged properties as described in the prospectus supplement. As specified in
the related prospectus supplement, home improvement contracts and manufactured
housing contracts may be unsecured or secured by purchase money security
interests in the financed home improvements and the financed manufactured homes.
When we use the term "properties" in this prospectus supplement, we mean the
related mortgaged properties, home improvements and manufactured homes. The
properties relating to the loans will consist primarily of single-family
properties, meaning detached or semi-detached one- to four-family dwelling
units, townhouses, rowhouses, individual condominium units, individual units in
planned unit developments and other dwelling units, or mixed-use properties. Any
mixed-use property will not exceed three stories and its primary use will be for
one- to four-family residential occupancy, with the remainder of its space for
retail, professional or other commercial uses. Any non-residential use will be
in compliance with local zoning laws and regulations. Properties may include
vacation and second homes, investment properties and leasehold interests. In the
case of leasehold interests, the term of the leasehold will exceed the scheduled
maturity of the related loan by a time period specified in the related
prospectus supplement. The properties may be located in any one of the fifty
states, the District of Columbia, Guam, Puerto Rico or any other territory of
the United States.
Loans with specified loan-to-value ratios and/or principal balances may
be covered wholly or partially by primary mortgage guaranty insurance policies.
The existence, extent and duration of any coverage provided by primary mortgage
guaranty insurance policies will be described in the related prospectus
supplement.
19
Home Equity Loans. The primary assets for a series may consist, in
whole or in part, of, closed-end home equity loans, revolving credit line home
equity loans or certain balances forming a part of the revolving credit line
loans, secured by mortgages creating senior or junior liens primarily on one- to
four-family residential or mixed-use properties. The full principal amount of a
closed-end loan is advanced at origination of the loan and generally is
repayable in equal (or substantially equal) installments of an amount sufficient
to fully amortize the loan at its stated maturity. Unless otherwise described in
the related prospectus supplement, the original terms to stated maturity of
closed-end loans will not exceed 360 months. Principal amounts of a revolving
credit line loan may be drawn down (up to the maximum amount set forth in the
related prospectus supplement) or repaid from time to time, but may be subject
to a minimum periodic payment. Except to the extent provided in the related
prospectus supplement, the trust fund will not include any amounts borrowed
under a revolving credit line loan after the cut-off date designated in the
prospectus supplement. As more fully described in the related prospectus
supplement, interest on each revolving credit line loan, excluding introductory
rates offered from time to time during promotional periods, is computed and
payable monthly on the average daily principal balance of that loan. Under
certain circumstances, a borrower under either a revolving credit line loan or a
closed-end loan may choose an interest-only payment option. In this case only
the amount of interest that accrues on the loan during the billing cycle must be
paid. An interest-only payment option may be available for a specified period
before the borrower must begin making at least the minimum monthly payment of a
specified percentage of the average outstanding balance of the loan.
The rate of prepayment on Home Equity Loans cannot be predicted. Home
Equity Loans have been originated in significant volume only during the past few
years and the depositor is not aware of any publicly available studies or
statistics on the rate of their prepayment. The prepayment experience of the
related trust fund may be affected by a wide variety of factors, including
general economic conditions, prevailing interest rate levels, the availability
of alternative financing and homeowner mobility and the frequency and amount of
any future draws on any revolving credit line loans. Other factors that might be
expected to affect the prepayment rate of a pool of Home Equity Loans include
the amounts of, and interest rates on, the underlying first mortgage loans, and
the use of first mortgage loans as long-term financing for home purchase and
junior mortgage loans as shorter-term financing for a variety of purposes,
including home improvement, education expenses and purchases of consumer
durables such as automobiles. Accordingly, Home Equity Loans may experience a
higher rate of prepayment than traditional fixed-rate first mortgage loans. On
the other hand, because Home Equity Loans such as the revolving credit line
loans generally are not fully amortizing, the absence of voluntary borrower
prepayments could cause rates of principal payments to be lower than, or similar
to, those of traditional fully-amortizing first mortgage loans. Any future
limitations on the right of borrowers to deduct interest payments on Home Equity
Loans for federal income tax purposes may further increase the rate of
prepayments of the Home Equity Loans. Moreover, the enforcement of a
"due-on-sale" provision (as described below) will have the same effect as a
prepayment of the related Home Equity Loans. See "Material Legal Aspects of the
Loans--Due-on-Sale Clauses in Mortgage Loans" in this prospectus.
Collections on revolving credit line loans may vary for a number of
reasons, including those listed below.
o A borrower may make a payment during a month in an amount that
is as little as the minimum monthly payment for that month or,
during the interest-only period for certain revolving credit
line loans (and, in more limited circumstances, closed-end
loans with respect to which an interest-only payment option
has been selected), the interest, fees and charges for that
month.
o A borrower may make a payment that is as much as the entire
principal balance plus accrued interest and related fees and
charges during a month.
o A borrower may fail to make the required periodic payment.
20
o Collections on the mortgage loans may vary due to seasonal
purchasing and the payment habits of borrowers.
Each single family property will be located on land owned in fee simple
by the borrower or on land leased by the borrower for a term at least ten years
(unless otherwise provided in the related prospectus supplement) greater than
the term of the related loan. Attached dwellings may include owner-occupied
structures where each borrower owns the land upon which the unit is built, with
the remaining adjacent land owned in common or dwelling units subject to a
proprietary lease or occupancy agreement in a cooperatively owned apartment
building. Unless otherwise specified in the related prospectus supplement,
mortgages on cooperative dwelling units consist of a lien on the shares issued
by the cooperative dwelling corporation and the proprietary lease or occupancy
agreement relating to the cooperative dwelling.
The aggregate principal balance of loans secured by single family
properties that are owner-occupied will be disclosed in the related prospectus
supplement. Unless otherwise specified in the prospectus supplement, the sole
basis for a representation that a given percentage of the loans are secured by
single family property that is owner-occupied will be either
o a representation by the borrower at origination of the loan
either that the underlying mortgaged property will be used by
the borrower for a period of at least six months every year or
that the borrower intends to use the mortgaged property as a
primary residence, or
o a finding that the address of the underlying mortgaged
property is the borrower's mailing address as reflected in the
servicer's records.
To the extent specified in the related prospectus supplement, single family
properties may include non-owner occupied investment properties and vacation and
second homes.
Home Improvement Contracts. The primary assets for a series may
consist, in whole or in part, of home improvement installment sales contracts
and installment loan agreements originated by home improvement contractors in
the ordinary course of business. As specified in the related prospectus
supplement, the Home Improvement Contracts will be either unsecured or secured
by senior or junior mortgages primarily on single family properties, or by
purchase money security interests in the related home improvements. Unless
otherwise specified in the applicable prospectus supplement, the Home
Improvement Contracts will be fully amortizing and may have fixed interest rates
or adjustable interest rates and may provide for other payment characteristics
as described below and in the related prospectus supplement.
Unless otherwise specified in the related prospectus supplement, the
home improvements securing the Home Improvement Contracts include, but are not
limited to, replacement windows, house siding, new roofs, swimming pools,
satellite dishes, kitchen and bathroom remodeling goods and solar heating
panels.
Manufactured Housing Contracts. The trust fund assets for a series may
consist, in whole or part, of conventional manufactured housing installment
sales contracts and installment loan agreements originated by a manufactured
housing dealer in the ordinary course of business. As specified in the related
prospectus supplement, the Manufactured Housing Contracts will be secured by
manufactured homes, located in any of the fifty states or the District of
Columbia or by mortgages on the real estate on which the manufactured homes are
located.
21
The manufactured homes securing the Manufactured Housing Contracts will
consist of manufactured homes within the meaning of 42 United States Code,
Section 5402(6), or manufactured homes meeting those other standards as shall be
described in the related prospectus supplement. Section 5402(6) defines a
"manufactured home" as "a structure, transportable in one or more sections,
which, in the traveling mode, is eight body feet or more in width or forty body
feet or more in length, or, when erected on site, is three hundred twenty or
more square feet, and which is built on a permanent chassis and designed to be
used as a dwelling with or without a permanent foundation when connected to the
required utilities, and includes the plumbing, heating, air conditioning and
electrical systems contained therein; except that the term shall include any
structure which meets all the requirements of [this] paragraph except the size
requirements and with respect to which the manufacturer voluntarily files a
certification required by the Secretary of Housing and Urban Development and
complies with the standards established under [this] chapter."
Manufactured homes, unlike mortgaged properties, generally depreciate
in value. Consequently, at any time after origination it is possible, especially
in the case of contracts with high loan-to-value ratios at origination, that the
market value of a manufactured home or home improvement may be lower than the
principal amount outstanding under the related contract.
Additional Information. The selection criteria applicable to the loans
will be specified in the related prospectus supplement. These include, but are
not limited to, the combined loan-to-value ratios or loan-to-value ratios, as
applicable, original terms to maturity and delinquency information.
The loans for a series of securities may include loans that do not
amortize their entire principal balance by their stated maturity in accordance
with their terms but require a balloon payment of the remaining principal
balance at maturity, as specified in the related prospectus supplement. As
further described in the related prospectus supplement, the loans for a series
of securities may include loans that do not have a specified stated maturity.
The loans will be either conventional contracts or contracts insured by
the Federal Housing Administration (FHA) or partially guaranteed by the Veterans
Administration (VA). Loans designated in the related prospectus supplement as
insured by the FHA will be insured under various FHA programs as authorized
under the United States Housing Act of 1937, as amended.. These programs
generally limit the principal amount and interest rates of the mortgage loans
insured. Loans insured by the FHA generally require a minimum down payment of
approximately 5% of the original principal amount of the loan. No FHA-insured
loans relating to a series of securities may have an interest rate or original
principal amount exceeding the applicable FHA limits at the time or origination
of such loan.
The insurance premiums for loans insured by the FHA are collected by
lenders approved by the Department of Housing and Urban Development (HUD) 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 HUD or upon assignment of the defaulted loan to HUD. With respect to
a defaulted FHA-insured 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. Such plans may involve the reduction or suspension of regular mortgage
payments for a specified period, with such payments to be made upon or before
the maturity date of the mortgage, or the recasting of payments due under the
mortgage up to or beyond the maturity date. In addition, when a default caused
by such circumstances is accompanied by certain other criteria, HUD may provide
relief by making payments to the servicer in partial or full satisfaction of
amounts due under the loan (which payments are to be repaid by the borrower to
HUD) or by accepting assignment of the loan from the servicer. With certain
exceptions, at least three full monthly installments must be due and unpaid
under the loan and HUD must have rejected any request for relief from the
borrower before the servicer may initiate foreclosure proceedings.
22
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
debenture interest rate. The servicer of each FHA-insured loan will be obligated
to purchase any such debenture issued in satisfaction of a loan upon default for
an amount equal to the principal amount of the debenture.
The amount of insurance benefits generally paid by the FHA is equal to
the entire unpaid principal amount of the defaulted loan adjusted to reimburse
the servicer for certain costs and expenses and to deduct certain 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
prior to the date of foreclosure 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 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-insured 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
loan 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.
Loans designated in the related prospectus supplement as guaranteed by
the VA will be partially guaranteed by the VA under the Serviceman's
Readjustment Act of 1944, as amended. The Serviceman's Readjustment Act 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 no mortgage loan limits, requires no down payment from the purchaser
and permits the guarantee of mortgage loans of up to 30 years' duration.
The maximum guaranty that may be issued by the VA under a VA-guaranteed
mortgage loan depends upon the original principal amount of the mortgage loan,
as further described in 38 United States Code Section 1803(a), as amended. 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 its guaranty, make full payment to a mortgage
holder of unsatisfied indebtedness on a mortgage upon its assignment to the VA.
With respect to a defaulted VA-guaranteed 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
guaranteed amount is submitted to the VA after liquidation of the related
mortgaged property.
The amount payable under a VA guaranty will be the percentage of the
VA-insured loan originally guaranteed by the VA applied to the indebtedness
outstanding as of the applicable date of computation specified in the VA
regulations. Payments under the guaranty will be equal to the unpaid principal
amount of the loan, interest accrued on the unpaid balance of the loan 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.
23
The prospectus supplement for each series will provide information with
respect to the loans that are primary assets of the related trust fund as of the
cut-off date, including, among other things, and to the extent relevant:
o the aggregate unpaid principal balance of the loans;
o the range and weighted average interest rates on the loans
and, in the case of adjustable rate loans, the range and
weighted average of the current interest rates and the
lifetime interest rate caps, if any;
o the range and average principal balance of the loans;
o the weighted average original and remaining terms to stated
maturity of the loans and the range of original and remaining
terms to stated maturity, if applicable;
o the range and weighted average of combined loan-to-value
ratios or loan-to-value ratios for the loans, as applicable;
o the percentage (by principal balance as of the cut-off date)
of loans that accrue interest at adjustable or fixed interest
rates;
o any special hazard insurance policy or bankruptcy bond or
other enhancement relating to the loans;
o the percentage (by principal balance as of the cut-off date)
of loans that are secured by mortgaged properties or home
improvements or that are unsecured;
o the geographic distribution of any mortgaged properties
securing the loans;
o for loans that are secured by single family properties, the
percentage (by principal balance as of the cut-off date)
secured by shares relating to cooperative dwelling units,
condominium units, investment property and vacation or second
homes;
o the lien priority of the loans;
o the delinquency status and year of origination of the loans;
o whether the loans are closed-end loans and/or revolving credit
line loans; and
o in the case of revolving credit line loans, the general
payments and credit line terms of those loans and other
pertinent features.
The prospectus supplement will also specify any other limitations on
the types or characteristics of the loans in the trust fund for the related
series of securities.
If information of the nature described above respecting the loans is
not known to the depositor at the time the securities are initially offered,
more general or approximate information of the nature described above will be
provided in the prospectus supplement and additional information will be set
forth in a Current Report on Form 8-K to be available to investors on the date
of issuance of the related series of securities and to be filed with the SEC
within 15 days after the initial issuance of the securities.
24
Private Label Securities
General. Primary assets for a series may consist, in whole or in part,
of Private Label Securities or PLS (i.e., private mortgage-backed asset-backed
securities) that include:
o pass-through certificates representing beneficial interests in
underlying loans of a type that would otherwise be eligible to
be loans held directly by the trust fund, or
o collateralized obligations secured by underlying loans of a
type that would otherwise be eligible to be loans held
directly by the trust fund.
The Private Label Securities will previously have been
o offered and distributed to the public pursuant to an effective
registration statement, or
o purchased in a transaction not involving any public offering
from a person that is not an affiliate of the Private Label
Securities at the time of sale (nor its affiliate at any time
during the three preceding months) and a period of two years
has elapsed since the date the Private Label Securities were
acquired from the issuer or its affiliate, whichever is later.
Although individual underlying loans may be insured or guaranteed by
the United States or one of its agencies or instrumentalities, they need not be,
and the Private Label Securities themselves may be, but need not be, insured or
guaranteed.
The Private Label Securities will have been issued pursuant to a
pooling and servicing agreement, a trust agreement or similar agreement. The
seller/servicer of the underlying loans will have entered into a PLS agreement
with the PLS trustee. The PLS trustee, its agent or a custodian will take
possession of the underlying loans. The underlying loans will be serviced by the
PLS servicer directly or by one or more sub-servicers subject to the supervision
of the PLS servicer.
The issuer Private Label Securities will be
o a financial institution or other entity engaged generally in
the business of lending,
o a public agency or instrumentality of a state, local or
federal government, or
o a limited purpose corporation organized for the purpose of,
among other things, establishing trusts and acquiring and
selling loans to such trusts, and selling beneficial interests
in trusts.
If specified in the prospectus supplement, the PLS issuer may be an affiliate of
the depositor. The obligations of the PLS issuer generally will be limited to
certain representations and warranties that it makes with respect to the assets
it conveys to the related trust. Unless otherwise specified in the related
prospectus supplement, the PLS issuer will not have guaranteed any of the assets
conveyed to the related trust or any of the Private Label Securities issued
under the PLS agreement.
Distributions of principal and interest will be made on the Private
Label Securities on the dates specified in the related prospectus supplement.
The Private Label Securities may be entitled to receive nominal or no principal
distributions or nominal or no interest distributions. Principal and interest
distributions will be made on the Private Label Securities by the PLS trustee or
the PLS servicer. The PLS issuer or the PLS servicer may have the right to
repurchase the underlying loans after a certain date or under other
circumstances specified in the related prospectus supplement.
25
The loans underlying the Private Label Securities may be fixed rate,
level payment, fully amortizing loans or adjustable rate loans or loans having
balloon or other irregular payment features. The underlying loans will be
secured by mortgages on mortgaged properties.
Credit Support Relating to Private Label Securities. Credit support in
the form of reserve funds, subordination of other private securities issued
under the PLS agreement, guarantees, cash collateral accounts, security policies
or other types of credit support may be provided with respect to the underlying
loans or with respect to the Private Label Securities themselves. The type,
characteristics and amount of credit support will be a function of the
characteristics of the underlying loans and other factors and will be based on
the requirements of the nationally recognized statistical rating organization
that rated the Private Label Securities.
Additional Information. If the primary assets of a trust fund include
Private Label Securities, the related prospectus supplement will specify the
items listed below, to the extent relevant and to the extent information is
reasonably available to the depositor and the depositor reasonably believes the
information to be reliable:
o the total approximate principal amount and type of the Private
Label Securities to be included in the trust fund,
o the maximum original term to stated maturity of the Private
Label Securities,
o the weighted average term to stated maturity of the Private
Label Securities,
o the pass-through or certificate rate or range of rates of the
Private Label Securities,
o the PLS issuer, the PLS servicer (if other than the PLS
issuer) and the PLS trustee,
o certain characteristics of any credit support such as reserve
funds, security policies or guarantees relating to the
underlying loans or to the Private Label Securities
themselves;
o the terms on which underlying loans may, or are required to,
be purchased prior to their stated maturity or the stated
maturity of the Private Label Securities, and
o the terms on which underlying loans may be substituted for
those originally underlying the Private Label Securities.
In addition, the related prospectus supplement will provide information about
the loans underlying the Private Label Securities, including
o the payment features of the underlying loans (i.e., whether
closed-end loans or revolving credit line loans, whether fixed
rate or adjustable rate, whether level payment or balloon
payment loans),
o the approximate aggregate principal balance, if known, of the
underlying loans insured guaranteed by a governmental entity,
o the servicing fee or range of servicing fees with respect to
the underlying loans,
26
o the minimum and maximum stated maturities of the underlying
loans at origination,
o the lien priority of the underlying loans, and
o the delinquency status and year of origination of the
underlying loans.
The above disclosure may be on an approximate basis and will be as of
the date specified in the related prospectus supplement. If information of the
nature described above for the Private Label Securities is not known to the
depositor at the time the securities are initially offered, more general or
approximate information of a similar nature will be provided in the prospectus
supplement and the additional information, if available, will be set forth in a
Current Report on Form 8-K to be available to investors on the date of issuance
of the related series of securities and to be filed with the SEC within 15 days
of the initial issuance of the securities.
Agency Securities
Ginnie Mae. The Government National Mortgage Association (Ginnie Mae)
is a wholly-owned corporate instrumentality of HUD. Section 306(g) of Title II
of the National Housing Act of 1934, as amended, authorizes Ginnie Mae to, among
other things, guarantee the timely payment of principal of and interest on
certificates which represent an interest in a pool of mortgage loans insured by
the FHA under the National Housing Act of 1934 or Title V of the National
Housing Act of 1949, or partially guaranteed by the VA under the Servicemen's
Readjustment Act of 1944, as amended, or Chapter 37 of Title 38 of the United
States Code.
Section 306 (g) of the National Housing Act of 1934 provides that "the
full faith and credit of the United States is pledged to the payment of all
amounts which may be required to be paid under any guarantee under this
subsection." In order to meet its obligations under any guarantee under Section
306 (g) of the National Housing Act, Ginnie Mae may, under Section 306(d) of the
National Housing Act, borrow from the United States Treasury in an amount which
is at any time sufficient to enable Ginnie Mae, with no limitations as to
amount, to perform its obligations under its guarantee.
Ginnie Mae Certificates. Each Ginnie Mae certificate held in a trust
fund for a series of securities will be a "fully modified pass-through"
mortgaged-backed certificate issued and serviced by a mortgage banking company
or other financial concern approved by Ginnie Mae or approved by Fannie Mae as a
seller-servicer of FHA loans and/or VA loans. Each Ginnie Mae certificate may be
a GNMA I certificate or a GNMA II certificate. The mortgage loans underlying the
Ginnie Mae certificates will consist of FHA loans and/or VA loans. Each mortgage
loan of this type is secured by a one- to four-family residential property or a
manufactured home. Ginnie Mae will approve the issuance of each Ginnie Mae
certificate in accordance with a guaranty agreement between Ginnie Mae and the
issuer and servicer of the Ginnie Mae certificate. Pursuant to its guaranty
agreement, a Ginnie Mae servicer will be required to advance its own funds in
order to make timely payments of all amounts due on each of the related Ginnie
Mae certificates, even if the payments received by the Ginnie Mae servicer on
the FHA loans or VA loans underlying each of those Ginnie Mae certificates are
less than the amounts due on those Ginnie Mae certificates.
The full and timely payment of principal of and interest on each Ginnie
Mae certificate will be guaranteed by Ginnie Mae, which obligation is backed by
the full faith and credit of the United States. Each Ginnie Mae certificate will
have an original maturity of not more than 40 years (but may have original
maturities of substantially less than 40 years). Each Ginnie Mae certificate
will provide for the payment by or on behalf of the Ginnie Mae servicer to the
registered holder of the Ginnie Mae certificate of scheduled monthly payments of
principal and interest equal to the registered holder's proportionate interest
in the aggregate amount of the monthly principal and interest payment on each
FHA loan or VA loan underlying the Ginnie Mae certificate, less the applicable
servicing and guarantee fee which together equal the difference between the
interest on the FHA loans or VA loans and the pass-through rate on the Ginnie
Mae certificate. In addition, each payment will include proportionate
pass-through payments of any prepayments of principal on the FHA loans or VA
loans underlying the Ginnie Mae certificate and liquidation proceeds in the
event of a foreclosure or other disposition of any the related FHA loans or VA
loans.
27
If a Ginnie Mae servicer is unable to make the payments on a Ginnie Mae
certificate as it becomes due, it must promptly notify Ginnie Mae and request
Ginnie Mae to make the payment. Upon notification and request, Ginnie Mae will
make payments directly to the registered holder of a Ginnie Mae certificate. In
the event no payment is made by a Ginnie Mae servicer and the Ginnie Mae
servicer fails to notify and request Ginnie Mae to make the payment, the holder
of the related Ginnie Mae certificate will have recourse only against Ginnie Mae
to obtain the payment. The trustee or its nominee, as registered holder of the
Ginnie Mae certificates held in a trust fund, will have the right to proceed
directly against Ginnie Mae under the terms of the guaranty agreements relating
to the Ginnie Mae certificates for any amounts that are not paid when due.
Except for pools of mortgage loans secured by manufactured homes, all
mortgage loans underlying a particular Ginnie Mae certificate must have the same
interest rate over the term of the loan. The interest rate on a GNMA I
certificate will equal the interest rate on the mortgage loans included in the
pool of mortgage loans underlying the GNMA I certificate, less one-half
percentage point per year of the unpaid principal balance of the mortgage loans.
Mortgage loans underlying a particular GNMA II certificate may have
annual interest rates that vary from each other by up to one percentage point.
The interest rate on each GNMA II certificate will be between one-half
percentage point and one and one-half percentage points lower than the highest
interest rate on the mortgage loans included in the pool of mortgage loans
underlying the GNMA II certificate (except for pools of mortgage loans secured
by manufactured homes).
Regular monthly installment payments on each Ginnie Mae certificate
will be comprised of interest due as specified on a Ginnie Mae certificate plus
the scheduled principal payments on the FHA loans or VA loans underlying the
Ginnie Mae certificate due on the first day of the month in which the scheduled
monthly installments on the Ginnie Mae certificate is due. Regular monthly
installments on each Ginnie Mae certificate, are required to be paid to the
trustee identified in the related prospectus supplement as registered holder by
the 15th day of each month in the case of a GNMA I certificate, and are required
to be mailed to the trustee by the 20th day of each month in the case of a GNMA
II certificate. Any principal prepayments on any FHA loans or VA loans
underlying a Ginnie Mae certificate held in a trust fund or any other early
recovery of principal on a loan will be passed through to the trustee identified
in the related prospectus supplement as the registered holder of the Ginnie Mae
certificate.
Ginnie Mae certificates may be backed by graduated payment mortgage
loans or by "buydown" mortgage loans for which funds will have been provided,
and deposited into escrow accounts, for application to the payment of a portion
of the borrowers' monthly payments during the early years of those mortgage
loans. Payments due the registered holders of Ginnie Mae certificates backed by
pools containing "buydown" mortgage loans will be computed in the same manner as
payments derived from other Ginnie Mae certificates and will include amounts to
be collected from both the borrower and the related escrow account. The
graduated payment mortgage loans will provide for graduated interest payments
that, during the early years of the mortgage loans, will be less than the amount
of stated interest on the mortgage loans. The interest not so paid will be added
to the principal of the graduated payment mortgage loans and, together with
interest on that interest, will be paid in subsequent years. The obligations of
Ginnie Mae and of a Ginnie Mae issuer/servicer will be the same irrespective of
whether the Ginnie Mae certificates are backed by graduated payment mortgage
loans or "buydown" mortgage loans. No statistics comparable to the FHA's
prepayment experience on level payment, non-buydown loans are available in
inspect of graduated payment or buydown mortgages. Ginnie Mae certificates
related to a series of certificates may be held in book-entry form.
28
Fannie Mae. The Federal National Mortgage Association (Fannie Mae) is a
federally chartered and privately owned corporation organized and existing under
the Federal National Mortgage Association Charter Act. Fannie Mae was originally
established in 1938 as a United States government agency to provide supplemental
liquidity to the mortgage market and was transformed into a stockholder-owned
and privately managed corporation by legislation enacted in 1968.
Fannie Mae provides funds to the mortgage market primarily by
purchasing mortgage loans from lenders. Fannie Mae acquires funds to purchase
mortgage loans from many capital market investors that may not ordinarily invest
in mortgages. In so doing, it expands the total amount of funds available for
housing. Operating nationwide, Fannie Mae helps to redistribute mortgage funds
from capital-surplus to capital-short areas.
Fannie Mae Certificates. Fannie Mae certificates are either guaranteed
mortgage pass-through certificates or stripped mortgage-backed securities. The
following discussion of Fannie Mae certificates applies equally to both types of
Fannie Mae certificates, except as otherwise indicated. Each Fannie Mae
certificate to be included in the trust fund for a series of securities will
represent a fractional undivided interest in a pool of mortgage loans formed by
Fannie Mae. Each pool formed by Fannie Mae will consist of mortgage loans of one
of the following types:
o fixed-rate level installment conventional mortgage loans,
o fixed-rate level installment mortgage loans that are insured
by FHA or partially guaranteed by the VA,
o adjustable rate conventional mortgage loans, or
o adjustable rate mortgage loans that are insured by the FHA or
partially guaranteed by the VA.
Each mortgage loan must meet the applicable standards set forth under the Fannie
Mae purchase program and will be secured by a first lien on a one- to
four-family residential property.
Each Fannie Mae certificate will be issued pursuant to a trust
indenture. Original maturities of substantially all of the conventional, level
payment mortgage loans underlying a Fannie Mae certificate are expected to be
between either eight to 15 years or 20 to 40 years. The original maturities of
substantially all of the fixed rate level payment FHA loans or VA loans are
expected to be 30 years.
Mortgage loans underlying a Fannie Mae certificate may have annual
interest rates that vary by as much as two percentage points from one another.
The rate of interest payable on a Fannie Mae guaranteed mortgage-backed
certificate and the series pass-through rate payable with respect to a Fannie
Mae stripped mortgage-backed security is equal to the lowest interest rate of
any mortgage loan in the related pool, less a specified minimum annual
percentage representing servicing compensation and Fannie Mae's guaranty fee.
Under a regular servicing option pursuant to which the mortgagee or other
servicer assumes the entire risk of foreclosure losses, the annual interest
rates on the mortgage loans underlying a Fannie Mae certificate will be between
50 basis points and 250 basis points greater than the annual pass-through rate,
in the case of a Fannie Mae guaranteed mortgage-backed certificate, or the
series pass-through rate in the case of a Fannie Mae stripped mortgage-backed
security. Under a special servicing option pursuant to which Fannie Mae assumes
the entire risk for foreclosure losses, the annual interest rates on the
mortgage loans underlying a Fannie Mae certificate will generally be between 55
basis points and 255 basis points greater than the annual pass-through rate, in
the case of a Fannie Mae guaranteed mortgage-backed certificate, or the series
pass-through rate in the case of a Fannie Mae stripped mortgage-backed security.
29
Fannie Mae guarantees to each registered holder of a Fannie Mae
certificate that it will distribute on a timely basis amounts representing the
holder's proportionate share of scheduled principal and interest payments at the
applicable pass-through rate provided for by the Fannie Mae certificate on the
underlying mortgage loans, whether or not received, and the holder's
proportionate share of the full principal amount of any foreclosed or other
finally liquidated mortgage loan, whether or not the principal amount is
actually recovered. The obligations of Fannie Mae under its guarantees are
obligations solely of Fannie Mae and are not backed by, or entitled to, the full
faith and credit of the United States. If Fannie Mae were unable to satisfy its
obligations, distributions to holders of Fannie Mae certificates would consist
solely of payments and other recoveries on the underlying mortgage loans and,
accordingly, monthly distributions to holders of Fannie Mae certificates would
be affected by delinquent payments and defaults on those mortgage loans.
Fannie Mae stripped mortgage-backed securities are issued in series of
two or more classes, with each class representing a specified undivided
fractional interest in principal distributions and interest distributions,
adjusted to the series pass-through rate, on the underlying pool of mortgage
loans. The fractional interests of each class in principal and interest
distributions are not identical, but the classes in the aggregate represent 100%
of the principal distributions and interest distributions, adjusted to the
series pass-through rate, on the respective pool. Because of the difference
between the fractional interests in principal and interest of each class, the
effective rate of interest on the principal of each class of Fannie Mae stripped
mortgage-backed securities may be significantly higher or lower than the series
pass-through rate and/or the weighted average interest rate of the underlying
mortgage loans.
Unless otherwise specified by Fannie Mae, Fannie Mae certificates
evidencing interests in pools of mortgages formed on or after May 1, 1985 will
be available in book-entry form only. Distributions of principal and interest on
each Fannie Mae certificate will be made by Fannie Mae on the 25th day of each
month to the persons in whose name the Fannie Mae certificate is entered in the
books of the Federal Reserve Banks, or registered on the Fannie Mae certificate
register in the case of fully registered Fannie Mae certificates as of the close
of business on the last day of the preceding month. With respect to Fannie Mae
certificates issued in book-entry form, distributions on the Fannie Mae
certificates will be made by wire, and with respect to fully registered Fannie
Mae certificates, distributions on the Fannie Mae certificates will be made by
check.
Freddie Mac. The Federal Home Loan Mortgage Corporation (Freddie Mac)
is a shareholder-owned, United States government-sponsored enterprise created
pursuant to the Federal Home loan Mortgage Corporation Act, Title III of the
Emergency Home Finance Act of 1970, as amended. The common stock of Freddie Mac
is owned by the Federal Home loan Banks. Freddie Mac was established primarily
for the purpose of increasing the availability of mortgage credit for the
financing of urgently needed housing. It seeks to provide an enhanced degree of
liquidity for residential mortgage investments primarily by assisting in the
development of secondary markets for conventional mortgages. The principal
activity of Freddie Mac currently consists of the purchase of first lien
conventional mortgage loans FHA loans, VA loans or participation interests in
those mortgage loans and the sale of the loans or participations so purchased in
the form of mortgage securities, primarily Freddie Mac certificates. Freddie Mac
is confined to purchasing, so far as practicable, mortgage loans that it deems
to be of the quality, type and class which meet generally the purchase standards
imposed by private institutional mortgage investors.
30
Freddie Mac Certificates. Each Freddie Mac certificate included in a
trust fund for a series will represent an undivided interest in a pool of
mortgage loans that may consist of first lien conventional loans, FHA loans or
VA loans. Freddie Mac certificates are sold under the terms of a mortgage
participation certificate agreement. A Freddie Mac certificate may be issued
under either Freddie Mac's Cash Program or Guarantor Program. Typically,
mortgage loans underlying the Freddie Mac certificates held by a trust fund will
consist of mortgage loans with original terms to maturity of from ten to 40
years. Each of those mortgage loans must meet the applicable standards set forth
in the law governing Freddie Mac. 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. Under the guarantor program, any Freddie Mac certificate group may
include only whole loans or participation interests in whole loans.
Freddie Mac guarantees to each registered holder of a Freddie Mac
certificate the timely payment of interest on the underlying mortgage loans to
the extent of the applicable certificate rate on the registered holder's pro
rata share of the unpaid principal balance outstanding on the underlying
mortgage loans in the Freddie Mac certificate group represented by a Freddie Mac
certificate, whether or not received. Freddie Mac also guarantees to each
registered holder of a Freddie Mac certificate ultimate receipt by a holder of
all principal on the underlying mortgage loans, without any offset or deduction,
to the extent of that holder's pro rata share. However, Freddie Mac does not
guarantee, except if and to the extent specified in the prospectus supplement
for a series, the timely payment of scheduled principal. Under Freddie Mac's
Gold PC Program, Freddie Mac guarantees the timely payment of principal based on
the difference between the pool factor published in the month preceding the
month of distribution and the pool factor published in the related month of
distribution. Pursuant to its guarantees, Freddie Mac indemnifies holders of
Freddie Mac certificates against any diminution in principal by reason of
charges for property repairs, maintenance and foreclosure. Freddie Mac may remit
the amount due on account of its guarantee of collection of principal at any
time after default on an underlying mortgage loan, but not later than (x) 30
days following foreclosure sale, (y) 30 days following payment of the claim by
any mortgage insurer, or (z) 30 days following the expiration of any right of
redemption, whichever occurs later, but in any event no later than one year
after demand has been made upon the mortgagor for accelerated payment of
principal. In taking actions regarding the collection of principal after default
on the mortgage loans underlying Freddie Mac certificates, including the timing
of demand for acceleration, Freddie Mac reserves the right to exercise its
judgment with respect to the mortgage loans in the same manner as for mortgage
loans which it has purchased but not sold. The length of time necessary for
Freddie Mac to determine that a mortgage loan should be accelerated varies with
the particular circumstances of each borrower, and Freddie Mac has not adopted
standards which require that the demand be made within any specified period.
Freddie Mac certificates are not guaranteed by the United States or by
any Federal Home loan Bank and do not constitute debts or obligations of the
United States or any Federal Home loan Bank. The obligations of Freddie Mac
under its guarantee are obligations solely of Freddie Mac and are not backed by,
nor entitled to, the full faith and credit of the United States. If Freddie Mac
were unable to satisfy its 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.
Registered holders of Freddie Mac certificates are entitled to receive
their monthly pro rata share of all principal payments on the underlying
mortgage loans received by Freddie Mac, including any scheduled principal
payments, full and partial prepayments of principal and principal received by
Freddie Mac by virtue of condemnation, insurance, liquidation or foreclosure,
and repurchases of the mortgage loans by Freddie Mac or by the party that sold
the related mortgage loans to Freddie Mac. Freddie Mac is required to remit each
registered Freddie Mac certificateholder's pro rata share of principal payments
on the underlying mortgage loans, interest at the Freddie Mac pass-through rate
and any other sums like prepayment fees, within 60 days of the date on which
those payments are deemed to have been received by Freddie Mac.
31
Under Freddie Mac's Cash Program, with respect to pools formed prior to
June 1, 1987, there is no limitation on be amount by which interest rates on the
mortgage loans underlying a Freddie Mac certificate may exceed the pass-through
rate on the Freddie Mac certificate. With respect to Freddie Mac certificates
issued on or after June 1, 1987, the maximum interest rate on the mortgage loans
underlying the Freddie Mac certificates may exceed the pass-through rate of the
Freddie Mac certificates by 50 to 100 basis points. Under that program, Freddie
Mac purchases group of whole mortgage loans from sellers at specified
percentages of their unpaid principal balances, adjusted for accrued or prepaid
interest, which when applied to the interest rate of the mortgage loans and
participations purchased, results in the yield expressed as a percentage
required by Freddie Mac. The required yield, which includes a minimum servicing
fee retained by the servicer, is calculated using the outstanding principal
balance. The range of interest rates on the mortgage loans and participations in
a Freddie Mac certificate group under the Cash Program will vary since mortgage
loans and participations are purchased and assigned to a Freddie Mac certificate
group based upon their yield to Freddie Mac rather than on the interest rate on
the underlying mortgage loans.
Under Freddie Mac's Guarantor Program, the pass-through rate on a
Freddie Mac certificate is established based upon the lowest interest rate on
the underlying mortgage loans, minus a minimum servicing fee and the amount of
Freddie Mac's management and guaranty income as agreed upon between the seller
and Freddie Mac. For Freddie Mac certificate group formed under the Guarantor
Program with certificate numbers beginning with 18-012, the range between the
lowest and the highest annual interest rates on the mortgage loans in a Freddie
Mac certificate group may not exceed two percentage points.
Freddie Mac certificates duly presented for registration of ownership
on or before the last business day of a month are registered effective as of the
first day of the month. The first remittance to a registered holder of a Freddie
Mac certificate will be distributed so as to be received normally by the 15th
day of the second month following the month in which the purchaser became a
registered holder of the Freddie Mac certificates. Subsequent remittances will
be distributed monthly to the registered holder so as to be received normally by
the 15th day of each month. The Federal Reserve Bank of New York maintains
book-entry accounts with respect to Freddie Mac certificates sold by Freddie Mac
on or after January 2, 1985, and makes payments of principal and interest each
month to the registered holders of Freddie Mac certificates in accordance with
the holders' instructions.
Stripped Mortgage-Backed Securities. Agency Securities may consist of
one or more stripped mortgage-backed securities, each as described in this
prospectus and in the related prospectus supplement. Each Agency Security of
this type will represent an undivided interest in all or part of either the
principal distributions or the interest distributions, or in some specified
portion of the principal and interest distributions, on particular Freddie Mac,
Fannie Mae, Ginnie Mae or other government agency or government-sponsored agency
certificates. The underlying securities will be held under a trust agreement by
Freddie Mac, Fannie Mae, Ginnie Mae or another government agency or
government-sponsored agency, each as trustee, or by another trustee named in the
related prospectus supplement. Freddie Mac, Fannie Mae, Ginnie Mae or another
government agency or government-sponsored agency will guarantee each stripped
agency security to the same extent as the applicable entity guarantees the
underlying securities backing the stripped Agency Security, unless otherwise
specified in the related prospectus supplement.
32
Other Agency Securities. If specified in the related prospectus
supplement, a trust fund may include other mortgage pass-through certificates
issued or guaranteed by Ginnie Mae, Fannie Mae, Freddie Mac or other government
agencies or government-sponsored agencies. The characteristics of any other
mortgage pass-through certificates issued or guaranteed by Ginnie Mae, Fannie
Mae, Freddie Mac or other government agencies or government-sponsored agencies
will be described in that prospectus supplement. If so specified, a combination
of different types of Agency Securities may be held in a trust fund.
Collection and Distribution Accounts
A separate collection account will be established by the trustee, or by
the servicer in the name of the trustee, for each series of securities for
receipt of
o the amount of any cash specified in the related prospectus
supplement to be initially deposited by the depositor in the
collection account,
o all amounts received with respect to the primary assets of the
related trust fund, and
o unless otherwise specified in the related prospectus
supplement, income earned on the foregoing amounts.
As provided in the related prospectus supplement, certain amounts on deposit in
the collection account and certain amounts available under any credit
enhancement for the securities of that series will be deposited into the
applicable distribution account for distribution to the holders of the related
securities. The trustee will establish a separate distribution account for each
series of securities. Unless otherwise specified in the related prospectus
supplement, the trustee will invest the funds in the collection account and the
distribution account in eligible investments including, among other investments,
obligations of the United States and certain of its agencies, federal funds,
certificates of deposit, commercial paper, demand and time deposits and banker's
acceptances, certain repurchase agreements of United States government
securities and certain guaranteed investment contracts, in each case acceptable
to the rating agencies named in the prospectus supplement. With certain
exceptions, all such eligible investments must mature, in the case of funds in
the collection account, not later than the day preceding the date when the funds
are due to be deposited into the distribution account or otherwise distributed
and, in the case of funds in the distribution account, not later than the day
preceding the next distribution date for the related series of securities.
Notwithstanding any of the foregoing, amounts may be deposited and
withdrawn pursuant to any deposit agreement or minimum principal payment
agreement that may be specified in the related prospectus supplement.
If specified in the related prospectus supplement, a trust fund will
include one or more pre-funding accounts that are segregated trust accounts
established and maintained with the trustee for the related series. If specified
in the prospectus supplement, a portion of the proceeds of the sale of the
securities equal to the pre-funded amount will be deposited into the pre-funding
account on the closing date and may be used to purchase additional primary
assets during the pre-funding period specified in the prospectus supplement. In
no case will the pre-funded amount exceed 50% of the total principal amount of
the related securities, and in no case will the pre-funding period exceed one
year. The primary assets to be purchased generally will be selected on the basis
of the same criteria as those used to select the initial primary assets of the
trust fund, and the same representations and warranties will be made with
respect to them. If any pre-funded amount remains on deposit in the pre-funding
account at the end of the pre-funding period, the remaining amount will be
applied in the manner specified in the related prospectus supplement to prepay
the notes and/or the certificates of that series.
33
If a pre-funding account is established, one or more capitalized
interest accounts that are segregated trust accounts may be established and
maintained with the trustee for the related series. On the closing date for the
series, a portion of the proceeds of the sale of the related securities will be
deposited into the capitalized interest account and used to fund the excess, if
any, of
o the sum of
- the amount of interest accrued on the securities of
the series, and
- if specified in the related prospectus supplement,
certain fees or expenses during the pre-funding
period,
over
o the amount of interest available from the primary assets in
the trust fund.
Any amounts on deposit in the capitalized interest account at the end
of the pre-funding period that are not necessary for these purposes will be
distributed to the person specified in the related prospectus supplement.
Credit Enhancement
If so provided in the prospectus supplement relating to a series of
securities, simultaneously with the depositor's assignment of the primary assets
to the trustee, the depositor will obtain from an institution or by other means
acceptable to the rating agencies named in the prospectus supplement one or more
types of credit enhancement in favor of the trustee on behalf of the holders of
the related series or designated classes of the series. The credit enhancement
will support the payment of principal of and interest on the securities, and may
be applied for certain other purposes to the extent and under the conditions set
forth in the prospectus supplement. Credit enhancement for a series may include
one or more of the forms described below or any other form as may be specified
in the related prospectus supplement. If so specified in the related prospectus
supplement, the credit enhancement may be structured so as to protect against
losses relating to more than one trust fund.
Subordinated Securities
If specified in the related prospectus supplement, credit enhancement
for a series may consist of one or more classes of subordinated securities. The
rights of the holders of subordinated securities to receive distributions on any
distribution date will be subordinate in right and priority to the rights of
holders of senior securities of the same series, but only to the extent
described in the related prospectus supplement.
Insurance Policies, Surety Bonds and Guaranties
If so provided in the prospectus supplement for a series of securities,
deficiencies in amounts otherwise payable on the securities or on specified
classes will be covered by insurance policies and/or surety bonds provided by
one or more insurance companies or sureties. Those instruments may cover, with
respect to one or more classes of securities of the related series, timely
distributions of interest and/or full distributions of principal on the basis of
a schedule of principal distributions set forth in or determined in the manner
specified in the related prospectus supplement. In addition, if specified in the
related prospectus supplement, a trust fund may also include bankruptcy bonds,
special hazard insurance policies, other insurance or guaranties for the purpose
of:
o maintaining timely payments or providing additional protection
against losses on the trust fund assets;
34
o paying administrative expenses; or
o establishing a minimum reinvestment rate on the payments made
in respect of those assets or principal payment rate on those
assets.
Arrangements may include agreements under which securityholders are entitled to
receive amounts deposited in various accounts held by the trustee upon the terms
specified in the related prospectus supplement. A copy of any arrangement
instrument for a series will be filed with the SEC as an exhibit to a Current
Report on Form 8-K to be filed with the SEC following issuance of the securities
of the related series.
Over-Collateralization
If so provided in the prospectus supplement for a series of securities,
a portion of the interest payment on each loan included in the trust fund may be
applied as an additional distribution in respect of principal to reduce the
principal balance of a class or classes of securities and, thus, accelerate the
rate of payment of principal on that class or those classes of securities.
Other Insurance Policies
If specified in the related prospectus supplement, credit enhancement
for a series may consist of pool insurance policies, special hazard insurance
policies, bankruptcy bonds and other types of insurance relating to the primary
assets, as described below and in the related prospectus supplement.
Pool Insurance Policy. If so specified in the related prospectus
supplement, the depositor will obtain a pool insurance policy for the loans in
the related trust fund. The pool insurance policy will cover any loss (subject
to the limitations described in the prospectus supplement) by reason of default,
but will not cover the portion of the principal balance of any loan that is
required to be covered by any primary mortgage insurance policy. The amount and
terms of any pool insurance coverage will be set forth in the related prospectus
supplement.
Special Hazard Insurance Policy. Although the terms of such policies
vary to some degree, a special hazard insurance policy typically provides that,
where there has been damage to property securing a defaulted or foreclosed loan
(title to which has been acquired by the insured) and to the extent the damage
is not covered by a standard hazard insurance policy (or any flood insurance
policy, if applicable) required to be maintained with respect to the property,
or in connection with partial loss resulting from the application of the
coinsurance clause in a standard hazard insurance policy, the special hazard
insurer will pay the lesser of
o the cost of repair or replacement of the property, and
o upon transfer of the property to the special hazard insurer,
the unpaid principal balance of the loan at the time of
acquisition of the property by foreclosure or deed in lieu of
foreclosure, plus accrued interest to the date of claim
settlement and certain expenses incurred by the servicer with
respect to the property.
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If the unpaid principal balance of the loan plus accrued interest and
certain expenses is paid by the special hazard insurer, the amount of further
coverage under the special hazard insurance policy will be reduced by that
amount less any net proceeds from the sale of the related property. Any amount
paid as the cost of repair of the property will reduce coverage by that amount.
Special hazard insurance policies typically do not cover losses occasioned by
war, civil insurrection, certain governmental actions, errors in design, faulty
workmanship or materials (except under certain circumstances), nuclear reaction,
flood (if the mortgaged property is in a federally designated flood area),
chemical contamination and certain other risks.
Restoration of the property with the proceeds described in the first
bullet of the second previous paragraph is expected to satisfy the condition
under any pool insurance policy that the property be restored before a claim
under the pool insurance policy may be validly presented with respect to the
defaulted loan secured by the property. The payment described in the second
bullet of the second previous paragraph will render unnecessary presentation of
a claim in respect of the loan under any pool insurance policy. Therefore, so
long as a pool insurance policy remains in effect, the payment by the special
hazard insurer of the cost of repair or of the unpaid principal balance of the
related loan plus accrued interest and certain expenses will not affect the
total amount in respect of insurance proceeds paid to holders of the securities,
but will affect the relative amounts of coverage remaining under the special
hazard insurance policy and pool insurance policy.
Bankruptcy Bond. In the event of a bankruptcy of a borrower, the
bankruptcy court may establish the value of the property securing the related
loan at an amount less than the then-outstanding principal balance of the loan.
The amount of the secured debt could be reduced to that value, and the holder of
the loan thus would become an unsecured creditor to the extent the principal
balance of the loan exceeds the value assigned to the property by the bankruptcy
court. In addition, certain other modifications of the terms of a loan can
result from a bankruptcy proceeding. See "Material Legal Aspects of the Loans"
in this prospectus. If the related prospectus supplement so provides, the
depositor or other entity specified in the prospectus supplement will obtain a
bankruptcy bond or similar insurance contract covering losses resulting from
proceedings with respect to borrowers under the Federal Bankruptcy Code. The
bankruptcy bond will cover certain losses resulting from a reduction by a
bankruptcy court of scheduled payments of principal of and interest on a loan or
a reduction by the court of the principal amount of a loan and will cover
certain unpaid interest on the amount of any principal reduction from the date
of the filing of a bankruptcy petition.
The bankruptcy bond will provide coverage in the aggregate amount
specified in the prospectus supplement for all loans in the trust fund for the
related series. The amount will be reduced by payments made under the bankruptcy
bond in respect of the loans, unless otherwise specified in the related
prospectus supplement, and will not be restored.
Reserve Funds
If the prospectus supplement relating to a series of securities so
specifies, the depositor will deposit into one or more reserve funds cash, a
letter or letters of credit, cash collateral accounts, eligible investments, or
other instruments meeting the criteria of the rating agencies in the amount
specified in the prospectus supplement. Each reserve fund will be established by
the trustee as part of the trust fund for that series or for the benefit of the
credit enhancement provider for that series. In the alternative or in addition
to the initial deposit by the depositor, a reserve fund for a series may be
funded over time through application of all or a portion of the excess cash flow
from the primary assets for the series, to the extent described in the related
prospectus supplement. If applicable, the initial amount of the reserve fund and
the reserve fund maintenance requirements for a series of securities will be
described in the related prospectus supplement.
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Amounts withdrawn from any reserve fund will be applied by the trustee
to make payments on the securities of the related series, to pay expenses, to
reimburse any credit enhancement provider for the series or for any other
purpose, in the manner and to the extent specified in the related prospectus
supplement.
Amounts deposited into a reserve fund will be invested by the trustee
in eligible investments maturing no later than the day specified in the related
prospectus supplement.
Cross-Collateralization
If specified in the related prospectus supplement, the beneficial
ownership of separate groups of assets included in a trust fund may be evidenced
by separate classes of the related series of securities. In that case, credit
support may be provided by a cross-collateralization feature which requires that
distributions be made with respect to securities evidencing a beneficial
ownership interest in, or secured by, one or more asset groups within the same
trust fund prior to distributions to subordinated securities evidencing a
beneficial ownership interest in, or secured by, one or more other asset groups
within that trust fund. Cross-collateralization may be provided by
o the allocation of a portion of excess amounts generated by one
or more asset groups within the same trust fund to one or more
other asset groups within the same trust fund, or
o the allocation of losses with respect to one or more asset
groups to one or more other asset groups within the same trust
fund.
Excess amounts will be applied and/or losses will be allocated to the class or
classes of subordinated securities of the related series then outstanding having
the lowest rating assigned by any rating agency or the lowest payment priority,
in each case to the extent and in the manner more specifically described in the
related prospectus supplement. The prospectus supplement for a series which
includes a cross-collateralization feature will describe the manner and
conditions for applying the cross-collateralization feature.
If specified in the related prospectus supplement, the coverage
provided by one or more forms of credit support described in this prospectus may
apply concurrently to two or more related trust funds. If applicable, the
related prospectus supplement will identify the trust funds to which credit
support relates and the manner of determining the amount of coverage the credit
support provides to the identified trust funds.
Minimum Principal Payment Agreement
If provided in the prospectus supplement relating to a series of
securities, the depositor will enter into a minimum principal payment agreement
with an entity meeting the criteria of the rating agencies named in the
prospectus supplement under which the entity will provide certain payments on
the securities of the series in the event that aggregate scheduled principal
payments and/or prepayments on the primary assets for the series are not
sufficient to make payments on the securities of the series as provided in the
prospectus supplement.
Deposit Agreement
If specified in a prospectus supplement, the depositor and the trustee
for a series of securities will enter into a deposit agreement with the entity
specified in the prospectus supplement on or before the sale of the related
series of securities. The deposit agreement is intended to accumulate available
cash for investment so that the cash, together with income thereon, can be
applied to future distributions on one or more classes of securities. The
related prospectus supplement will describe the terms of any deposit agreement.
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Financial Instruments
If provided in the related prospectus supplement, the trust fund may
include one or more financial instruments that are intended to meet the
following goals:
o to convert the payments on some or all of the loans and
Private Label Securities from fixed to floating payments, or
from floating to fixed, or from floating based on a particular
index to floating based on another index;
o to provide payments if any index rises above or falls below
specified levels; or
o to provide protection against interest rate changes, certain
types of losses or other payment shortfalls to one or more
classes of the related series.
If a trust fund includes financial instruments of this type, the instruments may
be structured to be exempt from the registration requirements of the Securities
Act of 1933, as amended.
The related prospectus supplement will include, or incorporate by
reference, material financial and other information about the provider of the
financial instruments.
Servicing of Loans
General
Under the pooling and servicing agreement or the servicing agreement
for a series of securities, the servicer will provide customary servicing
functions with respect to the loans comprising the primary assets of the related
trust fund.
Collection Procedures; Escrow Accounts
The servicer will make reasonable efforts to collect all payments
required to be made under the loans and will, consistent with the terms of the
related governing agreement for a series and any applicable credit enhancement,
follow such collection procedures as it follows with respect to comparable loans
held in its own portfolio. Consistent with the above, the servicer has the
discretion to
o waive any assumption fee, late payment charge, or other charge
in connection with a loan, and
o to the extent provided in the related agreement, arrange with
a borrower a schedule for the liquidation of delinquencies by
extending the due dates for scheduled payments on the loan.
If the related prospectus supplement so provides, the servicer, to the
extent permitted by law, will establish and maintain escrow or impound accounts
with respect to loans in which borrower payments for taxes, assessments,
mortgage and hazard insurance policy premiums and other comparable items will be
deposited. In the case of loans that do not require such payments under the
related loan documents, the servicer will not be required to establish any
escrow or impound account for those loans. The servicer will make withdrawals
from the escrow accounts to effect timely payment of taxes, assessments and
mortgage and hazard insurance, to refund to borrowers amounts determined to be
overages, to pay interest to borrowers on balances in the escrow accounts to the
extent required by law, to repair or otherwise protect the related property and
to clear and terminate the escrow accounts. The servicer will be responsible for
the administration of the escrow accounts and generally will make advances to
the escrow accounts when a deficiency exists.
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Deposits to and Withdrawals from the Collection Account
Unless the related prospectus supplement specifies otherwise, the
trustee or the servicer will establish a separate collection account in the name
of the trustee. Unless the related prospectus supplement provides otherwise, the
collection account will be
o an account maintained at a depository institution, the
long-term unsecured debt obligations of which at the time of
any deposit are rated by each rating agency named in the
prospectus supplement at levels satisfactory to the rating
agency; or
o an account the deposits in which are insured to the maximum
extent available by the Federal Deposit Insurance Corporation
or an account secured in a manner meeting requirements
established by each rating agency named in the prospectus
supplement.
Unless otherwise specified in the related prospectus supplement, the
funds held in the collection account may be invested in eligible investments. If
so specified in the related prospectus supplement, the servicer will be entitled
to receive as additional compensation any interest or other income earned on
funds in the collection account.
Unless otherwise specified in the related prospectus supplement, the
servicer, the depositor, the trustee or the seller, as appropriate, will deposit
into the collection account for each series, on the business day following the
closing date, all scheduled payments of principal and interest on the primary
assets due after the related cut-off date but received by the servicer on or
before the closing date, and thereafter, within two business days after the date
of receipt thereof, the following payments and collections received or made by
the servicer (other than, unless otherwise provided in the related prospectus
supplement, in respect of principal of and interest on the related primary
assets due on or before the cut-off date):
o all payments in respect of principal, including prepayments,
on the primary assets;
o all payments in respect of interest on the primary assets
after deducting, at the discretion of the servicer (but only
to the extent of the amount permitted to be withdrawn or
withheld from the collection account in accordance with the
related agreement), related servicing fees payable to the
servicer;
o all Liquidation Proceeds after deducting, at the discretion of
the servicer (but only to the extent of the amount permitted
to be withdrawn from the collection account in accordance with
the related agreement), the servicing fee, if any, in respect
of the related primary asset;
o all Insurance Proceeds;
o all amounts required to be deposited into the collection
account from any reserve fund for the series pursuant to the
related agreement;
o all advances of cash made by the servicer in respect of
delinquent scheduled payments on a loan and for any other
purpose as required pursuant to the related agreement; and
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o all repurchase prices of any primary assets repurchased by the
depositor, the servicer or the seller pursuant to the related
agreement.
Unless otherwise specified in the related prospectus supplement, the
servicer is permitted, from time to time, to make withdrawals from the
collection account for each series for the following purposes:
o to reimburse itself for advances that it made in connection
with that series under the related agreement; provided that
the servicer's right to reimburse itself is limited to amounts
received on or in respect of particular loans (including, for
this purpose, Liquidation Proceeds and proceeds of insurance
policies covering the related loans and Mortgaged Properties
("Insurance Proceeds")) that represent late recoveries of
scheduled payments with respect to which the Advance was made;
o to the extent provided in the related agreement, to reimburse
itself for any advances that it made in connection with the
series which the servicer determines in good faith to be
nonrecoverable from amounts representing late recoveries of
scheduled payments respecting which the advance was made or
from Liquidation Proceeds or Insurance Proceeds;
o to reimburse itself from Liquidation Proceeds for liquidation
expenses and for amounts expended by it in good faith in
connection with the restoration of damaged property and, in
the event deposited into the collection account and not
previously withheld, and to the extent that Liquidation
Proceeds after such reimbursement exceed the principal balance
of the related loan, together with accrued and unpaid interest
thereon to the due date for the loan next succeeding the date
of its receipt of the Liquidation Proceeds, to pay to itself
out of the excess the amount of any unpaid servicing fee and
any assumption fees, late payment charges, or other charges on
the related loan;
o in the event the servicer has elected not to pay itself the
servicing fee out of the interest component of any scheduled
payment, late payment or other recovery with respect to a
particular loan prior to the deposit of the scheduled payment,
late payment or recovery into the collection account, to pay
to itself the servicing fee, as adjusted pursuant to the
related agreement, from any scheduled payment, late payment or
other recovery to the extent permitted by the related
agreement;
o to reimburse itself for expenses incurred by and recoverable
by or reimbursable to it pursuant to the related agreement;
o to pay to the applicable person with respect to each primary
asset or related real property that has been repurchased or
removed from the trust fund by the depositor, the servicer or
the seller pursuant to the related agreement, all amounts
received thereon and not distributed as of the date on which
the related repurchase price was determined;
o to make payments to the trustee of the series for deposit into
the related distribution account or for remittance to the
holders of the series in the amounts and in the manner
provided for in the related agreement; and
o to clear and terminate the collection account pursuant to the
related agreement.
In addition, if the servicer deposits into the collection account for a
series any amount not required to be deposited therein, the servicer may, at any
time, withdraw the amount from the collection account.
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Advances and Limitations on Advances
The related prospectus supplement will describe the circumstances, if
any, under which the servicer will make advances with respect to delinquent
payments on loans. If specified in the related prospectus supplement, the
servicer will be obligated to make advances. Its obligation to make advances may
be limited in amount, or may not be activated until a certain portion of a
specified reserve fund is depleted. Advances are intended to provide liquidity
and, except to the extent specified in the related prospectus supplement, not to
guarantee or insure against losses. Accordingly, any funds advanced are
recoverable by the servicer out of amounts received on particular loans that
represent late recoveries of scheduled payments, Insurance Proceeds or
Liquidation Proceeds respecting which an advance was made. If an advance is made
and subsequently determined to be nonrecoverable from late collections,
Insurance Proceeds or Liquidation Proceeds from the related loan, the servicer
may be entitled to reimbursement from other funds in the collection account or
distribution account(s), as the case may be, or from a specified reserve fund,
as applicable, to the extent specified in the related prospectus supplement.
Maintenance of Insurance Policies and Other Servicing Procedures
Standard Hazard Insurance; Flood Insurance. Except as otherwise
specified in the related prospectus supplement, the servicer will be required to
maintain (or to cause the borrower under each loan to maintain) a standard
hazard insurance policy providing the standard form of fire insurance coverage
with extended coverage for certain other hazards as is customary in the state in
which the related property is located. The standard hazard insurance policies
will provide for coverage at least equal to the applicable state standard form
of fire insurance policy with extended coverage for property of the type
securing the related loans. In general, the standard form of fire and extended
coverage policy will cover physical damage to, or destruction of, the related
property caused by fire, lightning, explosion, smoke, windstorm, hail, riot,
strike and civil commotion, subject to the conditions and exclusions in each
policy. Because the standard hazard insurance policies relating to the loans
will be underwritten by different hazard insurers and will cover properties
located in various states, the policies will not contain identical terms and
conditions. The basic terms, however, generally will be determined by state law
and generally will be similar. Most such policies typically will not cover any
physical damage resulting from war, revolution, governmental actions, floods and
other water-related causes, earth movement (including earthquakes, landslides
and mudflows), nuclear reaction, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases, vandalism. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all inclusive. Uninsured risks not covered by a special hazard insurance policy
or other form of credit enhancement will adversely affect distributions to
holders. When a property securing a loan is located in a flood area identified
by HUD pursuant to the Flood Disaster Protection Act of 1973, as amended, the
servicer will be required to cause flood insurance to be maintained with respect
to the property, to the extent available.
The standard hazard insurance policies covering properties typically
will contain a "coinsurance" clause, which in effect will require that the
insured at all times carry hazard insurance of a specified percentage (generally
80% to 90%) of the full replacement value of the property, including any
improvements on the property, in order to recover the full amount of any partial
loss. If the insured's coverage falls below this specified percentage, the
coinsurance clause will provide that the hazard insurer's liability in the event
of partial loss will not exceed the greater of
o the actual cash value (i.e., replacement cost less physical
depreciation) of the property, including the improvements, if
any, damaged or destroyed, and
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o such proportion of the loss, without deduction for
depreciation, as the amount of insurance carried bears to the
specified percentage of the full replacement cost of the
property and improvements.
Since the amount of hazard insurance to be maintained on the improvements
securing the loans declines as their principal balances decrease, and since the
value of the properties will fluctuate over time, the effect of this requirement
in the event of partial loss may be that hazard insurance proceeds will be
insufficient to restore fully the damage to the affected property.
Unless otherwise specified in the related prospectus supplement,
coverage will be in an amount at least equal to the greater of
o the amount necessary to avoid the enforcement of any
co-insurance clause contained in the policy, and
o the outstanding principal balance of the related loan.
Unless otherwise specified in the related prospectus supplement, the servicer
will also maintain on REO property a standard hazard insurance policy in an
amount that is at least equal to the maximum insurable value of the REO
property. No earthquake or other additional insurance will be required of any
borrower or will be maintained on REO property other than pursuant to such
applicable laws and regulations as shall at any time be in force and shall
require the additional insurance.
Any amounts collected by the servicer under insurance policies (other
than amounts to be applied to the restoration or repair of the property,
released to the borrower in accordance with normal servicing procedures or used
to reimburse the servicer for amounts to which it is entitled to reimbursement)
will be deposited into the collection account. In the event that the servicer
obtains and maintains a blanket policy insuring against hazard losses on all of
the loans, written by an insurer then acceptable to each rating agency named in
the prospectus supplement, it will conclusively be deemed to have satisfied its
obligations to cause to be maintained a standard hazard insurance policy for
each loan or related REO property. This blanket policy may contain a deductible
clause, in which case the servicer will be required, in the event that there has
been a loss that would have been covered by the policy absent the deductible
clause, to deposit into the collection account the amount not otherwise payable
under the blanket policy because of the application of the deductible clause.
Realization upon Defaulted Loans
The servicer will use its reasonable best efforts to foreclose upon,
repossess or otherwise comparably convert the ownership of the properties
securing the related loans that come into and continue in default and as to
which no satisfactory arrangements can be made for collection of delinquent
payments. In this connection, the servicer will follow such practices and
procedures as it deems necessary or advisable and as are normal and usual in its
servicing activities with respect to comparable loans that it services. However,
the servicer will not be required to expend its own funds in connection with any
foreclosure or towards the restoration of the property unless it determines that
o the restoration or foreclosure will increase the Liquidation
Proceeds of the related loan available to the holders after
reimbursement to itself for its expenses, and
o its expenses will be recoverable either through Liquidation
Proceeds or Insurance Proceeds.
However, in the case of a trust fund for which a REMIC election has been made,
the servicer will be required to liquidate any REO property by the end of the
third calendar year after the trust fund acquires beneficial ownership of the
REO property. While the holder of an REO property can often maximize its
recovery by providing financing to a new purchaser, the trust fund will have no
ability to do so and neither the servicer nor the depositor will be required to
do so.
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The servicer may arrange with the borrower on a defaulted loan a change
in the terms of the loan to the extent provided in the related prospectus
supplement. This type of modification may only be entered into if it meets the
underwriting policies and procedures employed by the servicer in servicing
receivables for its own account and meets the other conditions set forth in the
related prospectus supplement.
Enforcement of Due-on-Sale Clauses
Unless otherwise specified in the related prospectus supplement for a
series, when any property is about to be conveyed by the borrower, the servicer
will, to the extent it has knowledge of the prospective conveyance and prior to
the time of the consummation of the conveyance, exercise its rights to
accelerate the maturity of the related loan under any applicable "due-on-sale"
clause, unless it reasonably believes that the clause is not enforceable under
applicable law or if enforcement of the clause would result in loss of coverage
under any primary mortgage insurance policy. In that event, the servicer is
authorized to accept from or enter into an assumption agreement with the person
to whom the property has been or is about to be conveyed. Under the assumption,
the transferee of the property becomes liable under the loan and the original
borrower is released from liability and the transferee is substituted as the
borrower and becomes liable under the loan. Any fee collected in connection with
an assumption will be retained by the servicer as additional servicing
compensation. The terms of a loan may not be changed in connection with an
assumption.
Servicing Compensation and Payment of Expenses
Except as otherwise provided in the related prospectus supplement, the
servicer will be entitled to a periodic servicing fee in an amount to be
determined as specified in the related prospectus supplement. The servicing fee
may be fixed or variable, as specified in the related prospectus supplement. In
addition, unless otherwise specified in the related prospectus supplement, the
servicer will be entitled to additional servicing compensation in the form of
assumption fees, late payment charges and similar items, and excess proceeds
following disposition of property in connection with defaulted loans.
Unless otherwise specified in the related prospectus supplement, the
servicer will pay certain expenses incurred in connection with the servicing of
the loans, including, without limitation, the payment of the fees and expenses
of each trustee and independent accountants, payment of security policy and
insurance policy premiums, if applicable, and the cost of any credit
enhancement, and payment of expenses incurred in preparation of reports to
holders.
When a borrower makes a principal prepayment in full between due dates
on the related loan, the borrower generally will be required to pay interest on
the amount prepaid only to the date of prepayment. If and to the extent provided
in the related prospectus supplement, in order that one or more classes of the
securities of a series will not be adversely affected by any resulting shortfall
in interest, the amount of the servicing fee may be reduced to the extent
necessary to include in the servicer's remittance to the applicable trustee for
deposit into the related distribution account an amount equal to one month's
interest on the related loan (less the servicing fee). If the total amount of
these shortfalls in a month exceeds the servicing fee for that month, a
shortfall to holders may occur.
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Unless otherwise specified in the related prospectus supplement, the
servicer will be entitled to reimbursement for certain expenses that it incurs
in connection with the liquidation of defaulted loans. The related holders will
suffer no loss by reason of the servicer's expenses to the extent the expenses
are covered under related insurance policies or from excess Liquidation
Proceeds. If claims are either not made or paid under the applicable insurance
policies or if coverage under the policies has been exhausted, the related
holders will suffer a loss to the extent that Liquidation Proceeds, after
reimbursement of the servicer's expenses, are less than the principal balance of
and unpaid interest on the related loan that would be distributable to holders.
In addition, the servicer will be entitled to reimbursement of its expenses in
connection with the restoration of REO property This right of reimbursement is
prior to the rights of the holders to receive any related Insurance Proceeds,
Liquidation Proceeds or amounts derived from other credit enhancement. The
servicer generally is also entitled to reimbursement from the collection account
for advances.
Unless otherwise specified in the related prospectus supplement, the
rights of the servicer to receive funds from the collection account for a
series, whether as the servicing fee or other compensation, or for the
reimbursement of advances, expenses or otherwise, are not subordinate to the
rights of holders of securities of the series.
Evidence as to Compliance
If so specified in the related prospectus supplement, the applicable
governing agreement will provide that, each year, a firm of independent public
accountants will furnish a statement to the trustee to the effect that the firm
has examined certain documents and records relating to the servicing of the
loans by the servicer and that, on the basis of the examination, the firm is of
the opinion that the servicing has been conducted in compliance with the
agreement, except for such exceptions as the firm believes to be immaterial and
any other exceptions set forth in the statement.
If so specified in the related prospectus supplement, the applicable
agreement will also provide for delivery to the trustee of an annual statement
signed by an officer of the servicer to the effect that the servicer has
fulfilled its obligations under the agreement throughout the preceding calendar
year.
Certain Matters Regarding the Servicer
The servicer for each series will be identified in the related
prospectus supplement. The servicer may be an affiliate of the depositor and may
have other business relationships with the depositor and its affiliates.
If an event of default occurs under either a servicing agreement or a
pooling and servicing agreement, the servicer may be replaced by the trustee or
a successor servicer. Unless otherwise specified in the related prospectus
supplement, the events of default and the rights of a trustee upon a default
under the agreement for the related series will be substantially similar to
those described under "The Agreements--Events of Default; Rights upon Event of
Default--Pooling and Servicing Agreement; Servicing Agreement" in this
prospectus.
Unless otherwise specified in the prospectus supplement, the servicer
does not have the right to assign its rights and delegate its duties and
obligations under the related agreement unless the successor servicer accepting
such assignment or delegation
o services similar loans in the ordinary course of its business;
o is reasonably satisfactory to the trustee;
o has a net worth of not less than the amount specified in the
prospectus supplement;
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o would not cause the rating of the related securities by a
rating agency named in the prospectus supplement, as such
rating is in effect immediately prior to the assignment, sale
or transfer, to be qualified, downgraded or withdrawn as a
result of the assignment, sale or transfer; and
o executes and delivers to the trustee an agreement, in form and
substance reasonably satisfactory to the trustee, that
contains an assumption by the successor servicer of the due
and punctual performance and observance of each covenant and
condition required to be performed or observed by the servicer
under the agreement from and after the date of the agreement.
No assignment will become effective until the trustee or a successor
servicer has assumed the servicer's obligations and duties under the related
agreement. To the extent that the servicer transfers its obligations to a
wholly-owned subsidiary or affiliate, the subsidiary or affiliate need not
satisfy the criteria set forth above. In this instance, however, the assigning
servicer will remain liable for the servicing obligations under the agreement.
Any entity into which the servicer is merged or consolidated or any successor
corporation resulting from any merger, conversion or consolidation will succeed
to the servicer's obligations under the agreement provided that the successor or
surviving entity meets the requirements for a successor servicer set forth
above.
Except to the extent otherwise provided, each agreement will provide
that neither the servicer nor any director, officer, employee or agent of the
servicer will be under any liability to the related trust fund, the depositor or
the holders for any action taken or for failing to take any action in good faith
pursuant to the related agreement, or for errors in judgment. However, neither
the servicer nor any such person will be protected against any breach of
warranty or representations made under the agreement, or the failure to perform
its obligations in compliance with any standard of care set forth in the
agreement, or liability that would otherwise be imposed by reason of willful
misfeasance, bad faith or negligence in the performance of their duties or by
reason of reckless disregard of their obligations and duties under the
agreement. Each agreement will further provide that the servicer and any
director, officer, employee or agent of the servicer is entitled to
indemnification from 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 securities, other than any loss, liability or
expense incurred by reason of willful misfeasance, bad faith or negligence in
the performance of duties under the agreement or by reason of reckless disregard
of those obligations and duties. In addition, the agreement will provide that
the servicer is not under any obligation to appear in, prosecute or defend any
legal action that is not incidental to its servicing responsibilities under the
agreement that, in its opinion, may involve it in any expense or liability. The
servicer may, in its discretion, undertake any such action that it may deem
necessary or desirable with respect to the agreement and the rights and duties
of the parties thereto and the interests of the holders thereunder. In that
event, the legal expenses and costs of the action and any resulting liability
may be expenses, costs, and liabilities of the trust fund and the servicer may
be entitled to be reimbursed therefor out of the collection account.
The Agreements
The following summaries describe the material provisions of the pooling
and servicing agreement or trust agreement, in the case of a series of
certificates, and the indenture and servicing agreement, in the case of a series
of notes. The summaries do not purport to be complete and are subject to, and
qualified in their entirety by reference to, the provisions of the agreements
applicable to the particular series of securities. Where particular provisions
or terms used in the agreements are referred to, the provisions or terms are as
specified in the agreements.
45
Assignment of Primary Assets
General. At the time of issuance of the securities of a series, the
depositor will transfer, convey and assign to the related trust fund all right,
title and interest of the depositor in the primary assets and other property to
be transferred to the trust fund. This assignment will include all principal and
interest due on or with respect to the primary assets after the cut-off date
(except for any retained interests). The trustee will, concurrently with the
assignment, execute and deliver the securities.
Assignment of Mortgage Loans. Unless otherwise specified in the related
prospectus supplement, the depositor will deliver to the trustee (or, if
specified in the prospectus supplement, a custodian on behalf of the trustee),
as to each Residential Loan and Home Equity Loan, the related note endorsed
without recourse to the order of the trustee or in blank, the original mortgage,
deed of trust or other security instrument with evidence of recording indicated
thereon (except for any mortgage not returned from the public recording office,
in which case a copy of the mortgage will be delivered, together with a
certificate that the original of the mortgage was delivered to such recording
office), and an assignment of the mortgage in recordable form. The trustee or,
if so specified in the related prospectus supplement, the custodian will hold
these documents in trust for the benefit of the holders.
If so specified in the related prospectus supplement, at the time of
issuance of the securities, the depositor will cause assignments to the trustee
of the mortgages relating to the loans to be recorded in the appropriate public
office for real property records, except in states where, in the opinion of
counsel acceptable to the trustee, recording is not required to protect the
trustee's interest in the related loans. If specified in the prospectus
supplement, the depositor will cause the assignments to be recorded within the
time after issuance of the securities as is specified in the related prospectus
supplement. In this event, the prospectus supplement will specify whether the
agreement requires the depositor to repurchase from the trustee any loan the
related mortgage of which is not recorded within that time, at the price
described below with respect to repurchases by reason of defective
documentation. Unless otherwise provided in the prospectus supplement, the
enforcement of the repurchase obligation would constitute the sole remedy
available to the holders or the trustee for the failure of a mortgage to be
recorded.
Assignment of Home Improvement Contracts. Unless otherwise specified in
the related prospectus supplement, the depositor will deliver to the trustee or
the custodian each original Home Improvement Contract and copies of related
documents and instruments and, except in the case of unsecured Home Improvement
Contracts, the security interest in the related home improvements. In order to
give notice of the right, title and interest of holders to the Home Improvement
Contracts, the depositor will cause a UCC-1 financing statement to be executed
by the depositor or the seller identifying the trustee as the secured party and
identifying all Home Improvement Contracts as collateral. Unless otherwise
specified in the related prospectus supplement, the Home Improvement Contracts
will not be stamped or otherwise marked to reflect their assignment to the trust
fund. Therefore, if, through negligence, fraud or otherwise, a subsequent
purchaser were able to take physical possession of the Home Improvement
Contracts without notice of the assignment, the interest of holders in the Home
Improvement Contracts could be defeated. See "Material Legal Aspects of the
Loans--The Home Improvement Contracts" in this prospectus.
Assignment of Manufactured Housing Contracts. If specified in the
related prospectus supplement, the depositor or the seller will deliver to the
trustee the original contract as to each Manufactured Housing Contract and
copies of documents and instruments related to each contract and, other than in
the case of unsecured contracts, the security interest in the property securing
that contract. In order to give notice of the right, title and interest of
securityholders to the contracts, if specified in the related prospectus
supplement, the depositor or the seller will cause a UCC-1 financing statement
to be executed by the depositor or the seller identifying the trustee as the
secured party and identifying all contracts as collateral. If so specified in
the related prospectus supplement, the contracts will not be stamped or
otherwise marked to reflect their assignment to the trustee. Therefore, if,
through negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the contracts without notice of the assignment, the
interest of securityholders in the contracts could be defeated.
See "Material Legal Aspects of the Loans-- The Contracts."
46
Loan Schedule. Each loan will be identified in a schedule appearing as
an exhibit to the related and will specify with respect to each loan:
o the original principal amount,
o its unpaid principal balance as of the cut-off date,
o the current interest rate,
o the current scheduled payment of principal and interest,
o the maturity date, if any, of the related note, and
o if the loan is an adjustable rate loan, the lifetime rate cap,
if any, and the current index.
Assignment of Agency and Private Label Securities. The depositor will
cause the Agency and Private Label Securities to be registered in the name of
the trustee (or its nominee or correspondent). The trustee (or its nominee or
correspondent) will take possession of any certificated Agency or Private Label
Securities. Unless otherwise specified in the related prospectus supplement, the
trustee will not be in possession of, or be assignee of record of, any loans
underlying the Agency or Private Label Securities. See "The Trust Funds--Private
Label Securities" in this prospectus. Each Agency and Private Label Security
will be identified in a schedule appearing as an exhibit to the related
agreement, which will specify the original principal amount, principal balance
as of the cut-off date, annual pass-through rate or interest rate and maturity
date for each Agency and Private Label Security conveyed to the related trust
fund. In the agreement, the depositor will represent and warrant to the trustee
that:
o the information contained in the Agency or Private Label
Securities schedule is true and correct in all material
respects,
o immediately prior to the conveyance of the Agency or Private
Label Securities, the depositor had good title and was the
sole owner of the Agency or Private Label Securities (subject
to any retained interest),
o there has been no other sale of the Agency or Private Label
Securities, and
o there is no existing lien, charge, security interest or other
encumbrance on the Agency or Private Label Securities (other
than any retained interest).
47
Repurchase and Substitution of Non-Conforming Primary Assets. Unless
otherwise provided in the related prospectus supplement, if any document in the
file relating to the primary assets delivered by the depositor to the trustee
(or custodian) is found by the trustee, within 90 days of the execution of the
related agreement (or promptly after the trustee's receipt of any document
permitted to be delivered after the closing date), to be defective in any
material respect and the depositor or seller does not cure such defect within 90
days (or within any other period specified in the related prospectus supplement)
the depositor or seller will, not later than 90 days (or within such any period
specified in the related prospectus supplement), after the trustee's notice to
the depositor or the seller, as the case may be, of the defect, repurchase from
the trustee the related primary asset or any property acquired in respect of the
asset. Unless otherwise specified in the related prospectus supplement, the
repurchase shall be effected at a price equal to the sum of:
o the lesser of
- the principal balance of the primary asset, and
- the trust fund's federal income tax basis in the
primary asset;
plus
o accrued and unpaid interest to the date of the next scheduled
payment on the primary asset at the rate set forth in the
related agreement.
[However, the purchase price shall not be limited to the trust fund's federal
income tax basis in the asset, if the repurchase at a price equal to the
principal balance of the repurchased primary asset will not result in any
prohibited transaction tax under Section 860F(a) of the Code.]
If provided in the related prospectus supplement, the depositor or
seller, as the case may be, may, rather than repurchase the primary asset as
described above, remove the non-conforming primary asset from the trust fund and
substitute in its place one or more other qualifying substitute primary assets.
If no REMIC election is made with respect to the trust fund, the substitution
must be effected within 120 days of the date of initial issuance of the
securities. If a REMIC election is made with respect to the trust fund the
trustee must have received after a specified time period a satisfactory opinion
of counsel that the substitution will not cause the trust fund to lose its
status as a REMIC or otherwise subject the trust fund to a prohibited
transaction tax.
Unless otherwise specified in the related prospectus supplement, any
qualifying substitute primary asset will, on the date of substitution, meet the
following criteria:
o it has a principal balance, after deduction of all scheduled
payments due in the month of substitution, not in excess of
the principal balance of the deleted primary asset (the amount
of any shortfall to be deposited to the collection account in
the month of substitution for distribution to holders),
o it has an interest rate not less than (and not more than 2%
greater than) the interest rate of the deleted primary asset,
o it has a remaining term-to-stated maturity not greater than
(and not more than two years less than) that of the deleted
primary asset; and
o it complies with all of the representations and warranties set
forth in the applicable agreement as of the date of
substitution.
Unless otherwise provided in the related prospectus supplement, the
above-described cure, repurchase or substitution obligations constitute the sole
remedies available to the holders or the trustee for a material defect in the
documentation for a primary asset.
48
The depositor or another entity will make representations and
warranties with respect to primary assets for each series. If the depositor or
the other entity cannot cure a breach of any such representations and warranties
in all material respects within the time period specified in the related
prospectus supplement after notification by the trustee of such breach, and if
the breach is of a nature that materially and adversely affects the value of the
primary asset, the depositor or the other entity will be obligated to repurchase
the affected primary asset or, if provided in the prospectus supplement, provide
a qualifying substitute primary asset, subject to the same conditions and
limitations on purchases and substitutions as described above.
The depositor's only source of funds to effect any cure, repurchase or
substitution will be through the enforcement of the corresponding obligations,
if any, of the responsible originator or seller of the non-conforming primary
assets. See "Risk Factors--Only the assets of the related trust fund are
available to pay your certificates" in this prospectus.
No holder of securities of a series, solely by virtue of the holder's
status as a holder, will have any right under the applicable agreement to
institute any proceeding with respect to agreement, unless holder previously has
given to the trustee for the series written notice of default and unless the
holders of securities evidencing not less than 51% of the aggregate voting
rights of the securities of the series have made written request upon the
trustee to institute the proceeding in its own name as trustee thereunder and
have offered to the trustee reasonable indemnity, and the trustee for 60 days
has neglected or refused to institute the proceeding.
Reports to Holders
The applicable trustee or other entity specified in the related
prospectus supplement will prepare and forward to each holder on each
distribution date, or as soon thereafter as is practicable, a statement setting
forth, to the extent applicable to any series, among other things:
o the amount of principal distributed to holders of the related
securities and the outstanding principal balance of the
securities following the distribution;
o the amount of interest distributed to holders of the related
securities and the current interest on the securities;
o the amount of any overdue accrued interest included in such
distribution, any remaining overdue accrued interest with
respect to the securities, or any current shortfall in amounts
to be distributed as accrued interest to holders of the
securities;
o the amount of any overdue payments of scheduled principal
included in the distribution, any remaining overdue principal
amounts with respect to the securities, any current shortfall
in receipt of scheduled principal payments on the related
primary assets, or any realized losses or Liquidation Proceeds
to be allocated as reductions in the outstanding principal
balances of the securities;
o the amount received under any related credit enhancement, and
the remaining amount available under the credit enhancement;
o the amount of any delinquencies with respect to payments on
the related primary assets;
o the book value of any REO property acquired by the related
trust fund; and
o other information specified in the related agreement.
49
In addition, within a reasonable period of time after the end of each
calendar year, the applicable trustee, unless otherwise specified in the related
prospectus supplement, will furnish to each holder of record at any time during
the calendar year:
o the total of the amounts reported pursuant to clauses under
the first and second bullets above and under the last clause
of the fourth bullet above for the calendar year, and
o the information specified in the related agreement to enable
holders to prepare their tax returns including, without
limitation, the amount of any original issue discount accrued
on the securities.
Information in the distribution date statements and annual statements
provided to the holders will not have been examined and reported upon by an
independent public accountant. However, the servicer will provide to the trustee
a report by independent public accountants with respect to its servicing of the
loans. See "Servicing of Loans--Evidence as to Compliance" in this prospectus.
If so specified in the prospectus supplement, the related series of
securities (or one or more classes of the series) will be issued in book-entry
form. In that event, owners of beneficial interests in those securities will not
be considered holders and will not receive such reports directly from the
trustee. The trustee will forward reports only to the entity or its nominee that
is the registered holder of the global certificate that evidences the book-entry
securities. Beneficial owners will receive reports from the participants and
indirect participants of the applicable book-entry system in accordance with the
policies and procedures of the participants and indirect participants.
Events of Default; Rights upon Event of Default
Pooling and Servicing Agreement; Servicing Agreement. Unless otherwise
specified in the related prospectus supplement, "events of default" under the
pooling and servicing agreement for each series of certificates include:
o any failure by the servicer to deposit amounts in the
collection account and distribution account(s) to enable the
trustee to distribute to holders of securities of the series
any required payment, provided that this failure continues
unremedied for the number of days specified in the related
prospectus supplement after the giving of written notice to
the servicer by the trustee, or to the servicer and the
trustee by holders having not less than 25% of the total
voting rights of the series;
o any failure by the servicer duly to observe or perform in any
material respect any other of its covenants or agreements in
the agreement provided that this failure continues unremedied
for the number of days specified in the related prospectus
supplement after the giving of written to the servicer by the
trustee, or to the servicer and the trustee by the holders
having not less than 25% of the total voting rights of the of
the series; and
o certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings
and certain actions by the servicer indicating its insolvency,
reorganization or inability to pay its obligations.
So long as an event of default remains unremedied under the applicable
agreement for a series of securities relating to the servicing of loans, unless
otherwise specified in the related prospectus supplement, the trustee or holders
of securities of the series having not less than 51% of the total voting rights
of the series may terminate all of the rights and obligations of the servicer as
servicer under the applicable agreement (other than its right to recovery of
other expenses and amounts advanced pursuant to the terms of the agreement,
which rights the servicer will retain under all circumstances), whereupon the
trustee will succeed to all the responsibilities, duties and liabilities of the
servicer under the agreement and will be entitled to reasonable servicing
compensation not to exceed the applicable servicing fee, together with other
servicing compensation in the form of assumption fees, late payment charges or
otherwise as provided in the agreement.
50
In the event that the trustee is unwilling or unable so to act, it may
select (or petition a court of competent jurisdiction to appoint) a finance
institution, bank or loan servicing institution with a net worth specified in
the related prospectus supplement to act as successor servicer under the
provisions of the agreement. The successor servicer would be entitled to
reasonable servicing compensation in an amount not to exceed the servicing fee
as set forth in the related prospectus supplement, together with other servicing
compensation in the form of assumption fees, late payment charges or otherwise,
as provided in the agreement.
During the continuance of any event of default of a servicer under an
agreement for a series of securities, the trustee will have the right to take
action to enforce its rights and remedies and to protect and enforce the rights
and remedies of the holders of securities of the series, and, unless otherwise
specified in the related prospectus supplement, holders of securities having not
less than 51% of the total voting rights of the series may direct the time,
method and place of conducting any proceeding for any remedy available to the
trustee or exercising any trust or power conferred upon the trustee. However,
the trustee will not be under any obligation to pursue any such remedy or to
exercise any of such trusts or powers unless the holders have offered the
trustee reasonable security or indemnity against the cost, expenses and
liabilities that may be incurred by the trustee as a result. The trustee may
decline to follow any such direction if it determines that the action or
proceeding so directed may not lawfully be taken or would involve it in personal
liability or be unjustly prejudicial to the non-assenting holders.
Indenture. Unless otherwise specified in the related prospectus
supplement, "events of default" under the indenture for each series of notes
include:
o a default for thirty (30) days or more in the payment of any
principal of or interest on any note of the series;
o failure to perform any other covenant of the depositor or the
trust fund in the indenture, provided that the failure
continues for a period of sixty (60) days after notice is
given in accordance with the procedures described in the
related 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 it or in connection with it with
respect to or affecting such series having been incorrect in a
material respect as of the time made, provided that the breach
is not cured within sixty (60) days after notice is given in
accordance with the procedures described in the related
prospectus supplement;
o certain events of bankruptcy, insolvency, receivership or
liquidation of the depositor or the trust fund; and
o any other event of default specified with respect to notes of
that series.
If an event of default with respect to the then-outstanding notes of
any series occurs and is continuing, either the indenture trustee or the holders
of a majority of the total amount of those notes may declare the principal
amount of all the notes of the series (or, if the notes of that series are zero
coupon securities, such portion of the principal amount as may be specified in
the related prospectus supplement) to be due and payable immediately. Under
certain circumstances of this type the declaration may be rescinded and annulled
by the holders of a majority of the total amount of those notes.
51
If, following an event of default with respect to any series of notes,
the related notes have been declared to be due and payable, the indenture
trustee may, in its discretion, and notwithstanding such acceleration, elect to
maintain possession of the collateral securing the notes and to continue to
apply distributions on the collateral as if there had been no declaration of
acceleration, provided that the collateral continues to provide sufficient funds
for the payment of principal of and interest on the notes as they would have
become due if there had not been a declaration. In addition, the indenture
trustee may not sell or otherwise liquidate the collateral securing the notes of
a series following an event of default (other than a default in the payment of
any principal of or interest on any note of the series for thirty (30) days or
more), unless:
o the holders of 100% of the total amount of the
then-outstanding notes of the series consent to the sale; or
o the proceeds of the sale or liquidation are sufficient to pay
in full the principal of and accrued interest due and unpaid
on the outstanding notes of the series at the date of sale; or
o the indenture trustee determines that the collateral would not
be sufficient on an ongoing basis to make all payments on the
notes as such 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% of the total
amount of the then-outstanding notes of the series.
In the event that the indenture trustee liquidates the collateral in
connection with an event of default involving a default for thirty (30) days or
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 its unpaid fees and expenses. As a result, upon
the occurrence of an event of default of this type, the amount available for
distribution to the noteholders may 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 noteholders
after the occurrence of the event of default.
Unless otherwise specified in the related prospectus supplement, in the
event that the principal of the notes of a series is declared due and payable as
described above, holders of the notes issued at a discount from par may be
entitled to receive no more than an amount equal to the unpaid principal amount
of those notes less the amount of the discount that remains unamortized.
Subject to the provisions of the indenture relating to the duties of
the indenture trustee, in case an event of default shall occur and be continuing
with respect to a series of notes, the indenture trustee will be under no
obligation to exercise any of its rights or powers under the indenture at the
request or direction of any of the holders of notes of the series, unless the
holders offer security or indemnity satisfactory to the indenture trustee
against the costs, expenses and liabilities it might incur in complying with
their request or direction. Subject to the provisions for indemnification and
certain limitations contained in the indenture, the holders of a majority of
amount of the then-outstanding notes of the series shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the indenture trustee or exercising any trust or power conferred on
the indenture trustee with respect to those notes, and the holders of a majority
of the amount of the amount of the then- outstanding notes of the series may, in
certain 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 affected holders of the outstanding notes.
52
The Trustees
The identity of the commercial bank, savings and loan association or
trust company named as the trustee or indenture trustee, as the case may be, for
each series of securities will be set forth in the related prospectus
supplement. Entities serving as trustee may have normal banking relationships
with the depositor or the servicer. In addition, for the purpose of meeting the
legal requirements of certain local jurisdictions, each trustee will have the
power to appoint co-trustees or separate trustees. In the event of an
appointment, all rights, powers, duties and obligations conferred or imposed
upon the trustee by the related agreement will be conferred or imposed upon that
trustee and each separate trustee or co-trustee jointly, or, in any jurisdiction
in which the trustee shall be incompetent or unqualified to perform certain
acts, singly upon the separate trustee or co-trustee who will exercise and
perform such rights, powers, duties and obligations solely at the direction of
the trustee. The trustee may also appoint agents to perform any of its
responsibilities, which agents will have any or all of the rights, powers,
duties and obligations of the trustee conferred on them by their appointment;
provided, however, that the trustee will continue to be responsible for its
duties and obligations under the agreement.
Duties of Trustees
No trustee will make any representations as to the validity or
sufficiency of the related agreement, the securities or of any primary asset or
related documents. If no event of default (as defined in the related agreement)
has occurred, the applicable trustee will be required to perform only those
duties specifically required of it under the agreement. Upon receipt of the
various certificates, statements, reports or other instruments required to be
furnished to it, the trustee will be required to examine them to determine
whether they are in the form required by the related agreement. However, the
trustee will not be responsible for the accuracy or content of any documents
furnished to it by the holders or the servicer under the agreement.
Each trustee may be held liable for its own negligent action or failure
to act, or for its own misconduct; provided, however, that no trustee will be
personally liable with respect to any action taken, suffered or omitted to be
taken by it in good faith in accordance with the direction of the related
holders in an event of default. No trustee will be required to expend or risk
its own funds or otherwise incur any financial liability in the performance of
any of its duties under the related agreement, or in the exercise of any of its
rights or powers, if it has reasonable grounds for believing that repayment of
such funds or adequate indemnity against such risk or liability is not
reasonably assured to it.
Resignation of Trustees
Each trustee may, upon written notice to the depositor, resign at any
time, in which event the depositor will be obligated to use its best efforts to
appoint a successor trustee. If no successor trustee has been appointed and has
accepted such appointment within 30 days after the giving of such notice of
resignation, the resigning trustee may petition any court of competent
jurisdiction for appointment of a successor trustee. Each trustee may also be
removed at any time
o if the trustee ceases to be eligible to continue as such under
the related agreement, or
o if the trustee becomes insolvent, or
o the holders of securities having more than over 50% of the
total voting rights of the securities in the trust fund give
written notice to the trustee and to the depositor.
53
Any resignation or removal of a trustee and appointment of a successor trustee
will not become effective until the successor trustee accepts its appointment.
Amendment of Agreement
Unless otherwise specified in the prospectus supplement, the Agreement
for each series of securities may be amended by the depositor, the servicer
(with respect to a series relating to loans), and the trustee, without notice to
or consent of the holders, for the following purposes:
o to cure any ambiguity,
o to correct any defective provisions or to correct or
supplement any provision in the agreement,
o to add to the duties of the depositor, the applicable trustee
or the servicer,
o to add any other provisions with respect to matters or
questions arising under the agreement or related credit
enhancement,
o to add or amend any provisions of the agreement as required by
any rating agency named in the prospectus supplement in order
to maintain or improve the rating of the securities (it being
understood that none of the depositor, the seller, the
servicer or any trustee is obligated to maintain or improve
the rating), or
o to comply with any requirements imposed by the Code.
In no event, however, shall any amendment (other than an amendment to comply
with Code requirements) adversely affect in any material respect the interests
of any holders of the series, as evidenced by an opinion of counsel delivered to
the trustee. Unless otherwise specified in the prospectus supplement, an
amendment shall be deemed not to adversely affect in any material respect the
interests of any holder if the trustee receives written confirmation from each
rating agency named in the prospectus supplement that the amendment will not
cause the rating agency to reduce its then-current rating.
Unless otherwise specified in the prospectus supplement, each agreement
for a series may also be amended by the applicable trustee, the servicer, if
applicable, and the depositor with the consent of the holders possessing not
less than 66 2/3% of the total outstanding principal amount of the securities of
the series (or, if only certain classes are affected by the amendment, 66 2/3%
of the total outstanding principal amount of each affected class), for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of the agreement, or modifying in any manner the rights of
holders of the series. In no event, however, shall any amendment
o reduce the amount or delay the timing of payments on any
security without the consent of the holder of the security, or
o reduce the percentage of the total outstanding principal
amount of securities of each class, the holders of which are
required to consent to any such amendment, without the consent
of the holders of 100% of the total outstanding principal
amount of each affected class.
Voting Rights
The prospectus supplement will set forth the method of determining
allocation of voting rights with respect to the related series of securities.
54
List of Holders
Upon written request of three or more holders of record of a series for
purposes of communicating with other holders with respect to their rights under
the agreement (which request is accompanied by a copy of the communication such
holders propose to transmit), the trustee will afford them access during
business hours to the most recent list of holders of that series held by the
trustee.
No agreement will provide for the holding of any annual or other
meeting of holders.
Book-Entry Securities
If specified in the related prospectus supplement for a series of
securities, the securities (or one or more of the securities) may be issued in
book-entry form. In that event, beneficial owners of those securities will not
be considered "Holders" under the agreements and may exercise the rights of
holders only indirectly through the participants in the applicable book-entry
system.
REMIC Administrator
For any series with respect to which a REMIC election is made,
preparation of certain reports and certain other administrative duties with
respect to the trust fund may be performed by a REMIC administrator, which may
be an affiliate of the depositor.
Termination
Pooling and Servicing Agreement; Trust Agreement. The obligations
created by the pooling and servicing agreement or trust agreement for a series
will terminate upon the distribution to holders of all amounts distributable to
them under the agreement in the circumstances described in the related
prospectus supplement. See "Description of the Securities--Optional Redemption,
Purchase or Termination" in this prospectus.
Indenture. The indenture will be discharged with respect to a series of
notes (except with respect to certain continuing rights specified in the
indenture) upon the delivery to the indenture trustee for cancellation of all
the notes of that series or, with certain limitations, upon deposit with the
indenture trustee of funds sufficient for the payment in full of all of the
notes of the series.
In addition to such discharge with certain limitations, if so specified
with respect to the notes of any series, the indenture will provide that the
related trust fund will be discharged from any and all obligations in respect of
the notes of that series (except for certain obligations relating to temporary
notes and exchange of notes, registration of the transfer or exchange of those
notes, replacing stolen, lost or mutilated notes, maintaining paying agencies
and holding 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 that, through the payment of interest
and principal 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
on the final scheduled distribution date for the notes and any installment of
interest on the notes in accordance with the terms of the indenture and the
notes. In the event of any such defeasance and discharge of notes of a series,
holders of notes of that series would be able to look only to such money and/or
direct obligations for payment of principal of and interest on, if any, their
notes until maturity.
55
Material Legal Aspects of the Loans
The following discussion contains general summaries of material legal
matters mortgage loans, home improvement installment sales contracts and home
improvement installment loan agreements that are general in nature. Because the
legal matters are determined primarily by applicable state law and because state
laws may differ substantially, the summaries do not purport to be complete, to
reflect the laws of any particular state, or to encompass the laws of all states
in which the properties securing the loans may be situated.
Mortgages
The Residential Loans and Home Equity Loans for a series will, and the
Home Improvement Contracts for a series may, be secured by mortgages or deeds of
trust or deeds to secure debt, depending upon the prevailing practice in the
state in which the property subject to a mortgage loan is located. We refer to
Residential Loans, Home Equity Loans and Home Improvement Contracts that are
secured by mortgages as "mortgage loans." The filing of a mortgage, deed of
trust or deed to secure debt creates a lien or title interest upon the real
property covered by that instrument and represents the security for the
repayment of an obligation that is customarily evidenced by a promissory note.
It is not prior to the lien for real estate taxes and assessments or other
charges imposed under governmental police powers and may also be subject to
other liens pursuant to the laws of the jurisdiction in which the mortgaged
property is located. Priority with respect to the instruments depends on their
terms, the knowledge of the parties to the mortgage and generally on the order
of recording with the applicable state, county or municipal office. There are
two parties to a mortgage: the mortgagor, who is the borrower/property owner or
the land trustee (as described below), and the mortgagee, who is the lender.
Under the mortgage instrument, the mortgagor delivers to the mortgagee a note or
bond and the mortgage. In the case of a land trust, there are three parties
because title to the property is held by a land trustee under a land trust
agreement of which the borrower/property owner is the beneficiary; at
origination of a mortgage loan, the borrower executes a separate undertaking to
make payments on the mortgage note. A deed of trust transaction normally has
three parties: the trustor, who is the borrower/property owner; the beneficiary,
who is the lender; and the trustee, a third-party grantee. Under a deed of
trust, the trustor grants the property, irrevocably until the debt is paid, in
trust, generally with a power of sale, to the trustee to secure payment of the
obligation. The mortgagee's authority under a mortgage and the trustee's
authority under a deed of trust are governed by the law of the state in which
the real property is located, the express provisions of the mortgage or deed of
trust, and, in some cases, in deed of trust transactions, the directions of the
beneficiary.
Foreclosure on Mortgages
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure occasionally may result from difficulties in locating
necessary parties defendant. When the mortgagee's right to foreclosure is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming and expensive. After the completion of a judicial foreclosure
proceeding, the court may issue a judgment of foreclosure and appoint a receiver
or other officer to conduct the sale of the property. In some states, mortgages
may also be foreclosed by advertisement, pursuant to a power of sale provided in
the mortgage. Foreclosure of a mortgage by advertisement is essentially similar
to foreclosure of a deed of trust by nonjudicial power of sale.
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Foreclosure of a deed of trust generally is accomplished by a
nonjudicial trustee's sale under a specific provision in the deed of trust that
authorizes the trustee to sell the property upon any default by the borrower
under the terms of the note or deed of trust. In certain states, foreclosure
also may be accomplished by judicial action in the manner provided for
foreclosure of mortgages. In some states, the trustee must record a notice of
default and send a copy to the borrower-trustor and to any person who has
recorded a request for a copy of a notice of default and notice of sale. In
addition, the trustee in some states must provide notice to any other individual
having an interest in the real property, including any junior lienholders. If
the deed of trust is not reinstated within any applicable cure period, a notice
of sale must be posted in a public place and, in most states, published for a
specified period of time in one or more newspapers. In addition, some state laws
require that a copy of the notice of sale be posted on the property and sent to
all parties having an interest of record in the property. The trustor, borrower
or any person having a junior encumbrance on the real estate may, during a
reinstatement period, cure the default by paying the entire amount in arrears
plus the costs and expenses incurred in enforcing the obligation. Generally,
state law controls the amount of foreclosure expenses and costs, including
attorney's fees, which may be recovered by a lender.
An action to foreclose a mortgage is an action to recover the mortgage
debt by enforcing the mortgagee's rights under the mortgage. It is regulated by
statutes and rules and subject throughout to the court's equitable powers.
Generally, a mortgagor is bound by the terms of the related mortgage note and
the mortgage as made and cannot be relieved from his default if the mortgagee
has exercised its rights in a commercially reasonable manner. However, since a
foreclosure action historically was equitable in nature, the court may exercise
equitable powers to relieve a mortgagor of a default and deny the mortgagee
foreclosure on proof that either the mortgagor's default was neither willful nor
in bad faith or the mortgagee's action established a waiver, fraud, bad faith,
or oppressive or unconscionable conduct such as to warrant a court of equity to
refuse affirmative relief to the mortgagee. Under certain circumstances, a court
of equity may relieve the mortgagor from an entirely technical default where the
default was not willful.
A foreclosure action is subject to most of the delays and expenses of
other lawsuits if defenses or counterclaims are interposed, and sometimes
requires up to several years to complete. Moreover, a non-collusive, regularly
conducted foreclosure sale may be challenged as a fraudulent conveyance,
regardless of the parties' intent, if a court determines that the sale was for
less than fair consideration and the sale occurred while the mortgagor was
insolvent and within one year (or within the state statute of limitations if the
trustee in bankruptcy elects to proceed under state fraudulent conveyance law)
of the filing of bankruptcy. Similarly, a suit against the debtor on the related
mortgage note may take several years and, generally, is a remedy alternative to
foreclosure, the mortgagee being precluded from pursuing both at the same time.
In the case of foreclosure under either a mortgage or a deed of trust,
a public sale is conducted by the referee or other designated officer or by the
trustee. However, because of the difficulty potential third party purchasers at
the sale have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at a
foreclosure sale. Rather, it is common for the lender to purchase the property
from the trustee or referee for an amount that may be equal to the unpaid
principal amount of the mortgage note secured by the mortgage or deed of trust
plus accrued and unpaid interest and the expenses of foreclosure, in which event
the mortgagor's debt will be extinguished. The lender may purchase the property
for a lesser amount in order to preserve its right against the borrower to seek
a deficiency judgment in states where such a judgment is available. Thereafter,
subject to the right of the borrower in some states to remain in possession
during the redemption period, the lender will assume the burdens of ownership,
including obtaining hazard insurance, paying taxes and making such repairs at
its own expense as are necessary to render the property suitable for sale. The
lender will commonly obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the property. Depending upon
market conditions, the ultimate proceeds of the sale of the property may not
equal the lender's investment in the property. Any loss may be reduced by the
receipt of any mortgage guaranty insurance proceeds.
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Environmental Risks
Federal, state and local laws and regulations impose a wide range of
requirements on activities that may affect the environment, health and safety.
These include laws and regulations governing air pollutant emissions, hazardous
and toxic substances, impacts to wetlands, leaks from underground storage tanks
and the management, removal and disposal of lead- and asbestos-containing
materials. In certain circumstances, these laws and regulations impose
obligations on the owners or operators of residential properties such as those
subject to the loans. The failure to comply with these laws and regulations may
result in fines and penalties.
Moreover, under various federal, state and local laws and regulations,
an owner or operator of real estate may be liable for the costs of addressing
hazardous substances on, in or beneath such property and related costs.
Liability may be imposed without regard to whether the owner or operator knew
of, or was responsible for, the presence of hazardous substances, and could
exceed the value of the property and the aggregate assets of the owner or
operator. In addition, persons who transport or dispose of hazardous substances,
or arrange for the transportation, disposal or treatment of hazardous
substances, at off-site locations may also be held liable if there are releases
or threatened releases of hazardous substances at such off-site locations.
In addition, under the laws of some states and under the Federal
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA),
contamination of property may give rise to a lien on the property to assure the
payment of the costs of clean-up. In several states, such a lien has priority
over the lien of an existing mortgage against the property. Under CERCLA, the
clean-up lien is subordinate to pre-existing, perfected security interests.
Under the laws of some states, and under CERCLA, there is a possibility
that a lender may be held liable as an "owner or operator" for costs of
addressing releases or threatened releases of hazardous substances at a
property, regardless of whether or not the environmental damage or threat was
caused by the current or prior owner or operator. CERCLA and some state laws
provide an exemption from the definition of "owner or operator" for a secured
creditor who, without "participating in the management" of a facility, holds
indicia of ownership primarily to protect its security interest in the facility.
The Solid Waste Disposal Act (SWDA) provides similar protection to secured
creditors in connection with liability for releases of petroleum from certain
underground storage tanks. However, if a lender "participates in the management"
of the facility in question or is found not to have held its interest primarily
to protect a security interest, the lender may forfeit its secured creditor
exemption status.
A regulation promulgated by the U.S. Environmental Protection Agency
(EPA) in April 1992 attempted to clarify the activities in which lenders could
engage both prior to and subsequent to foreclosure of a security interest
without forfeiting the secured creditor exemption under CERCLA. The rule was
struck down in 1994 by the United States Court of Appeals for the District of
Columbia Circuit in Kelley ex rel State of Michigan v. Environmental Protection
Agency, 15 F.3d 1100 (D.C. Cir. 1994), reh'g denied, 25 F.3d 1088, cert. denied
sub nom. Am. Bankers Ass'n v. Kelley, 115 S.Ct. 900 (1995). Another EPA
regulation promulgated in 1995 clarifies the activities in which lenders may
engage without forfeiting the secured creditor exemption under the underground
storage tank provisions of SWDA. That regulation has not been struck down.
On September 30, 1996, Congress enacted the Asset Conservation, Limited
Liability and Deposit Insurance Protection Act (ACA) which amended both CERCLA
and SWDA to provide additional clarification regarding the scope of the lender
liability exemptions under the two statutes. Among other things, ACA specifies
the circumstances under which a lender will be protected by the CERCLA and SWDA
exemptions, both while the borrower is still in possession of the secured
property and following foreclosure on the secured property.
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Generally, ACA states that a lender who holds indicia of ownership
primarily to protect a security interest in a facility will be considered to
participate in management only if, while the borrower is still in possession of
the facility encumbered by the security interest, the lender
o exercises decision-making control over environmental
compliance related to the facility such that the lender has
undertaken responsibility for hazardous substance handling or
disposal practices related to the facility or
o exercises control at a level comparable to that of a manager
of the facility such that the lender has assumed or manifested
responsibility for (a) overall management of the facility
encompassing daily decision-making with respect to
environmental compliance or (b) overall or substantially all
of the operational functions (as distinguished from financial
or administrative functions) of the facility other than the
function of environmental compliance.
ACA also specifies certain activities that are not considered to be
"participation in management," including monitoring or enforcing the terms of
the extension of credit or security interest, inspecting the facility, and
requiring a lawful means of addressing the release or threatened release of a
hazardous substance.
ACA also specifies that a lender who did not participate in management
of a facility prior to foreclosure will not be considered an "owner or
operator," even if the lender forecloses on the facility and after foreclosure
sells or liquidates the facility, maintains business activities, winds up
operations, undertakes an appropriate response action, or takes any other
measure to preserve, protect, or prepare the facility prior to sale or
disposition, if the lender seeks to sell or otherwise divest the facility at the
earliest practicable, commercially reasonable time, on commercially reasonable
terms, taking into account market conditions and legal and regulatory
requirements.
ACA specifically addresses the potential liability of lenders who hold
mortgages or similar conventional security interests in real property, such as
the trust fund does in connection with the mortgage loans and the Home
Improvement Contracts.
If a lender is or becomes liable under CERCLA, it may be authorized to
bring a statutory action for contribution against any other "responsible
parties," including a previous owner or operator. However, these persons or
entities may be bankrupt or otherwise judgment proof, and the costs associated
with environmental cleanup and related actions may be substantial. Moreover,
some state laws imposing liability for addressing hazardous substances do not
contain exemptions from liability for lenders. Whether the costs of addressing a
release or threatened release at a property pledged as collateral for one of the
loans would be imposed on the related trust fund, and thus occasion a loss to
the holders, therefore depends on the specific factual and legal circumstances
at issue.
Rights of Redemption
In some states, after sale pursuant to a deed of trust or foreclosure
of a mortgage, the trustor or mortgagor and foreclosed junior lienors are given
a statutory period in which to redeem the property from the foreclosure sale.
The right of redemption should be distinguished from the equity of redemption,
which is a non-statutory right that must be exercised prior to the foreclosure
sale. In some states, redemption may occur only upon payment of the entire
principal balance of the loan, accrued interest and expenses of foreclosure. In
other states, redemption may be authorized if the former borrower pays only a
portion of the sums due. The effect of a statutory right of redemption is to
diminish the ability of the lender to sell the foreclosed property. The exercise
of a right of redemption would defeat the title of any purchaser at a
foreclosure sale, or of any purchaser from the lender subsequent to foreclosure
or sale under a deed of trust. Consequently, the practical effect of a right of
redemption is to force the lender to retain the property and pay the expenses of
ownership until the redemption period has run. In some states, there is no right
to redeem property after a trustee's sale under a deed of trust.
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Junior Mortgages; Rights of Senior Mortgages
The mortgage loans comprising or underlying the primary assets included
in the trust fund for a series will be secured by mortgages or deeds of trust,
which may be second or more junior mortgages to other mortgages held by other
lenders or institutional investors. The rights of the related trust fund (and
therefore of the security holders), as mortgagee under a junior mortgage, are
subordinate to those of the mortgagee under the senior mortgage, including the
prior rights of the senior mortgagee to receive hazard insurance and
condemnation proceeds and to cause the property securing the mortgage loan to be
sold upon default of the mortgagor, thereby extinguishing the junior mortgagee's
lien unless the junior mortgagee asserts its subordinate interest in the
property in foreclosure litigation and, possibly, satisfies the defaulted senior
mortgage. A junior mortgagee may satisfy a defaulted senior loan in full and, in
some states, may cure the default and bring the senior loan current, in either
event adding the amounts expended to the balance due on the junior loan. In most
states, absent a provision in the mortgage or deed of trust, no notice of
default is required to be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected under
any hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply the proceeds and awards to any indebtedness secured by
the mortgage, in such order as the mortgagee may determine. Thus, in the event
improvements on the property are damaged or destroyed by fire or other casualty,
or in the event the property is taken by condemnation, the mortgagee or
beneficiary under underlying senior mortgages will have the prior right to
collect any insurance proceeds payable under a hazard insurance policy and any
award of damages in connection with the condemnation and to apply the same to
the indebtedness secured by the senior mortgages. Proceeds in excess of the
amount of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed
of trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property that appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee under the mortgage. Upon a
failure of the mortgagor to perform any of these obligations, the mortgagee is
given the right under certain mortgages to perform the obligation itself, at its
election, with the mortgagor agreeing to reimburse the mortgagee for any sums
expended by the mortgagee on behalf of the mortgagor. All sums so expended by
the mortgagee become part of the indebtedness secured by the mortgage.
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Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory prohibitions that limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a mortgage.
In some states, statutes limit the right of the beneficiary or mortgagee to
obtain a deficiency judgment against the borrower following foreclosure or sale
under a deed of trust. A deficiency judgment is a personal judgment against the
former borrower equal in most cases to the difference between the net amount
realized upon the public sale of the real property and the amount due to the
lender. Other statutes require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
In other states, the lender has the option of bringing a personal action against
the borrower on the debt without first exhausting the security. However, in some
of these states, the lender, following judgment on the personal action, may be
deemed to have elected a remedy and may be precluded from exercising remedies
with respect to the security. Consequently, the practical effect of the election
requirement, when applicable, is that lenders will usually proceed first against
the security rather than bringing a personal action against the borrower.
Finally, other statutory provisions limit any deficiency judgment against the
former borrower following a foreclosure sale to the excess of the outstanding
debt over the fair market value of the property at the time of the public sale.
The purpose of these statutes is generally to prevent a beneficiary or a
mortgagee from obtaining a large deficiency judgment against the former borrower
as a result of low or no bids at the foreclosure sale.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including the Federal Bankruptcy Code, the
Soldiers' and Sailors' Relief Act of 1940 and state laws affording relief to
debtors, may interfere with or affect the ability of the secured lender to
realize upon collateral and/or enforce a deficiency judgment. For example, with
respect to Federal Bankruptcy Code, the filing of a petition acts as a stay
against the enforcement of remedies for collection of a debt. Moreover, a court
with federal bankruptcy jurisdiction may permit a debtor through a
rehabilitation plan under chapter 13 of the Federal Bankruptcy Code to cure a
monetary default with respect to a loan on his residence by paying arrearages
within a reasonable time period and reinstating the original loan payment
schedule even though the lender accelerated the loan and the lender has taken
all steps to realize upon its security (provided no sale of the property has yet
occurred) prior to the filing of the debtor's chapter 13 petition. Some courts
with federal bankruptcy jurisdiction have approved plans, based on the
particular facts of the reorganization case, that effected the curing of a loan
default by permitting the obligor to pay arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that
the terms of a mortgage loan may be modified if the borrower has filed a
petition under chapter 13. These courts have suggested that such 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 residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan. Federal bankruptcy law and limited case law
indicate that the foregoing modifications could not be applied to the terms of a
loan secured by property that is the principal residence of the debtor. In all
cases, the secured creditor is entitled to the value of its security plus
post-petition interest, attorney's fees and costs to the extent the value of the
security exceeds the debt.
In a chapter 11 case under the Federal Bankruptcy Code, the lender is
precluded from foreclosing without authorization from the bankruptcy court. The
lender's lien may be transferred to other collateral and/or be limited in amount
to the value of the lender's interest in the collateral as of the date of the
bankruptcy. The loan term may be extended, the interest rate may be adjusted to
market rates and the priority of the loan may be subordinated to bankruptcy
court-approved financing. The bankruptcy court can, in effect, invalidate
due-on-sale clauses through confirmed Chapter 11 plans of reorganization.
The Federal Bankruptcy Code provides priority to certain tax liens over
the lender's security. This may delay or interfere with the enforcement of
rights in respect of a defaulted mortgage loan. In addition, substantive
requirements are imposed upon lenders in connection with the origination and the
servicing of mortgage loans by numerous federal and some state consumer
protection laws. The 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 and regulations. These
federal laws impose specific statutory liabilities upon lenders that originate
loans and that fail to comply with the provisions of the law. In some cases,
this liability may affect assignees of the loans.
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Due-on-Sale Clauses in Mortgage Loans
Due-on-sale clauses permit the lender to accelerate the maturity of the
loan if the borrower sells or transfers, whether voluntarily or involuntarily,
all or part of the real property securing the loan without the lender's prior
written consent. The enforceability of these clauses has been the subject of
legislation or litigation in many states, and in some cases, typically involving
single family residential mortgage transactions, their enforceability has been
limited or denied. In any event, the Garn-St. Germain Depository Institutions
Act of 1982 preempts state constitutional, statutory and case law that prohibits
the enforcement of due-on-sale clauses and permits lenders to enforce these
clauses in accordance with their terms, subject to certain exceptions. As a
result, due-on-sale clauses have become generally enforceable except in those
states whose legislatures exercised their authority to regulate the
enforceability of such clauses with respect to mortgage loans that were (i)
originated or assumed during the "window period" under the Garn-St. Germain Act,
which ended in all cases not later than October 15, 1982, and (ii) originated by
lenders other than national banks, federal savings institutions and federal
credit unions. Freddie Mac has taken the position in its published mortgage
servicing standards that, out of a total of eleven "window period states," five
states (Arizona, Michigan, Minnesota, New Mexico and Utah) have enacted statutes
extending, on various terms and for varying periods, the prohibition on
enforcement of due-on-sale clauses with respect to certain categories of window
period loans. Also, the Garn-St. Germain Act does "encourage" lenders to permit
assumption of loans at the original rate of interest or at some other rate less
than the average of the original rate and the market rate.
In addition, under the Federal Bankruptcy Code, due-on-sale clauses may
not be enforceable in bankruptcy proceedings and may, under certain
circumstances, be eliminated in any modified mortgage resulting from bankruptcy
proceedings.
Enforceability of Prepayment and Late Payment Fees
Forms of notes, mortgages and deeds of trust used by lenders may
contain provisions obligating the borrower to pay a late charge if payments are
not timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon the late charges a lender may collect
from a borrower for delinquent payments. Certain states also limit the amounts
that a lender may collect from a borrower as an additional charge if the loan is
prepaid. Late charges and prepayment fees are typically retained by servicers as
additional servicing compensation.
Equitable Limitations on Remedies
In connection with lenders' attempts to realize upon their security,
courts have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of his default
under the loan documents. Examples of judicial remedies that have been fashioned
include judicial requirements that the lender undertake affirmative and
expensive actions to determine the causes of the borrower's default and the
likelihood that the borrower will be able to reinstate the loan. In some cases,
courts have substituted their judgment for the lender's judgment and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disability. In
other cases, courts have limited the right of a lender to realize upon its
security if the default under the security agreement is not monetary, such as
the borrower's failure to adequately maintain the property or the borrower's
execution of secondary financing affecting the property. Finally, some courts
have been faced with the issue of whether or not federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under security agreements receive notices in addition to the
statutorily-prescribed minimums. For the most part, these cases have upheld the
notice provisions as being reasonable or have found that, in cases involving the
sale by a trustee under a deed of trust or by a mortgagee under a mortgage
having a power of sale, there is insufficient state action to afford
constitutional protections to the borrower.
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Most conventional single-family mortgage loans may be prepaid in full
or in part without penalty. The regulations of the Office of Thrift Supervision
prohibit the imposition of a prepayment penalty or equivalent fee for or in
connection with the acceleration of a loan by exercise of a due-on-sale clause.
A mortgagee to whom a prepayment in full has been tendered may be compelled to
give either a release of the mortgage or an instrument assigning the existing
mortgage. The absence of a restraint on prepayment, particularly with respect to
mortgage loans having higher mortgage rates, may increase the likelihood of
refinancing or other early retirements of such mortgage loans.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980 provides that state usury limitations shall not apply to
certain types of residential first mortgage loans originated by certain lenders
after March 31, 1980. Similar federal statutes were in effect with respect to
mortgage loans made during the first three months of 1980. The Office of Thrift
Supervision, as successor to the Federal Home Loan Bank Board, is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V.
Title V authorizes any state to reimpose interest rate limits by
adopting a state law before April 1, 1983 or by certifying that the voters of
such state have voted in favor of any provision, constitutional or otherwise,
which expressly rejects an application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V is not 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.
The Home Improvement Contracts and the Manufactured Housing Contracts
General
The Home Improvement Contracts and Manufactured Housing Contracts,
other than those that are unsecured or secured by mortgages on real estate,
generally are "chattel paper" or constitute "purchase money security interests,"
each as defined in the Uniform Commercial Code (UCC) in effect in the applicable
jurisdiction. 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
related agreement, the depositor will transfer physical possession of the
contracts to the trustee or a custodian or may retain possession of the
contracts as custodian for the trustee. In addition, the depositor 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. Unless otherwise
specified in the related prospectus supplement, the contracts will not be
stamped or otherwise marked to reflect their assignment from the depositor to
the trustee. Therefore, if through negligence, fraud or otherwise, a subsequent
purchaser were able to take physical possession of the contracts without notice
of such assignment, the trustee's interest in the contracts could be defeated.
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Security Interests in Home Improvements
A Home Improvement Contract that is secured by the related home
improvements grants to the originator of the contract a purchase money security
interest in the related home improvements to secure all or part of the purchase
price of the home improvements and related services. A financing statement
generally is not required to be filed to perfect a purchase money security
interest in consumer goods. Purchase money security interests of this type are
assignable. In general, a purchase money security interest grants to the holder
a security interest that has priority over a conflicting security interest in
the same collateral and the proceeds of the collateral. However, to the extent
that the collateral subject to a purchase money security interest becomes a
fixture, in order for the related purchase money security interest to take
priority over a conflicting interest in the fixture, the holder's interest in
the home improvement must generally be perfected by a timely fixture filing. In
general, under the UCC, a security interest does not exist under the UCC in
ordinary building material incorporated into an improvement on land. Home
Improvement Contracts that finance lumber, bricks, other types of ordinary
building material or other goods that are deemed to lose their characterization,
upon incorporation of the materials into the related property, will not be
secured by a purchase money security interest in the home improvement being
financed.
Enforcement of Security Interest in Home Improvements
So long as the home improvement has not become subject to real estate
law, a creditor can repossess a home improvement securing a Home Improvement
Contract by voluntary surrender, by "self-help" repossession that is "peaceful"
(i.e., without breach of the peace) or, in the absence of voluntary surrender
and the ability to repossess without breach of the peace, by judicial process.
The holder of a Home Improvement Contract must give the debtor a number of days'
notice, which varies from ten to 30 days depending on the state, prior to
commencement of any repossession. The UCC and consumer protection laws in most
states place restrictions on repossession sales, including requiring prior
notice to the debtor and commercial reasonableness in effecting the sale. The
law in most states also requires that the debtor be given notice of any sale
prior to resale of the unit that the debtor may redeem it at or before resale.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the property securing the debtor's loan. However, some states
impose prohibitions or limitations on deficiency judgments, and in many cases
the defaulting borrower will have no assets from which to pay a judgment.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit or
delay the ability of a lender to repossess and resell collateral or enforce a
deficiency judgment.
Security Interests in the Manufactured Homes
The manufactured homes securing the Manufactured Housing Contracts may
be located in all 50 states and the District of Columbia. 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.
The security interests of the trustee in the manufactured homes will not be
noted on the certificates of title or by delivery of the required documents and
payment of fees to the applicable state motor vehicle authorities unless the
related prospectus supplement so requires. With respect to each transaction, a
decision will be made as to whether or not the security interests of the trustee
in the manufactured homes will be noted on the certificates of title and the
required documents and fees will be delivered to the applicable state motor
vehicle authorities based upon, among other things, the practices and procedures
of the related originator and servicer and after consultation with the
applicable rating agency or rating agencies. In some nontitle states, perfection
pursuant to the provisions of the UCC is required. As manufactured homes have
become large 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 particular circumstances, may become governed by 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 manufactured home under applicable state real estate law. In order to
perfect a security interest in a manufactured home under real estate laws, the
secured party must file either a "fixture filing" under the provisions of the
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 manufactured home is located. If so specified in the
related prospectus supplement, the Manufactured Housing Contracts may 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, the
related lender may be required to perfect a security interest in the
manufactured home under applicable real estate laws.
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In the event that 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 relocation and, after
expiration of the four months, only if and after the owner re-registers the
manufactured home in the new state. If the owner were to relocate a manufactured
home to another state and not re-register a 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 secured party must surrender
possession if it holds the certificate of title to the manufactured home or, in
the case of manufactured homes registered in states which provide for notation
of lien on the certificate of title, notice of surrender would be given to the
secured party noted on the certificate of title. In states which do not require
a certificate of title for registration of a manufactured home, re-registration
could defeat perfection.
Under the laws of most states, liens for repairs performed on a
manufactured home and liens for personal property taxes take priority over a
perfected security interest in the manufactured home.
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 that gave rise to the transaction
(and certain related lenders and assignees) to transfer the contract free of
notice of claims by the related debtor. The effect of this rule is to subject
the assignee of the contract to all claims and defenses the debtor could assert
against the seller of goods. Liability under this rule is limited to amounts
paid under a contract; however, the obligor also may be able to assert the rule
to set off remaining amounts due as a defense against a claim brought by the
trustee against such obligor. Numerous other federal and state consumer
protection laws impose requirements applicable to the origination and lending
pursuant to the contracts, including the Truth in Lending Act, the Federal Trade
Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the
Equal Credit Opportunity Act, the Fair Debt Collection Practices Act and the
Uniform Consumer Credit Code. In the case of some of these laws, the failure to
comply with their provisions may affect the enforceability of the related
contract.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980 provides that, subject to the following conditions, state
usury limitations shall not apply to any contract that is secured by a first
lien on certain kinds of consumer goods. The Home Improvement Contracts or
Manufactured Housing Contracts would be covered if they satisfy certain
conditions, among other things, governing the terms of any prepayments, late
charges and deferral fees and requiring a 30-day notice period prior to
instituting any action leading to repossession of the related unit.
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Title V authorized any state to reimpose limitations on interest rates
and finance charges by adopting before April 1, 1983 a law or constitutional
provision that expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
Installment Sales Contracts
The loans may also consist of installment sales contracts. Under an
installment sales contract the seller/lender retains legal title to the property
and enters into an agreement with the purchaser/borrower for the payment of the
purchase price, plus interest, over the term of the contract. Only after full
performance by the purchaser/borrower of the contract is the seller/lender
obligated to convey title to the property to the borrower. As with mortgage or
deed of trust financing, during the effective period of the installment sales
contract, the borrower is generally responsible for maintaining the property in
good condition and for paying real estate taxes, assessments and hazard
insurance policy premiums associated with the property.
The method of enforcing the rights of the seller/lender under an
installment sales contract varies on a state-by-state basis depending upon the
extent to which state courts are willing, or able pursuant to state statute, to
enforce the contract strictly according to the terms. The terms of installment
sales contracts generally provide that upon a default by the borrower, the
borrower loses his right to occupy the property, the entire indebtedness is
accelerated, and the borrower's equitable interest in the property is forfeited.
The seller/lender in such a situation does not have to foreclose in order to
obtain title to the property, although in some cases a quiet title action is in
order if the borrower has filed the installment sales contract in local land
records and an ejectment action may be necessary to recover possession. In a few
states, particularly in cases of borrower default during the early years of an
installment sales contract, the courts will permit ejectment of the buyer and a
forfeiture of his interest in the property. However, most state legislatures
have enacted provisions by analogy to mortgage law protecting borrowers under
installment sales contracts from the harsh consequences of forfeiture. Under
these statutes, a judicial or nonjudicial foreclosure may be required, the
lender may be required to give notice of default and the borrower may be granted
some grace period during which the installment sales 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 borrower with significant investment in the property under an
installment sales contract for the sale of real estate to share in 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 lender's
procedures for obtaining possession and clear title under an installment sales
contract in a given state are simpler and less time-consuming and costly than
are the procedures for foreclosing and obtaining clear title to a property
subject to one or more liens.
Soldiers' and Sailors' Civil Relief Act of 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of
all branches of the military on active duty, including draftees and reservists
in military service,
o are entitled to have their interest rates reduced and capped
at 6% per year, on obligations (including loans) incurred
prior to the commencement of military service for the duration
of military service, and
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o may be entitled to a stay of proceedings on any kind of
foreclosure or repossession action in the case of defaults on
such obligations entered into prior to military service for
the duration of military service, and
o may have the maturity of their obligations incurred prior to
military service extended, the payments lowered and the
payment schedule readjusted for a period of time after the
completion of military service.
However, these benefits are subject to challenge by creditors and if, in the
opinion of the court, the ability of a person to comply with his obligations is
not materially impaired by military service, the court may apply equitable
principles accordingly.
If a borrower's obligation to repay amounts otherwise due on a loan included in
a trust fund for a series is relieved pursuant to the Relief Act, none of the
trust fund, the servicer, the depositor or the trustee will be required to
advance such amounts, and any related loss may reduce the amounts available to
be paid to the holders of the related securities. Unless otherwise specified in
the related prospectus supplement, any shortfalls in interest collections on
loans (or underlying loans), included in a trust fund for a series resulting
from application of the Relief Act will be allocated to each class of securities
of the series that is entitled to receive interest in respect of the loans (or
underlying loans) in proportion to the interest that each class of securities
would have otherwise been entitled to receive in respect of the loans (or
underlying loans) had the interest shortfall not occurred.
The Depositor
The depositor, Bear Stearns Asset Backed Securities, Inc., was
incorporated in the state of Delaware in June 1995, and is a wholly-owned
subsidiary of The Bear Stearns Companies Inc. The depositor's principal
executive offices are located at 245 Park Avenue, New York, New York 10167. Its
telephone number is (212) 272-4095.
The depositor will not engage in any activities other than to
authorize, issue, sell, deliver, purchase and invest in (and enter into
agreements in connection with), and/or to engage in the establishment of one or
more trusts, which will issue and sell, bonds, notes, debt or equity securities,
obligations and other securities and instruments. The depositor securities must
be collateralized or otherwise secured or backed by, or otherwise represent an
interest in, among other things, receivables or pass-through certificates or
participations or certificates of participation or beneficial ownership in one
or more pools of receivables, and the proceeds of the foregoing, that arise in
connection with loans secured by senior or junior mortgages on real estate or
manufactured housing and any and all other commercial transactions and
commercial, sovereign, student or consumer loans or indebtedness. The depositor
may purchase, acquire, own, hold, transfer, convey, service, sell, pledge,
assign, finance and otherwise deal with such receivables, pass-through
certificates, or participations or certificates of participation or beneficial
ownership. Article Third of the depositor's Certificate of Incorporation limits
the depositor's activities to the above activities and certain related
activities, such as credit enhancement with respect to depositor securities, and
to any activities incidental to and necessary or convenient for the
accomplishment of those purposes.
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Use of Proceeds
The depositor will apply all or substantially all of the net proceeds
from the sale of each of the related trust fund series of securities for one or
more of the following purposes:
o to purchase the primary assets of the related trust fund,
o to repay indebtedness incurred to obtain funds to acquire the
primary assets of the related trust fund,
o to establish any reserve funds described in the related
prospectus supplement, and
o to pay costs of structuring and issuing the securities,
including the costs of obtaining any credit enhancement.
If specified in the related prospectus supplement, the purchase of the
primary assets for a series may be effected by delivering the securities to the
seller in exchange for the primary assets.
Material Federal Income Tax Considerations
General
The following summary of the material federal income tax consequences
of the purchase, ownership, and disposition of the securities is based on the
opinion of Brown & Wood LLP or other tax counsel designated in the prospectus
supplement, as special counsel to the depositor. This summary is based upon the
provisions of the Internal Revenue Code, the regulations promulgated thereunder,
including, where applicable, proposed regulations, and the judicial and
administrative rulings and decisions now in effect, all of which are subject to
change or possible differing interpretations. The statutory provisions,
regulations, and interpretations on which this interpretation is based are
subject to change either prospectively or retroactively.
The summary does not purport to deal with all aspects of federal income
taxation that may affect particular investors in light of their individual
circumstances. This summary focuses primarily upon investors who will hold
securities as "capital assets" (generally, property held for investment) within
the meaning of section 1221 of the Code. Prospective investors may wish to
consult their own tax advisers concerning the federal, state, local and any
other tax consequences as relates specifically to such investors in connection
with the purchase, ownership and disposition of the securities.
The federal income tax consequences to security holders will vary
depending on whether
o the securities of a series are classified as indebtedness;
o an election is made to treat the trust fund relating to a
particular series of securities as a real estate mortgage
investment conduit or REMIC under the Code;
o the securities represent an ownership interest in some or all
of the assets included in the trust fund for a series;
o an election is made to treat the trust fund relating to a
particular series of certificates as a partnership; or
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o an election is made to treat the Trust Fund relating to a
particular series of securities as a Financial Asset
Securitization Investment Trust or FASIT under the Code.
The prospectus supplement for each series of securities will specify how the
securities will be treated for federal income tax purposes and will discuss
whether a REMIC election, if any, will be made with respect to the series.
Taxation of Debt Securities
Status as Real Property Loans. Except to the extent otherwise provided
in the related prospectus supplement, if the securities are regular interests in
a REMIC or represent interests in a grantor trust, in the opinion of tax
counsel:
o securities held by a domestic building and loan association
will constitute "loans... secured by an interest in real
property" within the meaning of section 7701(a)(19)(C)(v) of
the Code; and
o securities held by a real estate investment trust will
constitute "real estate assets" within the meaning of section
856(c)(4)(A) of the Code and interest on securities will be
considered "interest on obligations secured by mortgages on
real property or on interests in real property" within the
meaning of section 856(c)(3)(B) of the Code.
Interest and Acquisition Discount. In the opinion of tax counsel,
securities that are REMIC regular interests are generally taxable to holders in
the same manner as evidences of indebtedness issued by the REMIC. Stated
interest on the securities that are REMIC regular interests will be taxable as
ordinary income and taken into account using the accrual method of accounting,
regardless of the holder's normal accounting method. Interest (other than
original issue discount) on securities (other than securities that are REMIC
regular interests) which are characterized as indebtedness for federal income
tax purposes will be includible in income by holders thereof in accordance with
their usual methods of accounting. When we refer to "debt securities" in this
section, we mean securities characterized as debt for federal income tax
purposes and securities that are REMIC regular interests.
In the opinion of tax counsel, "compound interest securities" (i.e.,
debt securities that permit all interest to accrue for more than one year before
payments of interest are scheduled to begin) will, and certain of the other debt
securities issued at a discount may, be issued with "original issue discount" or
OID. The following discussion is based in part on the OID Regulations. A holder
should be aware, however, that the OID Regulations do not adequately address
certain issues relevant to prepayable securities, such as the debt securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a debt security and its issue price. In the
opinion of tax counsel, a holder of a debt security must include OID in gross
income as ordinary interest income as it accrues under a method taking into
account an economic accrual of the discount. In general, OID must be included in
income in advance of the receipt of the cash representing that income. The
amount of OID on a debt security will be considered to be zero if it is less
than a de minimis amount determined under the Code.
The issue price of a debt security is the first price at which a
substantial amount of debt securities of that class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular class of debt securities is sold for cash on
or prior to the closing date, the issue price for that class will be treated as
the fair market value of that class on the closing date. The issue price of a
debt security also includes the amount paid by an initial debt security holder
for accrued interest that relates to a period prior to the issue date of the
debt security. The stated redemption price at maturity of a debt security
includes the original principal amount of the debt security, but generally will
not include distributions of interest if the distributions constitute "qualified
stated interest."
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Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or 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 debt security. The
OID Regulations state that interest payments are unconditionally payable only if
a late payment or nonpayment is a remote contingency or reasonable remedies
exist to compel payment. Debt securities may provide for default remedies in the
event of late payment or nonpayment of interest. Interest is payable at a single
fixed rate only if the rate appropriately takes into account the length of the
interval between payments. Distributions of interest on debt securities with
respect to which deferred interest will accrue will not constitute qualified
stated interest payments, in which case the stated redemption price at maturity
of such debt securities includes all distributions of interest as well as
principal thereon. Where the interval between the issue date and the first
distribution date on a debt security is longer than the interval between
subsequent distribution dates, the greater of (i) the interest foregone and (ii)
the excess of the stated principal amount over the issue price will be included
in the stated redemption price at maturity and tested under the de minimis rule
described below. Where the interval between the issue date and the first
distribution date on a debt security is shorter than the interval between
subsequent distribution dates, all of the additional interest will be included
in the stated redemption price at maturity and tested under the de minimis rule
described below. In the case of a debt security with a long first period that
has non-de minimis OID, all stated interest in excess of interest payable at the
effective interest rate for the long first period will be included in the stated
redemption price at maturity and the debt security will generally have OID.
Holders of debt securities should consult their own tax advisors to determine
the issue price and stated redemption price at maturity of a debt security.
Under the de minimis rule, OID on a debt security will be considered to
be zero if the OID is less than 0.25% of the stated redemption price at maturity
of the debt security multiplied by the weighted average maturity of the debt
security. For this purpose, the weighted average maturity of the debt 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 debt security and the
denominator of which is the stated redemption price at maturity of the debt
security. Holders generally must report de minimis OID pro rata as principal
payments are received, and such income will be capital gain if the debt security
is held as a capital asset. However, accrual method holders may elect to accrue
all de minimis OID as well as market discount under a constant interest method.
Debt securities may provide for interest based on a qualified variable
rate. Under the OID Regulations, interest is generally treated as payable at a
qualified variable rate and not as contingent interest if
o the interest is unconditionally payable at least annually,
o the issue price of the debt instrument does not exceed the
total noncontingent principal payments, and
o interest is based on a "qualified floating rate," an
"objective rate," or a combination of "qualified floating
rates" that do not operate in a manner that significantly
accelerates or defers interest payments on the debt security.
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In the case of compound interest securities, certain interest weighted
securities, and certain of the other debt securities, none of the payments under
the instrument will be considered qualified stated interest, and thus the
aggregate amount of all payments will be included in the stated redemption price
at maturity.
The Internal Revenue Service issued contingent payment regulations
governing the calculation of OID on instruments having contingent interest
payments. These contingent payment regulations represent the only guidance
regarding the views of the IRS with respect to contingent interest instruments
and specifically do not apply for purposes of calculating OID on debt
instruments subject to section 1272(a)(6) of the Code, such as the debt
securities. Additionally, the OID Regulations do not contain provisions
specifically interpreting section 1272(a)(6) of the Code. Until the Treasury
issues guidance to the contrary, the trustee intends to base its computation on
section 1272(a)(6) and the OID Regulations as described in this prospectus.
However, because no regulatory guidance currently exists under Code Section
1272(a)(6), there can be no assurance that such methodology represents the
correct manner of calculating OID.
The holder of a debt security issued with OID must include in gross
income, for all days during its taxable year on which it holds the debt
security, the sum of the "daily portions" of OID. The amount of OID includible
in income by a holder will be computed by allocating to each day during a
taxable year a pro rata portion of the original issue discount that accrued
during the relevant accrual period. In the case of a debt security not subject
to acceleration resulting from prepayments on the loans, the amount of OID
includible in income of a holder for an accrual period (generally the period
over which interest accrues on the debt instrument) would equal the product of
the yield to maturity of the debt security and the adjusted issue price of the
debt security, reduced by any payments of qualified stated interest. The
adjusted issue price is the sum of a debt instrument's issue price plus prior
accruals of OID, reduced by the total payments made with respect to the debt
instrument in all prior periods, other than qualified stated interest payments.
The debt securities will be "pay-through securities," which are debt
instruments that are subject to acceleration due to prepayments on other debt
obligations securing those instruments. The amount of OID to be included in the
income of a pay-through security is computed by taking into account the
prepayment rate assumed in pricing the debt instrument. The amount of OID that
will accrue during an accrual period on a pay-through security is the excess, if
any, of the
o sum of
(a) the present value of all payments remaining to be
made on the pay-through security as of the close of
the accrual period and
(b) the payments during the accrual period of amounts
included in the stated redemption price of the
pay-through security,
over
o the adjusted issue price of the pay-through security at the
beginning of the accrual period.
The present value of the remaining payments is to be determined on the basis of
three factors:
o the original yield to maturity of the pay-through security
(determined on the basis of compounding at the end of each
accrual period and properly adjusted for the length of the
accrual period),
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o events that have occurred before the end of the accrual period
and
o the assumption that the remaining payments will be made in
accordance with the original prepayment assumption.
The effect of this method is to increase the portions of OID required to be
included in income by a holder to take into account prepayments with respect to
the loans at a rate that exceeds the prepayment assumption, and to decrease (but
not below zero for any period) the portions of OID required to be included in
income by a holder of a pay-through security to take into account prepayments
with respect to the loans at a rate that is slower than the prepayment
assumption. Although OID will be reported to holders of pay-through securities
based on the prepayment assumption, no representation is made to holders that
loans will be prepaid at that rate or at any other rate.
Certain classes of securities that are regular REMIC interests may
represent more than one class of REMIC regular interests. Unless otherwise
provided in the related prospectus supplement, the applicable trustee intends,
based on the OID Regulations, to calculate OID on such securities as if, solely
for the purposes of computing OID, the separate regular interests were a single
debt instrument.
A subsequent holder of a debt security will also be required to include
OID in gross income, but the holder who purchases the debt security for an
amount that exceeds its adjusted issue price will be entitled (as will an
initial holder who pays more than a debt security's issue price) to offset such
OID by comparable economic accruals of portions of the excess.
Effects of Defaults and Delinquencies. In the opinion of tax counsel,
holders will be required to report income with respect to the related securities
under an accrual method without giving effect to delays and reductions in
distributions attributable to a default or delinquency on the loans, except
possibly to the extent that it can be established that such amounts are
uncollectible. As a result, the amount of income (including OID) reported by a
holder of a security in any period could significantly exceed the amount of cash
distributed to the holder in that period. The holder will eventually be allowed
a loss (or will be allowed to report a lesser amount of income) to the extent
that the aggregate amount of distributions on the securities is reduced as a
result of a loan default. However, the timing and character of losses or
reductions in income are uncertain and, accordingly, holders of securities
should consult their own tax advisors on this point.
Interest Weighted Securities. An "interest weighted security" is a
security that is a REMIC regular interest or a "stripped" security (as discussed
under "--Tax Status as a Grantor Trust; General" below) the payments on which
consist solely or primarily of a specified portion of the interest payments on
qualified mortgages held by the REMIC or on loans underlying pass-through
securities. It is not clear how income should be accrued with respect to
interest weighted securities. The trustee intends to take the position that all
of the income derived from an interest weighted security should be treated as
OID and that the amount and rate of accrual of such OID should be calculated by
treating the interest weighted security as a compound interest security.
However, in the case of interest weighted securities that are entitled to some
payments of principal and whose interest is determined based on the principal
balance, the IRS could assert that income derived from the interest weighted
security should be calculated as if the security were a security purchased at a
premium equal to the excess of the price paid by the holder for the Security
over its stated principal amount, if any. Under this approach, a holder would be
entitled to amortize such premium only if it has in effect an election under
section 171 of the Code with respect to all taxable debt instruments held by
such holder, as described below. Alternatively, the IRS could assert that an
interest weighted security should be taxable under the rules governing bonds
issued with contingent payments. This treatment may be more likely in the case
of interest weighted securities that are stripped securities as described below.
See "--Tax Status as a Grantor Trust--Discount or Premium on Pass-Through
Securities" below.
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Variable Rate Debt Securities. In the opinion of tax counsel, in the
case of debt securities bearing interest at a rate that varies directly,
according to a fixed formula, with an objective index, it appears that the yield
to maturity of the debt securities and in the case of pay-through securities,
the present value of all payments remaining to be made on the debt securities,
should be calculated as if the interest index remained at its value as of the
issue date of the securities. Because the proper method of adjusting accruals of
OID on a variable rate debt security is uncertain, holders of variable rate debt
securities should consult their own tax advisers regarding the appropriate
treatment of such securities for federal income tax purposes.
Market Discount. In the opinion of tax counsel, a purchaser of a
security may be subject to the market discount rules of sections 1276 through
1278 of the Code. A holder that acquires a debt security with more than a
prescribed de minimis amount of "market discount" (generally, the excess of the
principal amount of the debt security over the purchaser's purchase price) will
be required to include accrued market discount in income as ordinary income in
each month, but limited to an amount not exceeding the principal payments on the
debt security received in that month and, if the securities are sold, the gain
realized. This market discount would accrue in a manner to be provided in
Treasury regulations but, until such regulations are issued, market discount
would in general accrue either
o on the basis of a constant yield (in the case of a pay-through
security, taking into account a prepayment assumption) or
o in the ratio of (a) in the case of securities not originally
issued with OID, stated interest payable in the relevant
period to total stated interest remaining to be paid at the
beginning of the period or (b) in the case of securities
originally issued at a discount, OID in the relevant period to
total OID remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination
date of the debt security, the excess of interest paid or accrued to purchase or
carry the security with market discount over interest received on the security
is allowed as a current deduction only to the extent such excess is greater than
the market discount that accrued during the taxable year in which such interest
expense was incurred. In general, the deferred portion of any interest expense
will be deductible when such market discount is included in income, including
upon the sale, disposition, or repayment of the security. A holder may elect to
include market discount in income currently as it accrues, on all market
discount obligations acquired by such holder during the taxable year such
election is made and thereafter, in which case the interest deferral rule will
not apply.
Premium. In the opinion of tax counsel, a holder who purchases a debt
security at a cost greater than its stated redemption price at maturity,
generally will be considered to have purchased the security at a premium, which
it may elect to amortize as an offset to interest income on the security (and
not as a separate deduction item) on a constant yield method. Although no
regulations addressing the computation of premium accrual on comparable
securities have been issued, the legislative history of the 1986 Act indicates
that premium is to be accrued in the same manner as market discount.
Accordingly, it appears that the accrual of premium on a class of pay-through
securities will be calculated using the prepayment assumption used in pricing
the class. If a holder makes an election to amortize premium on a debt security,
the election will apply to all taxable debt instruments (including all REMIC
regular interests and all pass-through certificates representing ownership
interests in a trust holding debt obligations) held by the holder at the
beginning of the taxable year in which the election is made, and to all taxable
debt instruments acquired thereafter by the holder, and will be irrevocable
without the consent of the IRS. Purchasers who pay a premium for the securities
should consult their tax advisers regarding the election to amortize premium and
the method to be employed.
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On December 30, 1997, the IRS issued final amortizable bond premium
regulations dealing with amortizable bond premium. The regulations specifically
do not apply to prepayable debt instruments subject to code section 1272(a)(6)
of the Code. Prospective purchasers of the debt securities should consult their
tax advisors regarding the possible application of rules analogous to the
amortizable bond premium regulations.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit the holder of a debt security to elect to accrue all
interest, discount (including de minimis market discount or OID) and premium as
interest, based on a constant yield method for Debt securities acquired on or
after April 4, 1994. If such an election were to be made with respect to a debt
security with market discount, the holder of the debt security would be deemed
to have made an election to include in income currently market discount with
respect to all other debt instruments having market discount that such holder of
the debt security acquires during the year of the election or thereafter.
Similarly, the holder of a debt security that makes this election for a debt
security 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 holder owns or acquires. The election to accrue interest,
discount and premium on a constant yield method with respect to a debt security
is irrevocable.
Taxation of the REMIC and its Holders
General. In the opinion of tax counsel, if a REMIC election is made
with respect to a series of securities, then the arrangement by which the
securities of that series are issued will be treated as a REMIC as long as all
of the provisions of the applicable governing agreement are complied with and
the statutory and regulatory requirements are satisfied. Securities will be
designated as "regular interests" or "residual interests" in a REMIC, as
specified in the related prospectus supplement.
Except to the extent specified otherwise in a prospectus supplement, if
a REMIC election is made with respect to a series of securities, in the opinion
of tax counsel:
o securities held by a domestic building and loan association
will constitute "a regular or a residual interest in a REMIC"
within the meaning of Section 7701(a)(19)(C)(xi) of the Code
(assuming that at least 95% of the REMIC's assets consist of
cash, government securities, "loans secured by an interest in
real property," and other types of assets described in Code
Section 7701(a)(19)(C)); and
o securities held by a real estate investment trust will
constitute "real estate assets" within the meaning of Section
856(c)(4)(A) of the Code, and income with respect to the
securities will be considered "interest on obligations secured
by mortgages on real property or on interests in real
property" within the meaning of Section 856(c)(3)(B) of the
Code (assuming, for both purposes, that at least 95% of the
REMIC's assets are qualifying assets).
If less than 95% of the REMIC's assets consist of assets described in the
immediately preceding bullets, then a security will qualify for the tax
treatment described in the previous sentence in the proportion that such REMIC's
assets are qualifying assets.
74
REMIC Expenses; Single Class REMICs
o As a general rule, in the opinion of tax counsel, all of the
expenses of a REMIC will be taken into account by holders of
the residual interest securities. In the case of a "single
class REMIC," however, the expenses will be allocated under
Treasury regulations among the holders of the REMIC regular
interest securities and the holders of the REMIC residual
interest securities on a daily basis in proportion to the
relative amounts of income accruing to each holder on that
day. In the case of a holder of a REMIC regular interest
security who is an individual or a "pass-through interest
holder" (including certain pass-through entities but not
including real estate investment trusts), the expenses will be
deductible only to the extent that the expenses, plus other
"miscellaneous itemized deductions" of the holder, exceed 2%
of the holder's adjusted gross income.
Unless otherwise specified in the related prospectus supplement, the expenses of
the REMIC will be allocated to holders of the related REMIC residual interest
securities.
Taxation of the REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, in the opinion of tax counsel, a REMIC is not generally subject to
entity-level tax. Rather, the taxable income or net loss of a REMIC is taken
into account by the holders of the REMIC residual interests. As described above,
the REMIC regular interests are generally taxable as debt of the REMIC.
Qualification as a REMIC requires ongoing compliance with certain conditions.
Although a REMIC is not generally subject to federal income tax, the Code
provides that failure to comply with one or more of the ongoing requirements of
the Code for REMIC status during any taxable year, including the implementation
of restrictions on the purchase and transfer of the residual interests in a
REMIC as described below under "--Taxation of Owners of Residual Interest
Securities", would cause the trust not to be treated as a REMIC for that year
and thereafter. In this event, the entity may be taxable as a separate
corporation and the related certificates may not be accorded the status or given
the tax treatment described below.
Calculation of REMIC Income. In the opinion of tax counsel, the taxable
income or net loss of a REMIC is determined under an accrual method of
accounting and in the same manner as in the case of an individual, with certain
adjustments. In general, the taxable income or net loss will be the difference
between
o the gross income produced by the REMIC's assets, including
stated interest and any OID or market discount on loans and
other assets, and
o deductions, including stated interest and original issue
discount accrued on the REMIC regular interest securities,
amortization of any premium with respect to loans, and
servicing fees and other expenses of the REMIC.
The holder of a REMIC residual interest security that is an individual or a
"pass-through interest holder" (including certain pass-through entities, but not
including real estate investment trusts) will be unable to deduct servicing fees
payable on the loans or other administrative expenses of the REMIC for a given
taxable year, to the extent that these expenses, when aggregated with the
holder's other miscellaneous itemized deductions for that year, do not exceed 2%
of the holder's adjusted gross income and not at all for AMT purposes.
For purposes of computing its taxable income or net loss, the REMIC
should have an initial aggregate tax basis in its assets equal to the aggregate
fair market value of the regular interests and the residual interests on the
startup day (generally, the day that the interests are issued). That aggregate
basis will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
75
The OID provisions of the Code apply to loans of individuals originated
on or after March 2, 1984, and the market discount provisions apply to loans
originated after July 18, 1984. Subject to possible application of the de
minimis rules, the method of accrual by the REMIC of OID income on such loans
will be equivalent to the method under which holders of pay-through securities
accrue OID (i.e., under the constant yield method taking into account the
prepayment assumption). The REMIC will deduct OID on the regular interest
securities in the same manner that the holders of the regular interest
securities include such discount in income, but without regard to the de minimis
rules. See "--Taxation of Debt Securities" above. However, a REMIC that acquires
loans at a market discount must include such market discount in income
currently, as it accrues, on a constant interest basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (taking into account the prepayment assumption) on a constant yield
method. Although the law is somewhat unclear regarding recovery of premium
attributable to loans originated on or before that date, it is possible that the
premium may be recovered in proportion to payments of loan principal.
Prohibited Transactions Tax and Contributions Taxes. The Code imposes a
tax on REMICs equal to 100% of the net income derived from "prohibited
transactions," called the "Prohibited Transactions Tax." In general, subject to
certain specified exceptions, a prohibited transaction means the disposition of
a mortgage loan, the receipt of income from a source other than a mortgage loan
or certain other permitted investments, the receipt of compensation for
services, or gain from the disposition of an asset purchased with the payments
on the mortgage loans for temporary investment pending distribution on the
certificates. It is not anticipated that any REMIC comprising the trust fund
will engage in any prohibited transactions in which it would recognize a
material amount of net income.
In addition, certain contributions to a trust fund that elects to be
treated as a REMIC made after the day on which such trust fund issues all of its
interests could result in the imposition of a tax on the trust fund equal to
100% of the value of the contributed property, called the "Contributions Tax."
Neither of the REMICs comprising the trust fund will accept contributions that
would subject it to such tax.
Further, a trust fund that elects to be treated as a REMIC may also be
subject to 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. "Net income from foreclosure property" generally means
gain from the sale of a foreclosure property held as inventory.
Where any Prohibited Transactions Tax, Contributions Tax, tax on net
income from foreclosure property or state or local income or franchise tax that
may be imposed on a REMIC arises out of a breach of the master servicer's or the
trustee's obligations, as the case may be, under the pooling and servicing
agreement or in respect of compliance with then applicable law, such tax will be
borne by the master servicer or trustee in either case out of its own funds. In
the event that the master servicer or the trustee, as the case may be, fails to
pay or is not required to pay any such tax as provided above, such tax will be
paid by the relevant REMIC within the trust fund with amounts otherwise
distributable to the holders of Certificates in the manner provided in the
pooling and servicing agreement.
Taxation of Holders of Residual Interest Securities
In the opinion of tax counsel, the holder of a certificate representing
a REMIC residual interest will take into account the "daily portion" of the
taxable income or net loss of the REMIC for each day during the taxable year on
which the holder held the residual interest security. The daily portion is
determined by allocating to each day in any calendar quarter its ratable portion
of the taxable income or net loss of the REMIC for that quarter, and by
allocating that amount among the holders (on that day) of the residual interest
securities in proportion to their respective holdings on that day.
76
In the opinion of tax counsel, the holder of a residual interest
security must report its proportionate share of the taxable income of the REMIC
whether or not it receives cash distributions from the REMIC attributable to
income or loss. The reporting of taxable income without corresponding
distributions could occur, for example, if the loans held by the REMIC were
issued or acquired at a discount, since mortgage prepayments cause recognition
of discount income, while the corresponding portion of the prepayment could be
used in whole or in part to make principal payments on REMIC regular interests
securities issued without any discount or at an insubstantial discount. (If this
occurs, it is likely that cash distributions will exceed taxable income in later
years.) Taxable income of a REMIC may also be greater in earlier years as a
result of the fact that interest expense deductions, as a percentage of
outstanding principal on the REMIC regular interest securities, will typically
increase over time as lower yielding securities are paid, whereas interest
income with respect to each fixed rate loan will generally remain constant over
time as a percentage of loan principal.
In any event, because the holder of a REMIC residual interest security
is taxed on the net income of the REMIC, the taxable income derived from the
residual interest security in a given taxable year will not be equal to the
taxable income associated with investment in a corporate bond or stripped
instrument having similar cash flow characteristics and pretax yield. The
after-tax yield on a residual interest security may be less than that of a
corporate bond or stripped instrument and, if no payment expected, generally
would be negotiable.
Limitation on Losses. In the opinion of tax counsel, the amount of the
REMIC's net loss that a holder may take into account currently is limited to the
holder's adjusted basis at the end of the calendar quarter in which the loss
arises. A holder's basis in a REMIC residual interest security will initially
equal the holder's purchase price, and will subsequently be increased by the
amount of the REMIC's taxable income allocated to the holder, and decreased (but
not below zero) by the amount of distributions made and the amount of the
REMIC's net loss allocated to the holder. Any disallowed loss may be carried
forward indefinitely, but may be used only to offset income of the REMIC
generated by the same REMIC. The ability of holders of residual interest
securities to deduct net losses may be subject to additional limitations under
the Code. Holders should consult their tax advisers with respect to such
additional limitations.
Distributions. In the opinion of tax counsel, distributions on a REMIC
residual interest security (whether at their scheduled times or as a result of
prepayments) will generally not result in any additional taxable income or loss
to a holder of the residual interest security. If the amount of the payment
exceeds the holder's adjusted basis in the residual interest security, however,
the holder will recognize gain (treated as gain from the sale of the residual
interest security) to the extent of the excess.
Sale or Exchange. In the opinion of tax counsel, the holder of a
residual interest security will recognize gain or loss on the sale or exchange
of the residual interest security equal to the difference, if any, between the
amount realized and the holder's adjusted basis in the residual interest
security at the time of sale or exchange. A holder's adjusted basis in a
residual interest security generally equals the cost of the residual interest
security increased by the taxable income of the REMIC that was included in the
income of the holder and decreased by distributions received thereon by the
holder. Except to the extent provided in regulations which have not yet been
issued, any loss upon disposition of a residual interest security will be
disallowed if the selling holder acquires any residual interest in a REMIC or
similar mortgage pool within six months before or after disposition. In that
event, the loss will be used to increase the residual interest security holder's
adjusted basis in the newly acquired asset.
77
Excess Inclusions. In the opinion of tax counsel, the portion of the
REMIC taxable income of a holder of a residual interest security consisting of
"excess inclusion" income may not be offset by other deductions or losses,
including net operating losses, on the holder's federal income tax return.
Further, if the holder of a residual interest security is an organization
subject to the tax on unrelated business income imposed by Section 511 of the
Code, the holder's excess inclusion income will be treated as unrelated business
taxable income of the holder. In addition, under Treasury regulations yet to be
issued, if a real estate investment trust, a regulated investment company, a
common trust fund, or certain cooperatives were to own a residual interest
security, a portion of dividends (or other distributions) paid by the real
estate investment trust (or other entity) would be treated as excess inclusion
income. If a residual interest security is owned by a foreign person, excess
inclusion income is subject to tax at a rate of 30%, which may not be reduced by
treaty, is not eligible for treatment as "portfolio interest" and is subject to
certain additional limitations. See "--Tax Treatment of Foreign Investors"
below. The Small Business Job Protection Act of 1996 has eliminated the special
rule permitting Section 593 thrift institutions to use net operating losses and
other allowable deductions to offset their excess inclusion income from residual
interest securities that have "significant value" within the meaning of the
REMIC Regulations, effective for taxable years beginning after December 31,
1995, except with respect to residual interest securities continuously held by a
thrift institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides
three rules for determining the effect of excess inclusions on the alternative
minimum taxable income of a residual holder.
o First, alternative minimum taxable income for the residual
holder is determined without regard to the special rule that
taxable income cannot be less than excess inclusions.
o Second, the residual holder's alternative minimum taxable
income for a tax year cannot be less than excess inclusions
for the year.
o Third, the amount of any alternative minimum tax net operating
loss deductions must be computed without regard to any excess
inclusions.
These rules are effective for tax years beginning after December 31, 1986,
unless a residual holder elects to have such rules apply only to tax years
beginning after August 20, 1996.
The excess inclusion portion of a REMIC's income is generally equal to
the excess, if any, of
o REMIC taxable income for the quarterly period allocable to a
residual interest security,
over
o the daily accruals for such quarterly period of (i) 120% of
the long term applicable federal rate on the startup day
multiplied by (ii) the adjusted issue price of the residual
interest security at the beginning of the quarterly period.
The adjusted issue price of a residual interest security at the beginning of
each calendar quarter will equal its issue price (calculated in a manner
analogous to the determination of the issue price of a regular interest
security), increased by the aggregate of the daily accruals for prior calendar
quarters, and decreased (but not below zero) by the amount of loss allocated to
a holder and the amount of distributions made on the residual interest security
before the beginning of the quarter. The long-term federal rate, which is
announced monthly by the Treasury Department, is an interest rate that is based
on the average market yield of outstanding marketable obligations of the United
States government having remaining maturities in excess of nine years.
78
Under the REMIC Regulations, transfers of residual interest securities
may be disregarded in certain circumstances. See "--Restrictions on Ownership
and Transfer of Residual Interest Securities" and "--Tax Treatment of Foreign
Investors" below.
Restrictions on Ownership and Transfer of Residual Interest Securities.
As a condition to qualification as a REMIC, reasonable arrangements must be made
to prevent the ownership of a REMIC residual interest by any "disqualified
organization" including the United States, any State or political subdivision
thereof, any foreign government, any international organization, or any agency
or instrumentality of any of the foregoing, a rural electric or telephone
cooperative described in Section 1381(a)(2)(C) of the Code, or any entity exempt
from the tax imposed by sections 1 through 1399 of the Code, if the entity is
not subject to tax on its unrelated business income. Accordingly, the applicable
pooling and servicing agreement will prohibit disqualified organizations from
owning a residual interest security. In addition, no transfer of a residual
interest security will be permitted unless the proposed transferee shall have
furnished to the trustee an affidavit representing and warranting that it is
neither a disqualified organization nor an agent or nominee acting on behalf of
a disqualified organization.
If a residual interest security is transferred to a disqualified
organization after March 31, 1988 (in violation of the restrictions set forth
above), a substantial tax will be imposed on the transferor of the residual
interest security at the time of the transfer. In addition, if a disqualified
organization holds an interest in a pass-through entity after March 31, 1988
(including, among others, a partnership, trust, real estate investment trust,
regulated investment company, or any person holding as nominee), that owns a
residual interest security, the pass-through entity will be required to pay an
annual tax on an allocable share of the excess inclusion income of the REMIC.
Under the REMIC Regulations, if a residual interest security is a
"noneconomic residual interest" as described below, the transfer of a residual
interest security to a U.S. Person will be disregarded for all federal tax
purposes unless no significant purpose of the transfer was to impede the
assessment or collection of tax. Such a purpose 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 (i.e., the transferor had "improper knowledge"). However, a safe
harbor exists under which a transferor is presumed to lack such knowledge
provided that the following two conditions are met:
o the transferor conducted, at the time of the transfer, a
reasonable investigation of the financial condition of the
transferee and found that the transferee had historically paid
its debts as they became due and found no significant evidence
to indicate that the transferee will not continue to pay its
debts as they become due; and
o the transferee represents to the transferor that it
understands that, as the holder of the noneconomic residual
interest, it may incur tax liabilities in excess of any cash
flows generated by the interest and that it intends to pay
taxes associated with holding the residual interest as they
become due.
A residual interest security is a "noneconomic residual interest"
unless, at the time of the transfer:
o the present value of the expected future distributions on the
residual interest security at least equals the product of the
present value of the anticipated excess inclusions and the
highest rate of tax for the year in which the transfer occurs;
and
o the transferor reasonably expects that the transferee will
receive distributions from the REMIC at or after the time at
which the taxes accrue on the anticipated excess inclusions in
an amount sufficient to satisfy the accrued taxes.
79
If a transfer of a residual interest security is disregarded, the
transferor would be liable for any federal income tax imposed upon taxable
income derived by the transferee from the REMIC. A similar type of limitation
exists with respect to certain transfers of residual interests by foreign
persons to U.S. Persons. See "--Tax Treatment of Foreign Investors" below.
New proposed Treasury regulations issued on February 4, 2000 would add
a third condition to the safe harbor under which transfers of noneconomic
residual interests would not be disregarded for federal income tax purposes.
Under the new proposed regulations, a transfer of a noneconomic residual
interest will qualify under this safe harbor only if the present value of the
anticipated tax liabilities associated with holding the residual interest does
not exceed the present value of the sum of:
o any consideration given to the transferee to acquire the
interest;
o future distributions on the interest; and
o any anticipated tax savings associated with holding the
interest as the REMIC generates losses. For purposes of this
calculation, the present value generally is calculated using a
discount rate equal to the applicable federal rate. The new
proposed regulations have a proposed effective date of
February 4, 2000.
A recently issued revenue procedure provides that, during the period in
which the IRS and Treasury consider comments on the new proposed regulations, a
transferor will be presumed to lack improper knowledge if:
o both conditions specified in the third preceding paragraph are
satisfied; and
o either (x) the safe harbor formula specified in the
immediately preceding paragraph is satisfied or (y) the
following three conditions are satisfied:
o for financial reporting purposes, the transferee's gross
assets exceed $100 million and its net assets exceed $10
million for the current year and prior two fiscal years,
excluding certain related party obligations;
o the transferee is an eligible corporation (i.e., a U.S. branch
of a domestic C corporation (other than a tax-exempt
corporation, a RIC, a REIT, a REMIC or cooperative)) that will
not be subject to net tax by a foreign country or U.S.
possession in respect of the residual interest security and
agrees in writing that any subsequent transfer of the residual
interest will be to an eligible corporation that satisfies
this safe harbor; and
o the facts and circumstances known to the transferor, including
any payment actually made to the transferee, must not
reasonably indicate that the taxes associated with the
residual interest will not be paid. Prospective investors
should consult their own tax advisors as to the applicability
and effect of the new proposed regulations and the Revenue
Procedure.
Mark-to-Market Rules. Prospective purchasers of a REMIC residual
interest security should be aware that the IRS recently issued final
mark-to-market regulations which provide that a REMIC residual interest security
acquired after January 3, 1995 cannot be mark-to-market.
Administrative Matters
The REMIC's books must be maintained on a calendar year basis and the
REMIC must file an annual federal income tax return. The REMIC will also be
subject to the procedural and administrative rules of the Code applicable to
partnerships, including the determination of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit, by the IRS in a
unified administrative proceeding.
80
Tax Status as a Grantor Trust
General. As further specified in the related prospectus supplement, if
a REMIC election is not made and the trust fund is not structured as a
partnership, then, in the opinion of tax counsel, the trust fund relating to a
series of securities will be classified for federal income tax purposes as a
grantor trust under Subpart E, Part 1 of Subchapter J of the Code and not as an
association taxable as a corporation. We refer to the securities of a series of
this type as ("pass-through securities"). In some series there will be no
separation of the principal and interest payments on the loans. In these
circumstances, a holder will be considered to have purchased a pro rata
undivided interest in each of the loans. In the case of ("stripped securities"),
sale of the securities will produce a separation in the ownership of all or a
portion of the principal payments from all or a portion of the interest payments
on the loans.
In the opinion of tax counsel, each holder must report on its federal
income tax return its share of the gross income derived from the loans (not
reduced by the amount payable as trust expense fees to the applicable trustee
and the servicer and similar fees), at the same time and in the same manner as
the items would have been reported under the holder's tax accounting method had
it held its interest in the loans directly, received directly its share of the
amounts received with respect to the loans, and paid directly its share of the
trust expense fees. In the case of pass-through securities other than stripped
securities, income will consist of a pro rata share of all of the income derived
from all of the loans and, in the case of stripped securities, income will
consist of a pro rata share of the income derived from each stripped bond or
stripped coupon in which the holder owns an interest. The holder of a security
will generally be entitled to deduct trust expense fees under section 162 or
section 212 of the Code to the extent that such fees represent "reasonable"
compensation for the services rendered by the applicable trustee and the
servicer (or third parties that are compensated for the performance of
services). In the case of a noncorporate holder, however, trust expense fees (to
the extent not otherwise disallowed, e.g., because they exceed reasonable
compensation) will be deductible in computing the holder's regular tax liability
only to the extent that the fees, when added to other miscellaneous itemized
deductions, exceed 2% of adjusted gross income and may not be deductible to any
extent in computing the holder's alternative minimum tax liability.
Discount or Premium on Pass-Through Securities. In the opinion of tax
counsel, the holder's purchase price of a pass-through security is to be
allocated among the loans in proportion to their fair market values, determined
as of the time of purchase of the securities. In the typical case, the trustee
(to the extent necessary to fulfill its reporting obligations) will treat each
loan as having a fair market value proportional to the share of the aggregate
principal balances of all of the loans that it represents, since the securities,
unless otherwise specified in the related prospectus supplement, will have a
relatively uniform interest rate and other common characteristics. To the extent
that the portion of the purchase price of a pass-through security allocated to a
loan (other than to a right to receive any accrued interest thereon and any
undistributed principal payments) is less than or greater than the portion of
the principal balance of the loan allocable to the security, the interest in the
loan allocable to the pass-through security will be deemed to have been acquired
at a discount or premium, respectively.
The treatment of any discount will depend on whether the discount
represents OID or market discount. In the case of a loan with OID in excess of a
prescribed de minimis amount or a stripped security, a holder of the security
will be required to report as interest income in each taxable year its share of
the amount of OID that accrues during that year in the manner described above.
OID with respect to a loan could arise, for example, by virtue of the financing
of points by the originator of the loan, or by virtue of the charging of points
by the originator of the loan in an amount greater than a statutory de minimis
exception, in circumstances under which the points are not currently deductible
pursuant to applicable Code provisions. Any market discount or premium on a loan
will be includible in income, generally in the manner described above, except
that in the case of pass-through securities, market discount is calculated with
respect to the loans underlying the security, rather than with respect to the
security itself. A holder that acquires an interest in a loan originated after
July 18, 1984 with more than a de minimis amount of market discount (generally,
the excess of the principal amount of the loan over the purchaser's allocable
purchase price) will be required to include accrued market discount in income in
the manner set forth above. See "--Taxation of Debt Securities --Market
Discount" and "--Premium" above.
81
In the case of market discount on a pass-through security attributable
to loans originated on or before July 18, 1984, the holder generally will be
required to allocate the portion of the discount that is allocable to a loan
among the principal payments on the loan and to include the discount allocable
to each principal payment in ordinary income at the time the principal payment
is made. This treatment would generally result in discount being included in
income at a slower rate than discount would be required to be included in income
using the method described in the preceding paragraph.
Stripped Securities. A stripped security may represent a right to
receive only a portion of the interest payments on the loans, a right to receive
only principal payments on the loans, or a right to receive certain payments of
both interest and principal. Ratio stripped securities may represent a right to
receive differing percentages of both the interest and principal on each loan.
Pursuant to section 1286 of the Code, the separation of ownership of the right
to receive some or all of the interest payments on an obligation from ownership
of the right to receive some or all of the principal payments results in the
creation of "stripped bonds" with respect to principal payments and "stripped
coupons" with respect to interest payments. Section 1286 of the Code applies the
OID rules to stripped bonds and stripped coupons. For purposes of computing OID,
a stripped bond or a stripped coupon is treated as a debt instrument issued on
the date that such stripped interest is purchased with an issue price equal to
its purchase price or, if more than one stripped interest is purchased, the
ratable share of the purchase price allocable to the stripped interest.
Servicing fees in excess of reasonable servicing fees will be treated
under the stripped bond rules. If the excess servicing fee is less than 100
basis points (i.e., 1% interest on the loan's principal balance) or the
securities are initially sold with a de minimis discount (assuming no prepayment
assumption is required), any non-de minimis discount arising from a subsequent
transfer of the securities should be treated as market discount. The IRS appears
to require that reasonable servicing fees be calculated on a loan by loan basis,
which could result in some loans being treated as having more than 100 basis
points of interest stripped off.
The Code, OID Regulations and judicial decisions provide no direct
guidance as to how the interest and OID rules are to apply to stripped
securities and other pass-through securities. Under the cash flow bond method
described above for pay-through securities, a prepayment assumption is used and
periodic recalculations are made that take into account with respect to each
accrual period the effect of prepayments during such period. However, the 1986
Act does not, absent Treasury regulations, appear specifically to cover
instruments such as stripped securities, which technically represent ownership
interests in the underlying loans, rather than being debt instruments "secured
by" those loans. Nevertheless, it is believed that the cash flow bond method is
a reasonable method of reporting income for such securities, and it is expected
that OID will be reported on that basis unless otherwise specified in the
related prospectus supplement. In applying the calculation to pass-through
securities, the trustee will treat all payments to be received by a holder with
respect to the underlying loans as payments on a single installment obligation.
The IRS could, however, assert that OID must be calculated separately for each
loan underlying a security.
82
Under certain circumstances, if the loans prepay at a rate faster than
the prepayment assumption, the use of the cash flow bond method may accelerate
the holder's recognition of income. If, however, the loans prepay at a rate
slower than the Prepayment Assumption, in some circumstances the use of this
method may decelerate the holder's recognition of income.
In the case of a stripped security that is an interest weighted
security, the applicable trustee intends, absent contrary authority, to report
income to holders as OID, in the manner described above for interest weighted
securities.
Possible Alternative Characterizations. The characterizations of the
stripped securities described above are not the only possible interpretations of
the applicable Code provisions. Among other possibilities, the IRS could contend
that:
o in certain series, each non-interest weighted security is
composed of an unstripped undivided ownership interest in
loans and an installment obligation consisting of stripped
principal payments;
o the non-Interest Weighted securities are subject to the
contingent payment provisions of the new proposed regulations;
or
o each interest weighted stripped security is composed of an
unstripped undivided ownership interest in loans and an
installment obligation consisting of stripped interest
payments.
Given the variety of alternatives for treatment of the stripped
securities and the different federal income tax consequences that result from
each alternative, potential purchasers are urged to consult their own tax
advisers regarding the proper treatment of the securities for federal income tax
purposes.
Character as Qualifying loans. In the case of stripped securities,
there is no specific legal authority existing regarding whether the character of
the securities, for federal income tax purposes, will be the same as the loans.
The IRS could take the position that the loans' character is not carried over to
the securities in such circumstances. Pass-through securities will be, and,
although the matter is not free from doubt, stripped securities should be
considered to represent:
o "real estate assets" within the meaning of section
856(c)(4)(A) of the Code; and
o "loans secured by an interest in real property" within the
meaning of section 7701(a)(19)(C)(v) of the Code.
Interest income attributable to pass-through securities and stripped securities
should be considered to represent "interest on obligations secured by mortgages
on real property or on interests in real property" within the meaning of section
856(c)(3)(B) of the Code. Reserves or funds underlying the securities may cause
a proportionate reduction in the above-described qualifying status categories of
securities.
Sale or Exchange
Subject to the discussion below with respect to any trust fund as to
which a partnership election is made, in the opinion of tax counsel, a holder's
tax basis in a security is the price the holder pays for the security, increased
by amounts of OID or market discount included in income, and reduced by any
payments received (other than qualified stated interest payments) and any
amortized premium. Gain or loss recognized on a sale, exchange, or redemption of
a security, measured by the difference between the amount realized and the
security's basis as so adjusted, will generally be capital gain or loss,
assuming that the security is held as a capital asset and will generally be
long-term capital gain or loss if the holding period of the security is more
than one year and short-term capital gain or loss if the holding period of the
Security is one year or less. Non-corporate taxpayers are subject to reduced
maximum rates on long-term capital gains and are generally subject to tax at
ordinary income rates on short-term capital gains. The deductibility of capital
losses is subject to certain limitations. Prospective investors should consult
their own tax advisors concerning these tax law provisions.
83
In the case of a security held by a bank, thrift, or similar
institution described in section 582 of the Code, gain or loss realized on the
sale or exchange of a security will be taxable as ordinary income or loss. In
addition, gain from the disposition of a REMIC regular interest security that
might otherwise be capital gain will be treated as ordinary income to the extent
of the excess, if any, of:
o the amount that would have been includible in the holder's
income if the yield on the regular interest security had
equaled 110% of the applicable federal rate as of the
beginning of such holder's holding period,
over
o the amount of ordinary income actually recognized by the
holder with respect to the regular interest security.
Miscellaneous Tax Aspects
Backup Withholding. Subject to the discussion below with respect to any
trust fund as to which a partnership election is made, a holder, other than a
holder of a REMIC residual interest security, may, under certain circumstances,
be subject to "backup withholding" at a rate of 31% (or a rate as adjusted for
payments made after August 6, 2001) "Backup Withholding Rate" with respect to
distributions or the proceeds of a sale of certificates to or through brokers
that represent interest or original issue discount on the securities. This
withholding generally applies if the holder of a security:
o fails to furnish the applicable trustee with its taxpayer
identification number;
o furnishes the applicable trustee an incorrect TIN;
o fails to report properly interest, dividends or other
"reportable payments" as defined in the Code; or
o under certain circumstances, fails to provide the applicable
trustee or such holder's securities broker with a certified
statement, signed under penalty of perjury, that the TIN
provided is its correct number and that the holder is not
subject to backup withholding.
Backup withholding will not apply, however, with respect to certain
payments made to holders, including payments to certain exempt recipients (such
as exempt organizations) and to certain nonresident alien individuals, foreign
partnerships or foreign corporations. Holders should consult their tax advisers
as to their qualification for exemption from backup withholding and the
procedure for obtaining the exemption.
The applicable trustee will report to the holders and to the servicer
for each calendar year the amount of any "reportable payments" during such year
and the amount of tax withheld, if any, with respect to payments on the
securities.
84
Tax Treatment of Foreign Investors
Subject to the discussion below with respect to any trust fund as to
which a partnership election is made, under the Code, unless interest (including
OID) paid on a security (other than a residual interest security) is considered
to be "effectively connected" with a trade or business conducted in the United
States by a nonresident alien individual, foreign partnership or foreign
corporation, in the opinion of tax counsel, interest will normally qualify as
portfolio interest, and will be exempt from federal income tax. However,
interest will not qualify as portfolio interest where:
o the recipient is a holder, directly or by attribution of 10%
or more of the capital or profits interest in the issuer, or
o the recipient is a controlled foreign corporation to which the
issuer is a related person.
For interest to qualify for the portfolio interest exemption from U.S.
withholding tax, the holder must generally complete a Form W-8BEN indicating
that the holder is a non-U.S. Person. The Form W-8BEN, or in certain
circumstances other documentation, must be provided to the person otherwise
required to withhold U.S. tax. If a foreign holder is a partnership or other
type of pass-through entity that is not treated for U.S. withholding tax
purposes as the beneficial owner of the income with respect to the security, the
holder generally must receive the Form W-8BEN as described in the previous
sentence from the holder's partners or other beneficial owners of the income
with respect to the security and may be required to provide the forms, and
certain additional information, to the person through whom the holder holds the
security. The forms provided by the holder or its interestholders regarding
status as a non-U.S. Person must generally be passed through the ownership chain
to the person otherwise required to withhold tax in order for the exemption to
apply. These provisions supersede the generally applicable provisions of United
States law that would otherwise require the issuer to withhold at a 30% rate
(unless such rate were reduced or eliminated by an applicable tax treaty) on,
among other things, interest and other fixed or determinable, annual or periodic
income paid to nonresident alien individuals, foreign partnerships or foreign
corporations. Holders of pass-through securities and stripped securities,
including ratio strip securities, however, may be subject to withholding to the
extent that the loans were originated on or before July 18, 1984.
Interest and OID of holders who are foreign persons are not subject to
withholding if they are effectively connected with a United States business
conducted by the holder and appropriate documentation is provided to the person
otherwise required to withhold. They will, however, generally be subject to the
regular United States income tax.
Payments to holders of REMIC residual interest securities who are
foreign persons will generally be treated as interest for purposes of the 30%
(or lower treaty rate) United States withholding tax. Holders should assume that
such income does not qualify for exemption from United States withholding tax as
"portfolio interest." It is clear that, to the extent that a payment represents
a portion of REMIC taxable income that constitutes excess inclusion income, the
holder of a residual interest security will not be entitled to an exemption from
or reduction of the 30% (or lower treaty rate) withholding tax rule. If the
payments are subject to United States withholding tax, they generally will be
taken into account for withholding tax purposes only when paid or distributed
(or when the residual interest security is disposed of). The Treasury has
statutory authority, however, to promulgate regulations that would require such
amounts to be taken into account at an earlier time in order to prevent the
avoidance of tax. Regulations could, for example, require withholding prior to
the distribution of cash in the case of residual interest securities that do not
have significant value. Under the REMIC Regulations, if a residual interest
security has tax avoidance potential, a transfer of a residual interest security
to a nonresident alien individual, foreign partnership or foreign corporation
will be disregarded for all federal tax purposes. A residual interest security
has tax avoidance potential unless, at the time of the transfer the transferor
reasonably expects that the REMIC will distribute to the transferee residual
interest holder amounts that will equal at least 30% of each excess inclusion,
and that such amounts will be distributed at or after the time at which the
excess inclusions accrue and not later than the calendar year following the
calendar year of accrual. If a nonresident alien individual, foreign partnership
or foreign corporation transfers a residual interest security to a U.S. Person,
and if the transfer has the effect of allowing the transferor to avoid tax on
accrued excess inclusions, then the transfer is disregarded and the transferor
continues to be treated as the owner of the residual interest security for
purposes of the withholding tax provisions of the Code. See "--Excess
Inclusions" above.
85
Tax Characterization of the Trust Fund as a Partnership
Tax counsel is of the opinion that a trust fund structured as a
partnership will not be an association (or publicly traded partnership) taxable
as a corporation for federal income tax purposes. This opinion is based on the
assumption that the terms of the trust agreement and related documents will be
complied with, and on counsel's conclusions that the nature of the income of the
trust fund will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations or the issuance of the certificates has
been structured as a private placement under an IRS safe harbor, so that the
trust fund will not be characterized as a publicly traded partnership taxable as
a corporation.
If the trust fund were taxable as a corporation for federal income tax
purposes, in the opinion of tax counsel, the trust fund would be subject to
corporate income tax on its taxable income. The trust fund's taxable income
would include all its income, possibly reduced by its interest expense on the
notes. Any such corporate income tax could materially reduce cash available to
make payments on the notes and distributions on the certificates, and holders of
certificates could be liable for any such tax that is unpaid by the trust fund.
Tax Consequences to Holders of the Notes
Treatment of the Notes as Indebtedness. The trust fund will agree, and
the noteholders will agree by their purchase of notes, to treat the notes as
debt for federal income tax purposes. As a result, tax counsel is, (except as
otherwise provided in the related prospectus supplement,) of the opinion that
the notes will be classified as debt for federal income tax purposes. The
discussion below assumes this characterization of the notes is correct.
OID, Indexed Securities, etc. The discussion below assumes that all
payments on the notes are denominated in U.S. dollars, and that the notes are
not "indexed securities" or "strip notes." Moreover, the discussion assumes that
the interest formula for the notes meets the requirements for "qualified stated
interest" under the OID Regulations, and that any OID on the notes (i.e., any
excess of the principal amount of the notes over their issue price) does not
exceed a de minimis amount (i.e., 0.25% of their principal amount multiplied by
the number of full years included in their term), all within the meaning of the
OID Regulations. If these conditions are not satisfied with respect to any given
series of notes, additional tax considerations with respect to the notes will be
disclosed in the applicable prospectus supplement.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, in the opinion of tax counsel, the notes
will not be considered issued with OID. The stated interest in the notes will be
taxable to a noteholder as ordinary interest income when received or accrued in
accordance with the noteholder's method of tax accounting. Under the OID
Regulations, a holder of a note issued with a de minimis amount of OID must
include the OID in income, on a pro rata basis, as principal payments are made
on the note. It is believed that any prepayment premium paid as a result of a
mandatory redemption will be taxable as contingent interest when it becomes
fixed and unconditionally payable. A purchaser who buys a note for more or less
than its principal amount will generally be subject, respectively, to the
premium amortization or market discount rules of the Code.
86
A holder of a note that is a "short-term note" (i.e., it has a fixed
maturity date of not more than one year from the issue date) may be subject to
special rules. An accrual basis holder of a short-term note (and certain cash
method holders, including regulated investment companies, as set forth in
section 1281 of the Code) generally would be required to report interest income
as interest accrues on a straight-line basis over the term of each interest
period. Other cash basis holders of a short-term note would, in general, be
required to report interest income as interest is paid (or, if earlier, upon the
taxable disposition of the short-term note). However, a cash basis holder of a
short-term note reporting interest income as it is paid may be required to defer
a portion of any interest expense otherwise deductible on indebtedness incurred
to purchase or carry the short-term note until the taxable disposition of the
short-term note. A cash basis taxpayer may elect under section 1281 of the Code
to accrue interest income on all nongovernment debt obligations with a term of
one year or less, in which case the taxpayer would include interest on the
short-term note in income as it accrues, but would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a short-term note is purchased for more or less than its
principal amount.
Sale or Other Disposition. In the opinion of tax counsel, if a
noteholder sells a note, the holder will recognize gain or loss in an amount
equal to the difference between the amount realized on the sale and the holder's
adjusted tax basis in the note. The adjusted tax basis of a note to a particular
noteholder will equal the holder's cost for the note, increased by any market
discount, acquisition discount, OID and gain previously included by the
noteholder in income with respect to the note and decreased by the amount of
bond premium (if any) previously amortized and by the amount of principal
payments previously received by the noteholder with respect to the note. Any
such gain or loss will be capital gain or loss if the note was held as a capital
asset, except for gain representing accrued interest and accrued market discount
not previously included in income. Capital losses generally may be used only to
offset capital gains.
Foreign Holders. In the opinion of tax counsel, interest payments made
(or accrued) to a noteholder who is a "foreign person" (i.e., nonresident alien,
foreign corporation or other non-U.S. Person) generally will be considered
"portfolio interest," and generally will not be subject to United States federal
income tax and withholding tax, if the interest is not effectively connected
with the conduct of a trade or business within the United States by the foreign
person and the foreign person:
o is not actually or constructively a "10 percent shareholder"
of the trust fund or the seller (including a holder of 10% of
the outstanding certificates) or a "controlled foreign
corporation" with respect to which the trust fund or the
seller is a "related person" within the meaning of the Code;
and
o provides the trustee or other person who is otherwise required
to withhold U.S. tax with respect to the notes with an
appropriate statement (on Form W-8BEN), signed under penalties
of perjury, certifying that the beneficial owner of the note
is a foreign person and providing the foreign person's name
and address.
87
If a foreign holder is a partnership or other type of pass-through entity that
is not treated for U.S. withholding tax purposes as the beneficial owner of the
income with respect to the certificate, the holder generally must receive the
Form W-8BEN as described in the previous sentence from the holder's partners or
other beneficial owners of the income with respect to the certificate and may be
required to provide the forms, and certain additional information, to the person
through whom the holder holds the certificates. The forms provided by the holder
or its interestholders regarding status as a non-U.S. Person must generally be
passed through the ownership chain to the person otherwise required to withhold
tax in order for the exemption to apply. If a note is held through a securities
clearing organization or certain other financial institutions, the foreign
person that owns the note should furnish such organization or institution with a
Form W-8BEN or a similar form. The organization or institution may then be
required to forward the Form W-8BEN to the withholding agent. If interest is not
portfolio interest and is not effectively connected with the conduct of a U.S.
trade or business, then it will be subject to United States federal income and
withholding tax at a rate of 30%, unless reduced or eliminated pursuant to an
applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax; provided, that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
Backup Withholding. Each holder of a note (other than an exempt holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalties of perjury, a certificate containing the holder's name,
address, correct federal taxpayer identification number and a statement that the
holder is not subject to backup withholding. Should a nonexempt noteholder fail
to provide the required certification, the trust fund will be required to
withhold 31% of the amount otherwise payable to the holder, and remit the
withheld amount to the IRS as a credit against the holder's federal income tax
liability.
Possible Alternative Treatments of the Notes. If, contrary to the
opinion of tax counsel, the IRS successfully asserted that one or more of the
notes did not represent debt for federal income tax purposes, the notes might be
treated as equity interests in the trust fund. If so treated, the trust fund
might be taxable as a corporation with the adverse consequences described above
(and the taxable corporation would not be able to reduce its taxable income by
deductions for interest expense on notes recharacterized as equity).
Alternatively, and most likely in the view of tax counsel, the trust fund might
be treated as a publicly traded partnership that would not be taxable as a
corporation because it would meet certain qualifying income tests. Nonetheless,
treatment of the notes as equity interests in such a publicly traded partnership
could have adverse tax consequences to certain holders. For example, income to
certain tax-exempt entities (including pension funds) may be "unrelated business
taxable income," income to foreign holders generally would be subject to U.S.
tax and U.S. tax return filing and withholding requirements, and individual
holders might be subject to certain limitations on their ability to deduct their
share of the trust fund's expenses.
Tax Consequences to Holders of the Certificates
Treatment of the Trust Fund as a Partnership. The trust fund and the
servicer will agree, and the certificateholders will agree by their purchase of
certificates, to treat the 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
trust fund, the partners of the partnership being the certificateholders, and
the notes being debt of the partnership. However, the proper characterization of
the arrangement involving the trust fund, the certificates, the notes, the trust
fund and the servicer is not clear because there is no authority on transactions
closely comparable to that contemplated herein.
88
A variety of alternative characterizations are possible. For example,
because the certificates have certain features characteristic of debt, the
certificates might be considered debt of the trust fund. Any such
characterization would not result in materially adverse tax consequences to
certificateholders as compared to the consequences from treatment of the
certificates as equity in a partnership, described below. The following
discussion assumes that the certificates represent equity interests in a
partnership.
Indexed Securities, etc. The following discussion assumes that all
payments on the certificates are denominated in U.S. dollars, none of the
certificates is an indexed security or a strip certificates, and that a series
of securities includes a single class of certificates. If these conditions are
not satisfied with respect to any given series of certificates, additional tax
considerations with respect to such certificates will be disclosed in the
applicable prospectus supplement.
Partnership Taxation. If the trust fund is a partnership, in the
opinion of tax counsel, the trust fund will not be subject to federal income
tax. Rather, in the opinion of tax counsel, each certificateholder will be
required to separately take into account the holder's allocated share of income,
gains, losses, deductions and credits of the trust fund. The trust fund's income
will consist primarily of interest and finance charges earned on the loans
(including appropriate adjustments for market discount, OID and bond premium)
and any gain upon collection or disposition of loans. The trust fund's
deductions will consist primarily of interest accruing with respect to the
notes, servicing and other fees, and losses or deductions upon collection or
disposition of loans.
In the opinion of tax counsel, the tax items of a partnership are
allocable to the partners in accordance with the Code, Treasury regulations and
the partnership agreement (here, the trust agreement and related documents). The
trust agreement will provide, in general, that the certificateholders will be
allocated taxable income of the trust fund for each month equal to the sum of:
o the interest that accrues on the certificates in accordance
with their terms for such month, including interest accruing
at the pass-through rate for that month and interest on
amounts previously due on the certificates but not yet
distributed;
o any trust fund income attributable to discount on the loans
that corresponds to any excess of the principal amount of the
certificates over their initial issue price;
o prepayment premium payable to the certificateholders for that
month; and
o any other amounts of income payable to the certificateholders
for that month.
This allocation will be reduced by any amortization by the trust fund
of premium on loans that corresponds to any excess of the issue price of
certificates over their principal amount. All remaining taxable income of the
trust fund will be allocated to the depositor. Based on the economic arrangement
of the parties, in the opinion of tax counsel, this approach for allocating
trust fund income should be permissible under applicable Treasury regulations,
although no assurance can be given that the IRS would not require a greater
amount of income to be allocated to certificateholders. Moreover, in the opinion
of tax counsel, even under the foregoing method of allocation,
certificateholders may be allocated income equal to the entire pass-through rate
plus the other items described above even though the trust fund might not have
sufficient cash to make current cash distributions of that amount. Thus, cash
basis holders will in effect be required to report income from the certificates
on the accrual basis and certificateholders may become liable for taxes on trust
fund income even if they have not received cash from the trust fund to pay
taxes. In addition, because tax allocations and tax reporting will be done on a
uniform basis for all certificateholders but certificateholders may be
purchasing certificates at different times and at different prices,
certificateholders may be required to report on their tax returns taxable income
that is greater or less than the amount reported to them by the trust fund.
89
In the opinion of tax counsel, all of the taxable income allocated to a
certificateholder that is a pension, profit sharing or employee benefit plan or
other tax-exempt entity (including an individual retirement account) may
constitute "unrelated business taxable income" generally taxable to the holder
under the Code.
In the opinion of tax counsel, an individual taxpayer's share of
expenses of the trust fund (including fees to the servicer but not interest
expense) would be miscellaneous itemized deductions. Such deductions might be
disallowed to the individual in whole or in part and might result in such holder
being taxed on an amount of income that exceeds the amount of cash actually
distributed to the holder over the life of the trust fund.
The trust fund intends to make all tax calculations relating to income
and allocations to certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each loan, the trust fund
might be required to incur additional expense but it is believed that there
would not be a material adverse effect on certificateholders.
Discount and Premium. It is believed that the loans were not issued
with OID, and, therefore, the trust fund should not have OID income. However,
the purchase price paid by the trust fund for the loans may be greater or less
than the remaining principal balance of the loans at the time of purchase. If
so, in the opinion of tax counsel, the loan will have been acquired at a premium
or discount, as the case may be. (As indicated above, the trust fund will make
this calculation on an aggregate basis, but might be required to recompute it on
a loan-by-loan basis.)
If the trust fund acquires the loans at a market discount or premium,
the trust fund will elect to include any discount in income currently as it
accrues over the life of the loans or to offset any premium against interest
income on the loans. As indicated above, a portion of market discount income or
premium deduction may be allocated to certificateholders.
Section 708 Termination. In the opinion of tax counsel, under section
708 of the Code, the trust fund will be deemed to terminate for federal income
tax purposes if 50% or more of the capital and profits interests in the trust
fund are sold or exchanged within a 12-month period. Pursuant to final Treasury
regulations issued May 9, 1997 under section 708 of the Code, if such a
termination occurs, the trust fund would be deemed to contribute its assets to a
new partnership in exchange for interests in the new partnership. Such interests
would be deemed distributed to the partners of the original trust fund
liquidation thereof, which would not constitute a sale or exchange.
Disposition of Certificates. Generally, in the opinion of tax counsel,
capital gain or loss will be recognized on a sale of certificates in an amount
equal to the difference between the amount realized and the seller's tax basis
in the certificates sold. A certificateholder's tax basis in a certificate will
generally equal the holder's cost increased by the holder's share of trust fund
income (includible in income) and decreased by any distributions received with
respect to the certificate. In addition, both the tax basis in the certificates
and the amount realized on a sale of a certificate would include the holder's
share of the notes and other liabilities of the trust fund. A holder acquiring
certificates at different prices may be required to maintain a single aggregate
adjusted tax basis in the certificates, and, upon sale or other disposition of
some of the certificates, allocate a portion of the aggregate tax basis to the
certificates sold (rather than maintaining a separate tax basis in each
certificate for purposes of computing gain or loss on a sale of that
certificate).
90
Any gain on the sale of a certificate attributable to the holder's
share of unrecognized accrued market discount on the loans would generally be
treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The trust fund does not expect to have any other assets
that would give rise to such special reporting requirements. Thus, to avoid
those special reporting requirements, the trust fund will elect to include
market discount in income as it accrues.
If a certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the certificates that exceeds the aggregate
cash distributions with respect thereto, this excess will generally give rise to
a capital loss upon the retirement of the certificates.
Allocations Between Transferors and Transferees. In general, the trust
fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the certificateholders
in proportion to the principal amount of certificates owned by them as of the
close of the last day of such month. As a result, a holder purchasing
certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the trust fund might be reallocated among the certificateholders. The trust
fund's method of allocation between transferors and transferees may be revised
to conform to a method permitted by future regulations.
Section 754 Election. In the event that a certificateholder sells its
certificates at a profit (loss), the purchasing certificateholder will have a
higher (lower) basis in the certificates than the selling certificateholder had.
The tax basis of the trust fund's assets will not be adjusted to reflect that
higher (or lower) basis unless the 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 trust fund will not make such
election. As a result, certificateholders might be allocated a greater or lesser
amount of trust fund income than would be appropriate based on their own
purchase price for certificates.
Administrative Matters. The trustee is required to keep or have kept
complete and accurate books of the trust fund. Books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the trust fund will be the calendar year. The trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
trust fund and will report each certificateholder's allocable share of items of
trust fund income and expense to holders and the IRS on Schedule K-1. The trust
fund will provide the Schedule K-l information to nominees that fail to provide
the trust fund with the information statement described below and such nominees
will be required to forward such information to the beneficial owners of the
certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the trust fund or be subject to penalties unless
the holder notifies the IRS of all such inconsistencies.
Under section 6031 of the Code, any person that holds certificates as a
nominee at any time during a calendar year is required to furnish the trust fund
with a statement containing certain information on the nominee, the beneficial
owners and the certificates so held. Such information includes:
o the name, address and taxpayer identification number of the
nominee; and
o as to each beneficial owner (a) the name, address and
identification number of such person, (b) whether such person
is a U.S. 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 (c) certain
information on certificates that were held, bought or sold on
behalf of such person throughout the year.
91
In addition, brokers and financial institutions that hold certificates
through a nominee are required to furnish directly to the trust fund information
as to themselves and their ownership of certificates. A clearing agency
registered under section 17A of the Securities Exchange Act of 1934 is not
required to furnish any such information statement to the trust fund. The
information referred to above for any calendar year must be furnished to the
trust fund on or before the following January 31. Nominees, brokers and
financial institutions that fail to provide the trust fund with the information
described above may be subject to penalties.
The depositor will be designated as the tax matters partner in the
related trust agreement and, as such, will be responsible for representing the
certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the trust fund by the appropriate taxing authorities
could result in an adjustment of the returns of the certificateholders, and,
under certain circumstances, a certificateholder may be precluded from
separately litigating a proposed adjustment to the items of the trust fund. An
adjustment could also result in an audit of a certificateholder's returns and
adjustments of items not related to the income and losses of the trust fund.
Tax Consequences to Foreign Certificateholders. It is not clear whether
the trust fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to non-U.S.
Persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the trust fund would be engaged in a trade or business in the United States
for such purposes, the trust fund will withhold as if it were so engaged in
order to protect the trust fund from possible adverse consequences of a failure
to withhold. The trust fund expects to withhold on the portion of its taxable
income that is allocable to foreign certificateholders pursuant to section 1446
of the Code, as if such income were effectively connected to a U.S. trade or
business, at a rate of 35% for foreign holders that are taxable as corporations
and 39.6% for all other foreign holders. Subsequent adoption of Treasury
regulations or the issuance of other administrative pronouncements may require
the trust fund to change its withholding procedures. In determining a holder's
withholding status, the trust fund may rely on IRS Form W-8BEN or a similar
form, IRS Form W-9 or the holder's certification of nonforeign status signed
under penalties of perjury.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the branch
profits tax) on its share of the trust fund's income. Each foreign holder must
obtain a taxpayer identification number from the IRS and submit that number to
the trust fund on Form W-8BEN in order to assure appropriate crediting of the
taxes withheld. A foreign holder generally would be entitled to file with the
IRS a claim for refund with respect to taxes withheld by the trust fund taking
the position that no taxes were due because the trust fund was not engaged in a
U.S. trade or business. However, interest payments made (or accrued) to a
certificateholder who is a foreign person generally will be considered
guaranteed payments to the extent such payments are determined without regard to
the income of the trust fund. If these interest payments are properly
characterized as guaranteed payments, then the interest will not be considered
"portfolio interest." As a result, certificateholders will be subject to United
States federal income tax and withholding tax at a rate of 30%, unless reduced
or eliminated pursuant to an applicable treaty. In such case, a foreign holder
would only be entitled to claim a refund for that portion of the taxes in excess
of the taxes that should be withheld with respect to the guaranteed payments.
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Backup Withholding. Distributions made on the certificates and proceeds
from the sale of the certificates will be subject to a "backup" withholding tax
at the Backup Withholding Rate if, in general, the certificateholder fails to
comply with certain identification procedures, unless the holder is an exempt
recipient under applicable provisions of the Code.
State Tax Considerations
In addition to the federal income tax considerations described in this
prospectus under "Material Federal Income Tax Considerations," potential
investors should consider the state and local income tax consequences of the
acquisition, ownership, and disposition of the securities. State and local
income tax law may differ substantially from the corresponding federal law, and
this discussion does not purport to describe any aspect of the income tax laws
of any state or locality. Therefore, potential investors should consult their
own tax advisors with respect to the various state and local tax consequences of
an investment in the securities.
FASIT Securities
General. The FASIT provisions of the Code were enacted by the Small
Business Job Protection Act of 1996 and create a new elective statutory vehicle
for the issuance of mortgage-backed and asset-backed FASIT securities effective
on September 1, 1997. On February 4, 2000, the IRS and Treasury issued proposed
Treasury regulations for FASITs. The regulations generally would not be
effective until final regulations are filed with the federal register. However,
it appears that certain anti-abuse rules would apply as of February 4, 2000.
Investors also should note that the FASIT discussions contained herein
constitutes only a summary of the federal income tax consequences to holders of
FASIT securities. With respect to each series of FASIT securities, the related
prospectus supplement will provide a detailed discussion regarding the federal
income tax consequences associated with the particular transaction.
FASIT securities will be classified as either FASIT "regular
securities," which generally will be treated as debt for federal income tax
purposes, or FASIT "ownership securities," which generally are not treated as
debt for such purposes, but rather as representing rights and responsibilities
with respect to the taxable income or loss of the related series. The prospectus
supplement for each series of securities will indicate whether one or more FASIT
elections will be made for the series, and which securities of the series will
be designated as regular securities, and which, if any, will be designated as
ownership securities.
Qualification as a FASIT. The trust fund underlying a series (or one or
more designated pools of assets held in the trust fund) will qualify under the
Code as a FASIT in which the FASIT regular securities and the FASIT ownership
securities will constitute the "regular interests" and the "ownership
interests," respectively, if
o a FASIT election is in effect,
o certain tests concerning the composition of the FASIT's assets
and the nature of the holders' interest in the FASIT are met
on a continuing basis, and
o the trust fund is not a regulated investment company or RIC as
defined in section 851(a) of the Code.
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However, the qualification as a FASIT of any trust fund for which a
FASIT election is made depends on the trust's ability to satisfy the
requirements of the FASIT provisions on an ongoing basis, including, without
limitation, the requirements of any final Treasury regulations that may be
promulgated in the future under the FASIT provisions or as a result of any
change in applicable law. Thus, no assurances can be made regarding the
qualification as a FASIT of any trust for which a FASIT election is made at any
particular time after the issuance of securities by the trust.
Asset Composition. In order for a trust fund (on one or more designated
pools of assets held by a trust fund) to be eligible for FASIT status,
substantially all of the assets of the trust fund (or the designated pool) 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
o cash or cash equivalents,
o debt instruments with fixed terms that would qualify as REMIC
regular interests if issued by a REMIC (generally, instruments
that provide for interest at a fixed rate, a qualifying
variable rate, or a qualifying interest-only type rate,
o foreclosure property,
o certain 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,
o contract rights to acquire qualifying debt instruments or
qualifying hedging instruments,
o FASIT regular interests, and
o REMIC regular interests.
o Permitted assets do not include any debt instruments issued by
the holder of the FASIT's ownership interest or by any person
related to the holder.
Interests in a FASIT. In addition to the foregoing asset qualification
requirements, the interests in a FASIT must meet certain requirements. All of
the interests in a FASIT must belong to either
o one or more classes of regular interests or
o a single class of ownership interest that is held by a fully
taxable domestic corporation. In the case of series that
include FASIT ownership securities, the ownership interest
will be represented by the FASIT ownership securities.
A FASIT interest generally qualifies as a regular interest if
o it is designated as a regular interest,
o it has a stated maturity no greater than thirty years,
o it entitles its holder to a specified principal amount,
o the issue price of the interest does not exceed 125% of its
stated principal amount,
o the yield to maturity of the interest is less than the
applicable Treasury rate published by the IRS plus 5%, and
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o if it pays interest, such interest is payable either at a
fixed rate with respect to the principal amount of the regular
interest or at 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 interest (i.e., certain qualified floating rates and weighted
average rates). See "Material Federal Income Tax Considerations--Taxation of
Debt Securities--Variable Rate Debt Securities" in this prospectus.
If a FASIT security fails to meet one or more of the requirements set
out in the third, fourth or fifth bullet in the preceding paragraph, but
otherwise meets the above requirements, it may still qualify as a type of
regular interest known as a "high-yield interest." In addition, if a FASIT
security fails to meet the requirements of the final bullet in the preceding
paragraph, but the interest payable on the security 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 security also will qualify as a
high-yield interest. A high-yield interest may be held only by domestic
corporations that are fully subject to corporate income tax, other FASITs and
dealers in securities who acquire such interests as inventory, rather than for
investment. In addition, holders of high-yield interests are subject to
limitations on offset of income derived from such interest. See "--Tax Treatment
of FASIT Regular Securities" and "--Treatment of High-Yield Interests" below.
Anti-Abuse Rule. Under proposed Treasury regulations, the IRS
Commissioner may make appropriate adjustments with regard to the FASIT and any
arrangement or transaction involving the FASIT if a principal purpose of forming
or using the FASIT is to achieve results inconsistent with the intent of the
FASIT provisions and the FASIT regulations. This determination would be based on
all of the facts and circumstances, including a comparison of the purported
business purpose for a transaction and the claimed tax benefits resulting from
the transaction.
Consequences of the Failure of the FASIT Trust to Qualify as a FASIT.
If a FASIT trust fails to comply with one or more of the Code's ongoing
requirements for FASIT status during any taxable year, proposed Treasury
regulations provide that its FASIT status would be lost for that year and the
FASIT trust would be unable to elect FASIT status without the Commissioner's
approval. If FASIT status is lost, under proposed Treasury regulations the
entity classification of the former FASIT would be determined under general
federal income tax principles. The holder of the FASIT ownership security would
be treated as exchanging the assets of the former FASIT for an amount equal to
their value and gain recognized would be treated as gain from a prohibited
transaction that is subject to the 100% tax, without exception. Loss, if any,
would be disallowed. In addition, the holder of the FASIT ownership security
must recognize cancellation of indebtedness income, on a regular interest by
regular interest basis, in an amount equal to the adjusted issue price of each
FASIT regular security outstanding immediately before the loss of FASIT status
over its fair market value. If the holder of the FASIT ownership security has a
continuing economic interest in the former FASIT, the characterization of this
interest is determined under general federal income tax principles. Holders of
FASIT regular securities are treated as exchanging their securities for
interests in the new entity classification of the former FASIT, which the
classification is determined under general federal income tax principles. Gain
is recognized to the extent the new interest either does not qualify as debt or
differs either in kind or extent. The basis of the interest in the new entity
classification of the former FASIT equals the basis in the FASIT regular
security increased by any gain recognized on the exchange.
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Tax Treatment of FASIT Regular Securities. Payments received by holders
of FASIT regular securities generally should be accorded the same tax treatment
under the Code as payments received on other taxable corporate debt instruments
and on REMIC regular securities. As in the case of holders of REMIC regular
securities, holders of FASIT regular securities must report income from such
securities 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 or acquired with
market discount or premium, 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 holder's basis is allocable to that payment. FASIT regular securities
issued with original issue discount or acquired with market discount or premium
generally will treat interest and principal payments on the securities in the
same manner described for REMIC regular securities. See "Material Federal Income
Tax Considerations--Taxation of Debt Securities," "--Market Discount," and
"--Premium" in this prospectus. High-yield interests may be held only by fully
taxable domestic corporations, other FASITs, and certain securities dealers.
Holders of high-yield interests are subject to limitations on their ability to
use current losses or net operating loss carryforwards or carrybacks to offset
any income derived from those securities.
If a FASIT regular security is sold or exchanged, the holder generally
will recognize gain or loss upon the sale in the manner described above for
securities other than REMIC regular interest securities. See "Material Federal
Income Tax Considerations--Sale or Exchange" in this prospectus. In addition, if
a FASIT regular security becomes wholly or partially worthless as a result of
default and delinquencies of the underlying assets, the holder of the security
should be allowed to deduct the loss sustained (or alternatively be able to
report a lesser amount of income). See "Material Federal Income Tax
Considerations--Taxation of Debt Securities--Effects of Default and
Delinquencies" in this prospectus.
FASIT regular securities held by a real estate investment trust or REIT
will qualify as "real estate assets" within the meaning of section 856(c) (4)(A)
of the Code, and interest on such securities will be considered "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of section 856(c)(3)(B) of the Code to the same
extent that REMIC securities would be so considered. FASIT regular securities
held by a thrift institution taxed as a "domestic building and loan association"
will represent qualifying assets for purposes of the qualification requirements
set forth in section 7701(a)(19) of the Code to the same extent that REMIC
securities would be so considered. See "Material Federal Income Tax
Considerations--Taxation of Debt Securities--Status as Real Property loans" in
this prospectus. In addition, FASIT regular securities held by a financial
institution to which section 585 of the Code applies will be treated as
evidences of indebtedness for purposes of section 582(c)(1) of the Code. FASIT
securities will not qualify as "government securities" for either REIT - or RIC
- - qualification purposes.
Treatment of High-Yield Interests. High-Yield Interests are subject to
special rules regarding the eligibility of holders of such interests, and the
ability of such holders to offset income derived from their FASIT Security with
losses. High-Yield Interests may be held only by Eligible Corporations other
FASITs, and dealers in securities who acquire such interests as inventory. 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 disqualified holders will be
disregarded for federal income tax purposes, and the transferor still will be
treated as the holder of the High-Yield Interest.
The holder of a High-Yield Interest may not use non-FASIT current
losses or net operating loss carryforwards or carrybacks to offset any income
derived from the High-Yield Interest, for either regular federal income tax
purposes or for alternative minimum tax purposes. In addition, the FASIT
provisions contain an anti-abuse rule that imposes corporate income tax on
income derived from a FASIT Regular Security that is held by a pass-through
entity (other than another FASIT) that issues debt or equity securities backed
by the FASIT Regular Security and that have the same features as High-Yield
Interests.
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Tax Treatment of FASIT Ownership Securities. 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. In general, the character of the income to the holder of a FASIT
Ownership Interest will be the same as the character of such income of the
FASIT, except that any tax-exempt interest income taken into account by the
holder of a FASIT Ownership Interest 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 the FASIT's assets and the FASIT Regular
securities issued by the FASIT according to a constant yield methodology and
under an accrual method of accounting. In addition, holders of FASIT Ownership
securities are subject to the same limitations on their ability to use losses to
offset income from their FASIT Security as are the holders of High-Yield
Interests. See "FASIT Securities--Treatment of High-Yield Interests."
Rules similar to the wash sale rules applicable to REMIC Residual
securities also will apply to FASIT Ownership Securities. 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 such Security
acquires any other FASIT Ownership Security or, in the case of a FASIT holding
mortgage assets, any interest in a Taxable Mortgage Pool that is economically
comparable to a FASIT Ownership Security. In addition, if any security that is
sold or contributed to a FASIT by the holder of the related FASIT Ownership
Security was required to be marked-to-market under Code section 475 by such
holder, then section 475 will continue to apply to such securities, except that
the amount realized under the mark-to-market rules will be a greater of the
securities' value under present law or the securities' value 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 semiannually.
The holder of a FASIT Ownership Security will be subject to a tax equal
to 100% of the net income derived by the FASIT from any "prohibited
transactions." Prohibited transactions include (i) the receipt of income derived
from assets that are not permitted assets, (ii) certain dispositions of
permitted assets, (iii) the receipt of any income derived from any loan
originated by a FASIT and (iv) in certain cases, the receipt of income
representing a servicing fee or other compensation. Any series for which a FASIT
election is made generally will be structured in order to avoid application of
the prohibited transaction tax.
Backup Withholding, Reporting and Tax Administration. Holders of FASIT
securities will be subject to backup withholding to the same extent holders of
REMIC securities would be subject. See "Certain Federal Income Tax
Considerations--Miscellaneous Tax Aspects--Backup Withholding." For purposes of
reporting and tax administration, holders of record of FASIT securities
generally will be treated in the same manner as holders of REMIC Securities.
Under proposed Treasury regulations, if a non-U.S. Person holds (either
directly or through a vehicle which itself is not subject to U.S. federal income
tax, such as a partnership or a trust) a FASIT Regular Security and a "conduit
debtor" pays or accrues interest on a debt instrument held by such FASIT, any
interest received or accrued by the non-U.S. Person FASIT Regular Security
holder is treated as received or accrued from the conduit debtor. The proposed
Treasury regulations state that a debtor is a conduit debtor if the debtor is a
U.S. Person or the United States branch of a non-U.S. Person and the non-U.S.
Person FASIT Regular Security holder is (1) a "10 percent shareholder" of the
debtor, (2) a "controlled foreign corporation" and the debtor is a related
person with respect to the controlled foreign corporation or (3) related to the
debtor. As set forth above, the proposed Treasury regulations would not be
effective until final regulations are filed with the federal register.
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Due to the complexity of the federal income tax rules applicable to
holders and the considerable uncertainty that exists with respect to many
aspects of those rules, potential investors should consult their own tax
advisors regarding the tax treatment of the acquisition, ownership, and
disposition of the securities.
ERISA Considerations
The following describes certain considerations under the Employee
Retirement Income Security Act of 1974, as amended and the Internal Revenue
Code, which apply only to securities of a series that are not divided into
subclasses. If securities are divided into subclasses, the related prospectus
supplement will contain information concerning considerations relating to ERISA
and the Code that are applicable to the related subclasses.
ERISA and Section 4975 of the Code impose requirements on employee
benefit plans - and on certain other retirement plans and arrangements,
including individual retirement accounts and annuities, Keogh plans and
collective investment funds and separate accounts in which plans, accounts or
arrangements are invested - and on persons who are fiduciaries with respect to
these types of plans and arrangements. In this prospectus we refer to these
types of plans and arrangements as "Plans." Generally, ERISA applies to
investments made by Plans. Among other things, ERISA requires that the assets of
Plans be held in trust and that the trustee, or other duly authorized fiduciary,
have exclusive authority and discretion to manage and control the assets of such
Plans. ERISA also imposes certain duties on persons who are fiduciaries of
Plans, such as the duty to invest prudently, to diversify investments unless it
is prudent not to do so, and to invest in accordance with the documents
governing the Plan. Under ERISA, any person who exercises any authority or
control respecting the management or disposition of the assets of a Plan is
considered to be a fiduciary of such Plan (subject to certain exceptions not
here relevant). Certain employee benefit plans, such as governmental plans (as
defined in Section 3(32) of ERISA) and, if no election has been made under
Section 410(d) of the Code, church plans (as defined in Section 3(33) of ERISA),
are not subject to ERISA's requirements. Accordingly, assets of such plans may
be invested in securities without regard to the ERISA considerations described
above and below, subject to the provisions of applicable federal or state law.
Any such plan that is qualified and exempt from taxation under Sections 401(a)
and 501(a) of the Code, however, is subject to the prohibited transaction rules
set forth in Section 503 of the Code.
On January 5, 2000, the United States Department of Labor (DOL) issued
final regulations under Section 401(c) of ERISA describing a safe harbor for
insurers that issued certain nonguaranteed policies supported by their general
accounts to Plans, and under which an insurer would not be considered an ERISA
fiduciary with respect to its general account by virtue of a Plan's investment
in such a policy. In general, to meet the safe harbor, an insurer must
o disclose certain specified information to investing Plan
fiduciaries initially and on an annual basis;
o allow Plans to terminate or discontinue a policy on 90 days'
notice to the insurer, and to elect, without penalty, either a
lump-sum payment or annual installment payments over a
ten-year period, with interest; and
o give Plans written notice of "insurer-initiated amendments" 60
days before the amendments take effect.
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In addition to the imposition of general fiduciary standards of
investment prudence and diversification, ERISA and Section 4975 of the Code
prohibit a broad range of transactions involving Plan assets and persons having
certain specified relationships to a Plan ("parties in interest"), and impose
additional prohibitions where parties in interest are fiduciaries with respect
to a Plan. Certain parties in interest that participate in a prohibited
transaction may be subject to excise taxes imposed pursuant to Section 4975 of
the Code, or penalties imposed pursuant to Section 502(i) of ERISA, unless a
statutory, regulatory or administrative exemption is available.
The DOL issued Plan asset regulations concerning the definition of what
constitutes the assets of a Plan (Labor Reg. Section 2510.3-101). Under these
regulations, the underlying assets and properties of corporations, partnerships,
trusts and certain other entities in which a Plan makes an "equity" investment
could be deemed for purposes of ERISA to be assets of the investing Plan in
certain circumstances.
Under the Plan asset regulations, the term "equity" interest is defined
as any interest in an entity other than an instrument that is treated as
indebtedness under "applicable local law" and which has no "substantial equity
features." If the trust fund issues notes that are not treated as equity
interests in the trust fund for purposes of the Plan asset regulations, a Plan's
investment in such notes would not cause the assets of the trust to be deemed
plan assets. However, the seller, the servicer, the backup servicer, the
indenture trustee, the owner trustee, the underwriter and the depositor may be
the sponsor of or investment advisor with respect to one or more Plans. Because
such parties may receive certain benefits in connection with the sale of the
notes, the purchase of notes using plan assets over which any of these parties
(or their affiliates) has investment authority might be deemed to be a violation
of the prohibited transaction rules of ERISA and the Code for which no exemption
may be available. Accordingly, notes may not be purchased using the assets of
any Plan if the seller, the servicer, the backup servicer, the indenture
trustee, the owner trustee, the underwriter, the depositor or any of their
affiliates
o has investment or administrative discretion with respect to
such Plan assets;
o has authority or responsibility to give, or regularly gives,
investment advice with respect to such plan assets for a fee
and pursuant to an agreement of understanding that the advice
will serve as a primary basis for investment decisions with
respect to the Plan assets and will be based on the particular
investment needs for the Plan; or
o is an employer maintaining or contributing to such Plan.
In addition, the trust fund, any underwriter, the trustee or their
affiliates might be considered or might become "parties in interest" with
respect to a Plan. Also, any holder of certificates of the trust fund, because
of its activities or the activities of its respective affiliates, may be deemed
to be a "party in interest" with respect to certain Plans, including but not
limited to Plans sponsored by the holder. In either case, whether nor not the
assets of the trust are considered to be Plan assets the acquisition or holding
of notes by or on behalf of a Plan could give rise to a prohibited transaction
within the meaning of ERISA and the Code, unless it is subject to one or more
exemptions such as:
o Prohibited Transaction Class Exemption (PTCE) 84-14, which
exempts certain transactions effected on behalf of a Plan by a
"qualified professional asset manager;"
o PTCE 90-1, which exempts certain transactions involving
insurance company pooled separate accounts;
o PTCE 91-38, which exempts certain transactions involving bank
collective investment funds;
o PTCE 95-60, which exempts certain transactions involving
insurance company general accounts; or
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o PTCE 96-23, which exempts certain transactions effected on
behalf of a Plan by certain "in-house asset managers."
There can be no assurance that any of these class exemptions will apply with
respect to any particular Plan's investment in notes, or, even if it did apply,
that any exemption would apply to all prohibited transactions that may occur in
connection with such an investment. Unless a different requirement is imposed in
the prospectus supplement, each prospective purchaser or transferee of a note
that is a Plan or a person acting on behalf or investing the assets of a Plan
shall be required to represent (or, with respect to any transfer of a beneficial
interest in a global note, shall be deemed to represent) to the indenture
trustee and the note registrar that the relevant conditions for exemptive relief
under at least one of the foregoing exemptions have been satisfied.
The Plan asset regulations provide that, generally, the assets of an
entity in which a Plan invests will not be deemed to be assets of the Plan for
purposes of ERISA if the equity interest acquired by the investing Plan is a
publicly-offered security, or if equity participation by benefit plan investors
is not significant. In general, a publicly-offered security, as defined in the
Plan asset regulations, is a security that is widely held, freely transferable
and registered under the Securities Exchange Act of 1934. Equity participation
in an entity by benefit plan investors is not significant if, after the most
recent acquisition of an equity interest in the entity, less than 25% of the
value of each class of equity interest in the entity is held by "benefit plan
investors," which include benefit plans described in ERISA or under Section 4975
of the Code, whether or not they are subject to ERISA, as well as entities whose
underlying assets include assets of a Plan by reason of a Plan's investment in
the entity.
If no exception under the Plan asset regulations applies and if a Plan
(or a person investing Plan assets, such as an insurance company general
account) acquires an equity interest in the trust, then the assets of the trust
would be considered to be assets of the Plan. Because the loans held by the
trust may be deemed plan assets of each Plan that purchases an equity interest,
an investment in an equity interest issued by the trust by a Plan might be a
prohibited transaction under ERISA and subject to an excise tax under Section
4975 of the Code, and may cause transactions undertaken in the course of
operating the trust to constitute prohibited transactions, unless a statutory or
administrative exemption applies.
The DOL issued to Bear, Stearns & Co. Inc., an individual underwriter
exemption (Prohibited Transaction Exemption 90-30, 55 Fed. Reg. 21461 (1990)),
which exempts from the application of certain of the prohibited transaction
rules transactions relating to the acquisition, sale and holding by Plans of
certain securities, including certificates, representing an interest in
asset-backed pass-through entities, including trusts, that hold certain types of
receivables or obligations and with respect to which Bear, Stearns & Co. Inc. is
the underwriter, or the manager or co-manager of an underwriting syndicate.
The underwriter exemption sets forth the following general conditions
which must be satisfied before a transaction involving the acquisition, sale and
holding of the certificates or a transaction in connection with the servicing,
operation and management of the trust fund may be eligible for exemptive relief
thereunder:
o The acquisition of the certificates by a Plan is on terms
(including the price for the certificates) that are at least
as favorable to the investing Plan as they would be in an
arm's-length transaction with an unrelated party.
o The rights and interests evidenced by the certificates
acquired by the Plan are not subordinated to the rights and
interests evidenced by other certificates of the same trust
fund, other than in the case of a "designated transaction" (as
defined below).
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o The certificates acquired by the Plan have received a rating
at the time of such acquisition that is in one of the three
(or in the case of a designated transaction, four) highest
generic rating categories from any of Fitch, Inc., Moody's
Investors Service, Inc. and Standard & Poor's.
o The trustee is not an affiliate of the underwriters, the
depositor, the servicer, any borrower whose obligations under
one or more mortgage loans constitute more than 5% of the
aggregate unamortized principal balance of the assets in the
trust, the counterparty in a permitted notional principal
transaction, or any of their respective affiliates (together
with the trustee, the "restricted group").
o The sum of all payments made to and retained by the
underwriters in connection with the distribution of the
certificates represents not more than reasonable compensation
for underwriting or placing such certificates; the sum of all
payments made to and retained by the depositor pursuant to the
sale of the mortgage loans to the trust represents not more
than the fair market value of such mortgage loans; and the sum
of all payments made to and retained by the servicers
represent not more than reasonable compensation for the
servicers' services under the pooling and servicing agreements
and reimbursement of the servicers' reasonable expenses in
connection therewith.
o The Plan investing in the certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of
1933.
For purposes of the underwriter exemption, a "designated transaction"
means, for certificates issued on or after August 23, 2000, a transaction in
which the assets underlying the certificates consist of single-family
residential, multi-family residential, home equity, manufactured housing and/or
commercial mortgage obligations that are fully secured by single-family
residential, multi-family residential or commercial real property or leasehold
interests in the foregoing.
Moreover, the underwriter exemption provides relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when a
fiduciary causes a Plan to acquire certificates in a trust containing
receivables on which such person (or its affiliate) is an obligor; provided,
that among other requirements:
o the person (or its affiliate) is not an obligor with respect
to more than 5% of the fair market value of the obligations or
receivables contained in the trust;
o the Plan is not a plan with respect to which any member of the
restricted group is the "plan sponsor" (as defined in Section
3(16)(B) of ERISA);
o in the case of an acquisition in connection with the initial
issuance of certificates, at least 50% of each class of
certificates in which Plans have invested is acquired by
persons independent of the restricted group and at least 50%
of the aggregate interest in the trust fund is acquired by
persons independent of the restricted group;
o a Plan's investment in certificates of any class does not
exceed 25% of all of the certificates of that class
outstanding at the time of the acquisition; and
o immediately after the acquisition, no more than 25% of the
assets of any Plan with respect to which such person has
discretionary authority or renders investment advice are
invested in certificates representing an interest in one or
more trusts containing assets sold or serviced by the same
entity.
101
The underwriter exemptions as amended by Prohibited Transaction
Exemption 97-34, 62 Fed. Reg. 39021 (1997), provides exemptive relief to certain
mortgage-backed and asset-backed securities transactions that utilize
pre-funding accounts and that otherwise satisfy the requirements of the
underwriter exemption. Mortgage loans or other secured receivables supporting
payments to certificateholders, and having a value equal to no more than 25% of
the total principal amount of the certificates being offered by the trust, may
be transferred to the trust within a 90-day or three-month funding period
following the closing date of being required to be either identified or
transferred on or before the closing date. The relief is available when the
following conditions are met:
o The funding limit (i.e., ratio of the amount allocated to the
pre-funding account to the total principal amount of the
certificates being offered) must not exceed 25%.
o All the additional obligations transferred after the closing
date must meet the same terms and conditions for eligibility
as the original obligations used to create the trust, which
terms and conditions have been approved by a rating agency;
provided, that the terms and conditions for determining the
eligibility of an obligation may be changed if such changes
receive prior approval either by a majority vote of the
outstanding certificateholders or by a rating agency.
o The transfer of additional obligations to the trust during the
funding period must not result in the certificates to be
covered by the underwriter exemption receiving a lower credit
rating from a rating agency upon termination of the funding
period than the rating that was obtained at the time of the
initial issuance of the certificates by the trust.
o Solely as a result of the use of pre-funding, the weighted
average annual percentage interest rate for all of the
obligations in the trust at the end of the funding period must
not be more than 100 basis points lower than the average
interest rate for the obligations transferred to the trust on
the closing date.
o In order to insure that the characteristics of the additional
obligations are substantially similar to the original
obligations which were transferred to the trust fund:
(i) the characteristics of the additional obligations
must be monitored by an insurer or other credit
support provider that 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 each rating agency rating the
certificates, the related underwriter and the related
trustee) stating whether or not the characteristics
of the additional obligations conform to the
characteristics described in the related prospectus
or prospectus supplement and/or pooling and servicing
agreement. In preparing the letter, the independent
accountant must use the same type of procedures as
were applicable to the obligations transferred to the
trust as of the closing date.
o The period of pre-funding must end no later than three months
or 90 days after the closing date or earlier in certain
circumstances if the pre-funding account falls below the
minimum level specified in the pooling and servicing agreement
or an event of default occurs.
o Amounts transferred to any pre-funding account and/or
capitalized interest account used in connection with the
pre-funding may be invested only in certain permitted
investments.
102
o The related prospectus or prospectus supplement must describe:
(i) any pre-funding account and/or capitalized interest
account used in connection with a pre-funding
account,
(ii) the duration of the period of pre-funding,
(iii) the percentage and/or dollar amount of the funding
limit for the trust, and
(iv) that the amounts remaining in the pre-funding account
at the end of the funding period will be remitted to
certificateholders as repayments of principal.
o The related pooling and servicing agreement must describe the
permitted investments for the pre-funding account and/or
capitalized interest account and, if not disclosed in the
related prospectus or prospectus supplement, the terms and
conditions for eligibility of additional obligations.
On November 13, 2000, the DOL published in the Federal Register an
amendment (Prohibited Transaction Exemption 2000-58) to the underwriter
exemption (65 Fed. Reg. 67765 (2000)) that, effective as of August 23, 2000,
generally permits Plans to purchase securities, including subordinated
securities, rated in any of the four highest ratings categories (provided that
all other requirements of the underwriter exemption are met). The description
above reflects this amendment.
In general, neither PTCE 83-1, which exempts certain transactions
involving Plan investments in mortgage trusts, nor the underwriter exemption
applies to a trust which contains unsecured obligations. However, PTE 2000-58
provides that, for purposes of the underwriter exemption, residential and home
equity loan receivables issued in designated transactions may be less than fully
secured if
o the rights and interests evidenced by the certificates issued
in the designated transaction are not subordinated to the
rights and interests evidenced by other securities of the same
trust fund,
o the certificates have received a rating at the time of
acquisition that is in one of the two highest generic rating
categories from a rating agency, and
o the receivables are secured by collateral whose fair market
value on the closing date of the designated transaction is at
least 80% of the sum of the outstanding principal balance due
under the receivable and the outstanding principal balance of
any other receivable of higher priority which is secured by
the same collateral.
Any Plan fiduciary that proposes to cause a Plan to purchase securities
should consult with counsel concerning the impact of ERISA and the Code, the
applicability of PTCE 83-1, the underwriter exemption, or any other exemption
and the potential consequences in their specific circumstances, prior to making
an investment. Moreover, each Plan fiduciary should determine whether, under the
general fiduciary standards of investment prudence and diversification, an
investment in the securities is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
103
Legal Matters
The legality of the securities of each series, including the material
federal income tax consequences with respect to the securities, will be passed
upon for the depositor by Brown & Wood LLP, New York, New York or other counsel
designated in the prospectus supplement.
Financial Information
A new trust fund will be formed for each series of securities. No trust
fund will engage in any business activities or have any assets or obligations
prior to the issuance of the related series of securities. Accordingly, no
financial statements with respect to any trust fund will be included in this
prospectus or in the related prospectus supplement.
Available Information
The depositor has filed with the SEC a registration statement under the
Securities Act of 1933, as amended, with respect to the securities. This
prospectus, which forms a part of the registration statement, and the prospectus
supplement relating to each series of securities contain summaries of the
material terms of the documents referred to herein and therein, but do not
contain all of the information set forth in the registration statement pursuant
to the Rules and Regulations of the SEC. For further information, reference is
made to the registration statement and its exhibits. The registration statement
and exhibits can be inspected and copied at prescribed rates at the public
reference facilities maintained by the SEC at its Public Reference Section, 450
Fifth Street, N.W., Washington, D.C. 20549, and at its Regional Offices located
as follows: Midwest Regional Office, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511; and Northeast Regional Office, 7 World Trade
Center, Suite 1300, New York, New York 10048. In addition, the SEC maintains a
Web site at http://www.sec.gov containing reports, proxy and information
statements and other information regarding registrants, including the depositor,
that file electronically with the SEC.
Incorporation of Certain Information by Reference
This prospectus incorporates by reference all documents and reports
filed by the depositor, Bear Stearns Asset Backed Securities, Inc., with respect
to a trust fund pursuant to Section 13(a), 14 or 15(d) of the Securities
Exchange Act of 1934, as amended, prior to the termination of the offering of
the related securities. Upon request by any person to whom this prospectus is
delivered in connection with the offering of one or more classes securities, the
depositor will provide or cause to be provided without charge a copy of any of
the documents and/or reports incorporated herein by reference, in each case to
the extent the documents or reports relate to those classes of securities, other
than the exhibits to the documents (unless the exhibits are specifically
incorporated by reference in such documents). Requests to the depositor should
be directed in writing to: Bear Stearns Asset Backed Securities, Inc., 245 Park
Avenue, New York, New York 10167, telephone number (212) 272-4095. The depositor
has determined that its financial statements are not material to the offering of
any securities.
Investors may read and copy the documents and/or reports incorporated
herein by reference at the Public Reference Room of the Securities and Exchange
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Investors may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. In addition, the SEC maintains a website at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding issuers, including each trust fund, that file
electronically with the SEC.
104
Ratings
It is a condition to the issuance of the securities of each series
offered by this prospectus and the accompanying prospectus supplement that they
shall have been rated in one of the four highest rating categories by the
nationally recognized statistical rating agency or agencies specified in the
prospectus supplement.
Each such rating will be based on, among other things, the adequacy of
the value of the trust fund assets and any credit enhancement with respect to
the related class and will reflect the rating agency's assessment solely of the
likelihood that the related holders will receive payments to which they are
entitled. No rating will constitute an assessment of the likelihood that
principal prepayments on the related loans will be made, the degree to which the
rate of prepayments might differ from that originally anticipated or the
likelihood of early optional termination of the securities. A rating should not
be deemed a recommendation to purchase, hold or sell securities, inasmuch as it
does not address market price or suitability for a particular investor. A rating
will not address the possibility that prepayment at higher or lower rates than
anticipated by an investor may cause such investor to experience a lower than
anticipated yield or that an investor purchasing a security at a significant
premium might fail to recoup its initial investment under certain prepayment
scenarios.
There is also no assurance that any rating will remain in effect for
any given period of time or that it may not be lowered or withdrawn entirely by
the applicable rating agency in the future if in its judgment circumstances so
warrant. In addition to being lowered or withdrawn due to any erosion in the
adequacy of the value of trust fund assets or any credit enhancement with
respect to a series, a rating might also be lowered or withdrawn because of,
among other reasons, an adverse change in the financial or other condition of a
credit enhancement provider or a change in the rating of the credit enhancement
provider's long-term debt.
The amount, type and nature of any credit enhancement established with
respect to a series of securities will be determined on the basis of criteria
established by each rating agency named in the related prospectus supplement.
These criteria are sometimes based upon an actuarial analysis of the behavior of
mortgage loans in a larger group. Such analysis is often the basis upon which
each rating agency determines the amount of credit enhancement required with
respect to each class of securities. There can be no assurance that the
historical data supporting any such actuarial analysis will accurately reflect
future experience nor any assurance that the data derived from a large pool of
mortgage loans will accurately predict the delinquency, foreclosure or loss
experience of any particular pool of loans. No assurance can be given that
values of any properties have remained or will remain at their levels on the
respective dates of origination of the related loans. If residential real estate
markets should experience an overall decline in property values such that the
principal balances of the loans in a particular trust fund and any secondary
financing on the related properties become equal to or greater than the value of
those properties, the rates of delinquencies, foreclosures and losses could be
higher than those now generally experienced in the mortgage lending industry. In
additional, adverse economic conditions (which may or may not affect real
property values) may affect the timely payment by borrowers of scheduled
payments of principal of and interest on the loans and, accordingly, the rates
of delinquencies, foreclosures and losses with respect to any trust fund. To the
extent that losses are not covered by credit enhancement, losses will be borne,
at least in part, by the holders of one or more classes of the securities of the
related series.
Legal Investment Considerations
Unless otherwise specified in the related prospectus supplement, the
securities will not constitute "mortgage-related securities" within the meaning
of the Secondary Market Mortgage Credit Enhancement Act of 1984, as amended.
Accordingly, investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether and to
what extent the securities constitute legal investments for them.
105
Plan of Distribution
The depositor may offer each series of securities through Bear, Stearns
& Co. Inc. (BS&Co.) or one or more other firms that may be designated at the
time of the related offering. The participation of BS&Co. in any offering will
comply with Schedule E to the By-Laws of the National Association of securities
Dealers, Inc. The prospectus supplement relating to each series of securities
will set forth the specific terms of the offering of the series and of each
class within the series, the names of the underwriters, the purchase price of
the securities, the proceeds to the depositor from the sale, any securities
exchange on which the securities may be listed, and, if applicable, the initial
public offering prices, the discounts and commissions to the underwriters and
any discounts and concessions allowed or reallowed to dealers. The place and
time of delivery of each series of securities will also be set forth in the
related prospectus supplement. BS&Co. is an affiliate of the depositor.
Glossary of Terms
Agency Securities. Mortgage-backed securities issued or guaranteed by
Ginnie Mae, Fannie Mae or Freddie Mac.
Asset Value. Unless otherwise specified in the related prospectus
supplement with respect to the primary assets in the trust fund, the product of
the Asset Value percentage set forth in the related indenture multiplied by the
lesser of
o the stream of remaining regularly scheduled payments in the
primary assets net of certain amounts payable as expenses,
together with income earned on each regularly scheduled
payment received through the day preceding the next
distribution date at the Assumed Reinvestment Rate, if any,
discounted to present value at the highest interest rate on
the notes of the series over periods equal to the interval
between payments on the notes and
o the then outstanding principal balance of the primary assets.
Assumed Reinvestment Rate. With respect to a series of securities, the
highest rate permitted by the rating agencies named in the related prospectus
supplement or a rate insured by means of a surety bond, guaranteed investment
contract, reinvestment agreement or other arrangement satisfactory to the rating
agencies.
Home Equity Loans. Closed-end loans and/or revolving credit line loans
secured by mortgages, deeds of trust or other similar security instruments
creating senior or junior liens on one- to four-family residential properties or
mixed-use properties.
Home Improvement Contracts. Home Improvement installment sales
contracts and installment loan agreements which are either unsecured or secured
by mortgages, deeds of trust or similar security instruments creating generally
junior liens on one- to four-family residential properties or mixed-use
properties or secured by purchase money security interests in the related home
improvements.
Insurance Proceeds. Amounts received by the related servicer under any
title insurance policy, hazard insurance policy or other insurance policy
covering any primary asset in a trust fund, other than amounts to be applied to
the restoration or repair of the related property or released to the borrower
under the related agreement.
106
Liquidation Proceeds. Amounts received by the related servicer in
connection with the liquidation of the primary assets or related real property
in a trust fund, whether through foreclosure sale, repossession or otherwise,
including payments in connection with the primary assets received from the
borrower, other than amounts required to be paid or refunded to the borrower
under the applicable loan documents or pursuant to law, net of the related
liquidation expenses.
OID Regulations. Sections 1271 through 1275 of the Internal Revenue
Code of 1986, as amended, and the Treasury regulations issued thereunder on
February 2, 1994 and amended on June 11, 1996.
Manufactured Housing Contracts. Manufactured housing installment sales
contracts and installment loan agreements secured by senior or junior liens on
the related manufactured homes or secured by mortgages, deeds of trust or other
similar security instruments creating senior or junior liens on the real estate
on which the related manufactured homes are located.
Private Label Securities. Private mortgage-backed securities, other
than Agency Securities, backed or secured by underlying loans that may be
Residential Loans, Home Equity Loans, Home Improvement Contracts and/or
Manufactured Housing Contracts.
Residential Loans. Loans secured by mortgages, deeds of trust or other
similar security instruments creating senior or junior liens on one- to
four-family residential properties.
U.S. Person: Any of the following:
o a citizen or resident of the United States;
o a corporation or a partnership (including an entity treated as
a corporation or partnership for U.S. 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 are adopted
that provide otherwise);
o an estate whose income from sources outside the United States
is includible in gross income for federal income tax purposes
regardless of its connection with the conduct of a trade or
business within the United States; or
o a trust if a court within the United States is able to
exercise primary supervision of the administration of the
trust and one or more U.S. Persons have the authority to
control all substantial decisions of the trust.
In addition, certain trusts which would not qualify as U.S. Persons under the
above definition but which are eligible to and make an election to be treated as
U.S. Persons will also be treated as U.S. Persons.
107
$181,934,150
(Approximate)
Bear Stearns Asset Backed Securities Trust 2001-3
Issuer
Asset-Backed Certificates, Series 2001-3
EMC Mortgage Corporation
Seller and Master Servicer
Bear Stearns Asset Backed Securities, Inc.
Depositor
Bear, Stearns & Co. Inc.
Countrywide Securities Corporation
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 Series 2001-3 Asset-Backed Certificates in any
state where the offer is not permitted.
Dealers will deliver a prospectus supplement and prospectus when acting
as underwriters of the Series 2001-3 Asset-Backed Certificates and with respect
to their unsold allotments or subscriptions. In addition, all dealers selling
the Series 2001-3 Asset-Backed Certificates will be required to deliver a
prospectus supplement and prospectus until February 25, 2002.
November 27, 2001