PROSPECTUS SUPPLEMENT
(To Prospectus dated December 14, 2001)
$630,000,000
(Approximate)
CWABS, INC.
Depositor
[LOGO OF COUNTRYWIDE HOME LOANS]
Seller
Countrywide Home Loans Servicing LP
Master Servicer
Asset-Backed Certificates, Series 2002-S1
Distributions are payable on the 25th day of each month, beginning in May 2002
------------
- --------------------------------------------------------------------------------
Consider carefully the risk factors beginning on page S-7 in this prospectus
supplement and on page 4 in the prospectus.
The certificates represent obligations of the trust only and do not represent
an interest in or obligation of CWABS, Inc., Countrywide Home Loans, Inc. or
any of their affiliates (except to the extent of the Loss Coverage Obligation
of Countrywide Home Loans, Inc. described in this prospectus supplement).
This prospectus supplement may be used to offer and sell the Certificates only
if accompanied by the prospectus.
- --------------------------------------------------------------------------------
The following classes of certificates are being offered pursuant to this
prospectus supplement and the accompanying prospectus:
Original Certificate Pass-Through Price to Underwriting Proceeds to
Principal Balance(1) Rate Public Discount Depositor
-------------------- ------------ ---------- ------------ -----------
A-1........................... $324,750,000 (2)(3) 100.00000% 0.10417% 99.89583%
A-2A.......................... $ 70,000,000 4.670%(3) 99.99996% 0.31250% 99.68746%
A-2B.......................... $ 70,600,000 5.151%(3) 99.99753% 0.31250% 99.68503%
A-3........................... $ 49,900,000 5.877%(3)(4) 99.99812% 0.41667% 99.58145%
A-4........................... $ 23,900,000 6.150%(3)(4) 99.99541% 0.52083% 99.47458%
A-5........................... $ 56,200,000 5.960%(3)(4) 99.99688% 0.41667% 99.58021%
A-IO.......................... $630,000,000(5) (6) (7) (7) (7)
A-R........................... (8) 5.000%(3) (7) (7) (7)
M-1........................... $ 28,350,000 6.180%(3) 99.99804% 0.62500% 99.37304%
M-2........................... $ 6,300,000 6.695%(3) 99.99854% 0.83333% 99.16521%
(1) This amount is subject to a permitted variance in the aggregate of plus
or minus 10%.
(2) The pass-through rate for the Class A-1 Certificates will adjust monthly
and will be subject to an interest rate cap, in each case, as described
in this prospectus supplement under "Description of the Certificates --
Distributions -- Distributions of Interest."
(3) The pass-through rates for these classes will be subject to an interest
rate cap, as described in this prospectus supplement under "Description
of the Certificates -- Distributions -- Distributions of Interest."
(4) The pass-through rates for the Class A-3, Class A-4 and Class A-5
Certificates will increase to 6.377%, 6.650% and 6.460% per annum,
respectively, after the optional termination date.
(5) No principal will be paid on the Class A-IO Certificates. The Class A-IO
Certificates will have a notional amount equal to the aggregate stated
principal balance of the mortgage loans, as described under "Description
of the Certificates -- General."
(6) The Class A-IO Certificates will accrue interest at the variable rate
described in this prospectus supplement under "Description of the
Certificates -- Distributions -- Distributions of Interest."
(7) The Class A-IO and Class A-R Certificates will not be purchased by the
underwriters and are being transferred to the seller as partial
consideration for the sale of the mortgage loans. See "Method of
Distribution."
(8) The original certificate principal balance of the Class A-R
Certificates is expected to be $100.
The Certificates
o The certificates represent interests in a pool of fixed rate mortgage
loans that are secured by second liens on one- to four-family
residential properties, as described in this prospectus supplement.
o The Class M-1 and Class M-2 Certificates (which classes are sometimes
called "subordinate certificates") are subordinated to the Class A,
Class A-IO and Class A-R Certificates (which are sometimes called
"senior certificates"), as described in this prospectus supplement.
Subordination provides a form of credit enhancement for the senior
certificates.
Optional Termination
o The master servicer will, subject to certain conditions specified in the
pooling and servicing agreement, have the option to purchase the assets
of the trust fund on any distribution date on which the principal
balance of the mortgage loans and any related foreclosed real estate
owned by the trust fund as of such date has declined to or below 10% of
the aggregate principal balance as of the cut-off date of the mortgage
loans delivered to the trust fund on the closing date.
Neither the SEC nor any state securities commission has approved the
securities offered by this prospectus supplement or determined that this
prospectus supplement or the prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
Countrywide Securities Corporation
Credit Suisse First Boston
Deutsche Bank Securities
April 26, 2002
Table of Contents
Page
----
SUMMARY.............................................................S-1
Risk Factors........................................................S-7
The Mortgage Pool..................................................S-15
The Loan Insurer...................................................S-20
Loan Insurance Policy..............................................S-20
Servicing of the Mortgage Loans....................................S-23
Description of the Certificates....................................S-28
Yield, Prepayment and Maturity Considerations......................S-49
Use of Proceeds....................................................S-62
Material Federal Income Tax Consequences...........................S-62
Other Taxes........................................................S-65
ERISA Considerations...............................................S-66
Method of Distribution.............................................S-67
Legal Matters......................................................S-68
Ratings............................................................S-69
Index of Defined Terms.............................................S-70
Important Notice About Information in This
Prospectus and Accompanying Prospectus Supplement..................3
Risk Factors..........................................................4
The Trust Fund.......................................................13
Use of Proceeds......................................................18
The Depositor........................................................18
Loan Program.........................................................18
Description of the Securities........................................20
Credit Enhancement...................................................32
Yield and Prepayment Considerations..................................37
The Agreements.......................................................39
Certain Legal Aspects of the Loans...................................51
Material Federal Income Tax Consequences.............................62
State Tax Considerations.............................................79
ERISA Considerations.................................................79
Legal Investment.....................................................83
Method of Distribution...............................................84
Legal Matters........................................................84
Financial Information................................................84
Rating...............................................................85
Index to Defined Terms...............................................86
i
SUMMARY
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, read this entire document and the accompanying prospectus
carefully.
The Certificates
Asset-Backed Certificates, Series 2002-S1, represent undivided beneficial
ownership interests in a trust fund. The trust fund consists primarily of a pool
of fixed rate, conventional mortgage loans that are secured by closed-end second
lien mortgage loans on one- to four-family residential properties and certain
other property and assets described in this prospectus supplement.
See "Description of the Certificates -- General" in this prospectus supplement.
Depositor
CWABS, Inc., is a Delaware corporation and a limited purpose finance subsidiary
of Countrywide Credit Industries, Inc., a Delaware corporation.
See "The Depositor" in the prospectus.
Seller
Countrywide Home Loans, Inc.
See "Servicing of the Mortgage Loans -- Countrywide Home Loans" in this
prospectus supplement.
Master Servicer
Countrywide Home Loans Servicing LP.
See "Servicing of the Mortgage Loans -- The Master Servicer" in this prospectus
supplement.
Trustee
The Bank of New York, a New York banking corporation.
See "Description of the Certificates -- The Trustee" in this prospectus
supplement.
Co-Trustee
Wells Fargo Bank Minnesota, N.A., a national banking association.
See "Description of the Certificates -- Co-Trustee" in this prospectus
supplement.
Loan Insurer
United Guaranty Residential Insurance Company of North Carolina will provide a
second mortgage bulk insurance policy that provides coverage if a borrower
defaults on mortgage loans secured by a second mortgage as described in this
prospectus supplement.
Pooling and Servicing Agreement
FThe pooling and servicing agreement among the seller, the master servicer, the
depositor, the trustee and the co-trustee, under which the trust fund will be
formed.
Cut-off Date
For any mortgage loan, the later of April 1, 2002 and the origination date of
that mortgage loan. When used in this prospectus supplement with respect to any
mortgage loan, the phrase "the cut-off date" means the related cut-off date for
that mortgage loan.
Closing Date
On or about April 30, 2002.
The Mortgage Loans
The mortgage loans consist of fixed rate, conventional mortgage loans that may
or may not conform to Fannie Mae guidelines with respect to combined loan
amounts and that are secured by closed-end second lien mortgages on one- to
four-family properties.
See "The Mortgage Pool" in this prospectus supplement.
S-1
Description of the Certificates
General
The trust will issue the Class A-1, the Class A-2A, the Class A-2B, the Class
A-3, the Class A-4, the Class A-5, the Class A-IO, the Class A-R, the Class M-1
and the Class M-2 certificates, which are offered by this prospectus supplement.
The original certificate principal balances, pass-through rates and last
scheduled distribution dates for the Certificates are as follows:
Original
Certificate Last Scheduled
Principal Pass-Through Distribution
Class Balance(1) Rate Date(2)
- ------------------- ------------ ------------- --------------
Class A-1 ......... $324,750,000 (3) November 2016
Class A-2A ........ $ 70,000,000 4.670%(4) November 2016
Class A-2B ........ $ 70,600,000 5.151%(4) November 2016
Class A-3 ......... $ 49,900,000 5.877%(4)(5) November 2016
Class A-4 ......... $ 23,900,000 6.150%(4)(5) April 2031
Class A-5 ......... $ 56,200,000 5.960%(4)(5) November 2016
Class A-IO ........ $630,000,000(6) Variable April 2031
Class A-R ......... 000,000(7) 5.000% May 2002
Class M-1 ......... $ 28,350,000 6.180%(4) April 2031
Class M-2 ......... $ 6,300,000 6.695%(4) April 2031
(1) The original certificate principal balance of the Certificates will be
subject to a permitted variance in the aggregate of plus or minus 10%,
depending on the amount of mortgage loans actually delivered on the
closing date.
(2) Each date was determined as described under "Yield, Prepayment and
Maturity Considerations" in this prospectus supplement.
(3) The pass-through rate for the Class A-1 Certificates will adjust
monthly, and will be subject to an interest rate cap, as described in
this prospectus supplement under "Description of the Certificates --
Distributions -- Distributions of Interest."
(4) The pass-through rates for these classes of certificates will be
subject to an interest rate cap, in each case as described under
"Description of the Certificates--Distributions--Distributions of
Interest."
(5) The pass-through rates for the Class A-3, Class A-4 and Class A-5
Certificates will increase to 6.377%, 6.650% and 6.460% per annum,
respectively, after the optional termination date.
(6) No principal will be paid on the Class A-IO Certificates. The Class
A-IO Certificates will have a notional amount equal to the aggregate
stated principal balances of the mortgage loans, as described under
"Description of the Certificates -- General."
(7) The original certificate principal balance of the Class A-R
Certificates is expected to be $100.
Record Date
In the case of the Class A-1 Certificates, the business day immediately
preceding a distribution date, or if the Class A-1 Certificates are no longer
book-entry certificates, the last business day of the month preceding the month
of a distribution date. In the case of each class of Certificates other than the
Class A-1 Certificates, the last business day of the month preceding the month
of a distribution date.
Denominations
$20,000 and multiples of $1,000 in excess thereof, except that the Class A-R
Certificates will be issued as two certificates in the denominations specified
in the pooling and servicing agreement.
Registration of Certificates
The certificates (other than the Class A-R Certificates) will initially be
issued in book-entry form. Persons acquiring beneficial ownership interests in
the certificates (other than the Class A-R Certificates) may elect to hold their
beneficial interests through The Depository Trust Company, in the United States,
or Clearstream, Luxembourg or the Euroclear System, in Europe. The Class A-R
Certificates will be issued in fully registered certificated form. The Class A-R
Certificates will be subject to certain restrictions on transfer described
herein and as more fully provided for in the pooling and servicing agreement.
See "Description of Certificates -- Book-Entry Certificates" and "--
Restrictions on Transfer of the Class A-R Certificates" in this prospectus
supplement.
Pass-Through Rates
The pass-through rate for the Class A-1 Certificates is a variable rate that may
change from distribution date to distribution date. On any distribution date,
the pass-through rate per annum for the Class A-1 Certificates will be equal to
the lesser of:
o One-Month LIBOR plus 0.15%, and
S-2
o the net rate cap, calculated as described under "Description of the
Certificates -- Distributions -- Distributions of Interest" in this
prospectus supplement.
The pass-through rate for the Class A-2A Certificates will be equal to the
lesser of 4.670% per annum and the net rate cap.
The pass-through rate for the Class A-2B Certificates will be equal to the
lesser of 5.151% per annum and the net rate cap.
The pass-through rate for the Class A-3 Certificates will be equal to the lesser
of 5.877% per annum and the net rate cap. After the optional termination date,
the pass-through rate for the Class A-3 Certificates will increase to 6.377% per
annum, subject to the net rate cap.
The pass-through rate for the Class A-4 Certificates will be equal to the lesser
of 6.150% per annum and the net rate cap. After the optional termination date,
the pass-through rate for the Class A-4 Certificates will increase to 6.650%,
subject to the net rate cap.
The pass-through rate for the Class A-5 Certificates will be equal to the lesser
of 5.960% per annum and the net rate cap. After the optional termination date,
the pass-through rate for the Class A-5 Certificates will increase to 6.460% per
annum, subject to the net rate cap.
The pass-through rate for the Class M-1 Certificates will be equal to the lesser
of 6.180% per annum and the net rate cap.
The pass-through rate for the Class M-2 Certificates will be equal to the lesser
of 6.695% per annum and the net rate cap.
The pass-through rate for the Class A-IO Certificates is a variable rate that
may change from distribution date to distribution date.
The pass-through rate for the Class A-R Certificates will be equal to the lesser
of 5.000% per annum and the net rate cap.
In each case, the net rate cap will be calculated as described under
"Description of the Certificates -- Distributions -- Distributions of Interest"
in this prospectus supplement.
See "Description of the Certificates -- Distributions -- Distributions of
Interest" and "-- Calculation of One-Month LIBOR" in this prospectus supplement.
If on any distribution date, the pass-through rate for a class of certificates
(other than the Class A-IO Certificates) is based on the net rate cap, the
holder of the applicable certificates will be entitled to receive the resulting
shortfall from amounts otherwise distributable on the Class A-IO Certificates as
described herein.
On any distribution date, the pass-through rate for the Class A-IO Certificates
will be equal to the excess of:
o the weighted average adjusted net mortgage rate of the mortgage loans
(weighted on the basis of the stated principal balances thereof), over
o the weighted average pass-through rates of the other classes of
certificates (weighted on the basis of the class certificate principal
balances thereof) and, in the case of the Class A-1 Certificates,
adjusted to an effective rate for the related accrual period reflecting
the calculation of interest on the basis of a 360-day year consisting
of twelve 30-day months.
See "Description of the Certificates -- Distributions" in this prospectus
supplement.
Distribution Dates
The trustee will make distributions on the 25th day of each calendar month. If
the 25th day of a month is not a business day, then the trustee will make
distributions on the next business day. The first distribution date is scheduled
for May 28, 2002.
Interest Payments
On each distribution date, holders of the certificates will be entitled to
receive:
o the interest that has accrued on the 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.
S-3
The "accrual period":
o for the Class A-1 Certificates, will be the period from and including
the preceding distribution date (or from and including the closing
date, in the case of the first distribution date) to and including the
day prior to the current distribution date, and
o for each class of Certificates other than the Class A-1 Certificates,
will be the calendar month immediately preceding the calendar month in
which a distribution date occurs.
The trustee will calculate interest:
o on the Class A-1 Certificates based on a 360-day year and the actual
number of days elapsed during the related accrual period and
o on each Class of Certificates other than the Class A-1 Certificates
based on a 360-day year that consists of twelve 30-day months.
There are certain circumstances that could reduce the amount of interest paid to
you.
See "Description of the Certificates -- Distributions -- Distributions of
Interest" in this prospectus supplement.
Principal Payments
On each distribution date, certificateholders (other than Class A-IO
Certificateholders) 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 and recoveries on the mortgage loans,
o any payments made by the seller under its loss coverage obligation
described under "Description of the Certificates -- Seller Loss
Coverage Obligation" in this prospectus supplement, and
o any proceeds of the second mortgage bulk insurance policy.
Certificateholders should review the priority of payments described under
"Description of the Certificates -- Distributions" in this prospectus
supplement.
See "Description of the Certificates -- Distributions" in this prospectus
supplement.
Credit Enhancement
Credit enhancements provide limited protection to certain holders of
certificates against shortfalls in payments received on the mortgage loans. This
transaction employs the following forms of credit enhancement.
Subordination
The issuance of senior certificates and subordinate certificates by the trust is
designed to increase the likelihood that senior certificateholders will receive
regular payments of interest and principal. The Class A-1, Class A-2A, Class
A-2B, Class A-3, Class A-4, Class A-5, Class A-IO and Class A-R Certificates
will constitute the "senior certificates" and the Class M-1 and Class M-2
Certificates will constitute the "subordinate certificates."
The certificates that have been designated as senior certificates will have a
payment priority over the certificates that are designated as subordinate
certificates. Within the classes of subordinate certificates, the Class M-1
Certificates will have payment priority over the Class M-2 Certificates.
Subordination is designed to provide the holders of certificates having a higher
payment priority with protection against most 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, this loss
protection is accomplished by allocating realized losses among the subordinate
certificates, beginning with the subordinate certificates with the lowest
payment priority, before realized losses are allocated to the senior
certificates.
See "Description of the Certificates -- Distributions" in this prospectus
supplement.
Loan Insurance
United Guaranty Residential Insurance Company of North Carolina, a North
Carolina corporation, will issue a second mortgage bulk insurance policy that
will generally cover realized losses on the mortgage loans due to the failure by
the mortgagors to make scheduled payments on the mortgage loans up to an
aggregate amount equal to approximately $76,215,115. Subject to certain
limitations, the second mortgage bulk insurance policy will be available to
cover losses from defaults in payment on all mortgage loans that are not subject
to a policy exclusion.
S-4
See "The Mortgage Pool -- Loan Insurance Policy" in this prospectus supplement.
Loss Coverage Provided by the Seller
The seller will make payments to the trust fund to the extent of any losses
realized on the mortgage loans after application of liquidation proceeds and any
proceeds of the second mortgage bulk insurance policy. The loss coverage
provided by the seller will initially be equal, in the aggregate, to
approximately 2.30% of the aggregate original certificate principal balances of
the certificates. This amount may decrease in accordance with the terms of the
pooling and servicing agreement.
See "Description of the Certificates -- Seller Loss Coverage Obligation" in this
prospectus supplement.
Advances
The master servicer will make cash advances with respect to delinquent payments
of principal and interest on the mortgage 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.
See "Servicing of the Mortgage Loans" in this prospectus supplement.
Additional Required Interest Advances
In addition to the advances described above, but without duplication of such
advances, the master servicer will make certain other cash advances with respect
to delinquent payments of interest on the mortgage loans until the coverage
amount under the second mortgage bulk insurance policy has been exhausted and
the amount of the seller's coverage of realized losses has been reduced to zero,
to the extent described under "Servicing of the Mortgage Loans -- Additional
Required Interest Advances" in this prospectus supplement.
Optional Termination
Subject to certain conditions specified in the pooling and servicing agreement,
the master servicer may purchase all of the remaining assets of the trust fund
after the aggregate principal balance of the mortgage loans and any foreclosed
real estate owned by the trust fund declines to or below 10% of the aggregate
principal balance as of the cut-off date of the mortgage loans delivered to the
trust fund on the closing date. Such a purchase by the master servicer will
result in the early retirement of the certificates.
See "Description of the Certificates -- Optional Termination" in this prospectus
supplement.
Material 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 (other than the Class A-R Certificates) will represent beneficial
ownership of REMIC "regular interests" in the upper tier REMIC identified in the
pooling and servicing agreement.
The Class A-R Certificates will represent the beneficial ownership of the sole
class of "residual interest" in each REMIC. Some classes of certificates may be
issued with original issue discount for federal income tax purposes.
The certificates (other than the Class A-IO Certificates) will also represent
the beneficial interest in the right to receive payments from the carryover
reserve fund pursuant to the pooling and servicing agreement.
See "Material Federal Income Tax Consequences" in this prospectus supplement and
in the prospectus.
Legal Investment Considerations
None of the classes of certificates will be "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984.
See "Legal Investment" in the prospectus.
ERISA Considerations
The certificates (other than the Class A-IO and the Class A-R Certificates) may
be purchased by a pension or other benefit plan subject to the Employee
Retirement Income Security Act of 1974 or Section 4975 of the Internal Revenue
Code of 1986, or by an entity investing the assets of a benefit plan, so long as
certain conditions are met. A fiduciary of a benefit plan must determine that
the purchase of a certificate is consistent with its fiduciary duties under
applicable law and does not result in a nonexempt prohibited transaction under
applicable law.
S-5
See "ERISA Considerations" in this prospectus supplement and in the prospectus.
Certificate 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. and
Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
Moody's
Class Rating S&P Rating
----- ------- ----------
A-1 Aaa AAA
A-2A Aaa AAA
A-2B Aaa AAA
A-3 Aaa AAA
A-4 Aaa AAA
A-5 Aaa AAA
A-IO Aaa AAA
A-R Aaa AAA
M-1 Aa2 AA
M-2 A2 A
A rating is not a recommendation to buy, sell or hold securities. These ratings
may be lowered or withdrawn at any time by any of the rating agencies.
See "Ratings" in this prospectus supplement and "Risk Factors -- Rating of the
Securities" and "Rating" in the prospectus.
Some 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 we predict in our
forward-looking statements.
S-6
Risk Factors
The following information, which you should carefully consider, identifies
certain significant sources of risk associated with an investment in the
certificates. You should also carefully consider the information set forth under
"Risk Factors" in the prospectus.
Junior Lien Priority Could Result
in Payment Delay or Loss......... The mortgage loans are secured by mortgages
that create second liens on residential
properties. The master servicer may under
certain circumstances consent to a new
mortgage lien on the mortgaged property
having priority over the mortgage loans in
the trust fund. Mortgage loans secured by
junior liens are entitled to proceeds that
remain from the sale of the related
mortgaged property after the related senior
mortgage loan and prior statutory liens have
been satisfied. If the remaining proceeds
are insufficient to satisfy the mortgage
loans secured by second mortgages and prior
liens in the aggregate and the credit
enhancement provided by the second mortgage
bulk insurance policy and by the seller's
loss coverage obligation has been exhausted
or is otherwise not available to cover the
losses, you will bear
o the risk of delay in payments while
any deficiency judgment against the
borrower is sought; and
o the risk of loss if the deficiency
judgment is not pursued, cannot be
obtained or is not realized upon
for any other reason.
The Subordinate Certificates
have a Greater Risk of Loss
than Senior Certificates and
Subordination may not be
Sufficient to Protect Senior
Certificates from Losses......... When certain classes of certificates provide
credit enhancement for other classes of
certificates this is sometimes referred to
as "subordination." The subordination
feature is intended to enhance the
likelihood that senior certificateholders
will receive regular payments of interest
and principal. For purposes of this
prospectus supplement, "subordinate classes"
means:
o with respect to the senior
certificates, the Class M
Certificates, and
o with respect to the Class M-1
Certificates, the Class M-2
Certificates.
Credit enhancement in the form of
subordination will be provided for the
certificates, first, by the right of the
holders of the certificates to receive
certain payments of principal prior to the
subordinate classes and, second, by the
allocation of realized losses to the
subordinate classes. This form of credit
enhancement is provided by using collections
on the mortgage loans otherwise payable to
the holders of the subordinate classes to
pay amounts due on the more senior classes.
After the credit enhancement provided by the
second mortgage bulk insurance policy and by
the seller's loss coverage obligation has
been exhausted or is otherwise not available
to cover the losses, collections otherwise
payable to the subordinate classes comprise
the sole source of funds from which such
credit enhancement is provided to the
certificates. Realized losses are allocated
to the subordinate certificates, beginning
with the subordinate certificates with the
lowest payment priority, until the principal
balance of that subordinate class has been
reduced to zero. This means that, if credit
enhancement provided by the second mortgage
bulk insurance policy and by the seller's
loss coverage obligation has been exhausted
or is otherwise not available to cover the
losses, realized losses on the mortgage
loans will first be allocated to the Class
M-2 Certificates until the principal balance
of the Class M-2 Certificates has been
reduced to zero. Subsequent realized losses
will be allocated to the Class M-1
Certificates, until the principal balance of
that class has been reduced to zero.
Accordingly, if the aggregate principal
balance of the subordinate 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-7
There will be no overcollateralization built
up to provide protection for the subordinate
certificates. The only credit enhancement
for the Class M-2 Certificates will be the
coverage of the second mortgage bulk
insurance policy and the obligation of the
seller to provide limited coverage for
losses on the mortgage loans. Once the
principal balance of a certificate is
reduced by the amount of a loss on the
mortgage loans, no amounts will be available
thereafter to reimburse the holder of such
certificates for the amount of such
reduction.
The seller's loss coverage obligation will
be reduced by payments in respect of
realized losses as well as accrued and
unpaid interest on defaulted mortgage loans
at the time of liquidation. As a result,
both the length of time required for
liquidation and the interest rate on a
defaulted mortgage loan may affect the
amount of the seller's loss coverage
obligation available to cover realized
losses.
You should fully consider the risks of
investing in a subordinate certificate,
including the risk that you may not fully
recover your initial investment as a result
of realized losses. In addition, investors
in senior certificates should consider the
risk that, if the credit enhancement
provided by the second mortgage bulk
insurance policy and by the seller's loss
coverage obligation has been exhausted or is
otherwise not available to cover the losses,
the subordination provided by the
subordinate classes may not be sufficient to
protect the senior certificates from losses.
See "Description of the Certificates" in
this prospectus supplement.
Ratings on the Certificates Are
Dependent on the
Creditworthiness of United
Guaranty Residential Insurance
Company of North Carolina and
the Seller....................... The ratings assigned to the certificates by
the rating agencies will be based in part on
the rating assigned to United Guaranty
Residential Insurance Company of North
Carolina, the second mortgage bulk insurance
policy provider with respect to mortgage
loans. The ratings assigned to the
certificates by the rating agencies also
will be based in part on ratings assigned to
the seller, which will provide limited loss
coverage to the trust fund. The seller's
loss coverage obligation will constitute an
unsecured general obligation of the seller.
Any reduction in the rating assigned to the
second mortgage bulk insurance policy
provider by S&P or the ratings assigned to
the seller by either rating agency could
result in the reduction of the ratings
assigned to the certificates. This reduction
in ratings would likely adversely affect the
liquidity and market value of the
certificates.
S-8
The rating by each of the rating agencies of
the certificates is not a recommendation to
purchase, hold or sell the certificates
because that rating does not address the
market price of the certificates or
suitability for a particular investor.
The rating agencies may suspend, lower or
withdraw the ratings on the certificates at
anytime. Any reduction in, or suspension or
withdrawal of, the ratings assigned to the
certificates would probably reduce the
market value of the certificates and may
affect your ability to sell them.
Balloon Loans May Have High
Rates of Default................. Approximately 59.19% of all loans expected
to be included in the trust fund require the
related borrower to make monthly payments of
principal that are less than sufficient to
amortize such mortgage loans by their
maturity. These 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 such
balloon loan. The ability of a borrower to
make such a payment may depend on his or her
ability to obtain refinancing of the balance
due on the mortgage loan. In addition, an
increase in prevailing market interest rates
over the loan rate on the mortgage loan at
origination may reduce the borrower's
ability to obtain refinancing and to pay the
principal balance of the mortgage loan at
its maturity.
Cash Flow Considerations and
Risks 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 a liquidation.
These delays could continue for several
years. Furthermore, an action to obtain a
deficiency judgment is regulated by statutes
and rules, and the amount or availability 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
o the protection provided by the
second mortgage bulk insurance
policy on the mortgage loans, the
seller's loss coverage obligation
and the subordination of certain
classes are insufficient to cover
any shortfall,
you could lose all or a portion of the money
you paid for the certificates.
S-9
Yield and Reinvestment Could
be Adversely Affected by
Unpredictability
of Prepayments................... No one can accurately predict the level of
prepayments that the trust fund will
experience. The trust fund'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,
o the borrowers' equity in their
homes and the amount of the related
first lien,
o the fact that borrowers generally
do not view second mortgage loans
as permanent financing,
o the small balances, relative to
those of the first mortgages may
reduce the perceived benefit of
refinancing,
o the applicability of prepayment
penalties, and
o homeowner mobility.
In addition, 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.
See "The Mortgage Pool" and "Yield,
Prepayment and Maturity Considerations" in
this prospectus supplement and "Certain
Legal Aspects of the Loans -- Due-on-Sale
Clauses" in the prospectus for a description
of certain provisions of the mortgage loans
that may affect the prepayment experience on
the 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 generally, if you purchase your
certificates at a discount and
principal is repaid on the mortgage
loans slower than you anticipate,
then your yield may be lower than
you anticipate,
o generally, if you purchase the
Class A-IO Certificates or if you
purchase your certificates at a
premium, and principal is repaid on
the mortgage loans faster than you
anticipate, then your yield may be
lower than you anticipate, and, in
the case of the Class A-IO
Certificates, you may not fully
recoup your initial investment,
o if you purchase the Class A-1
Certificates or the Class A-IO
Certificates, your yield will also
be sensitive to:
S-10
(1) the level of one-month LIBOR,
and
(2) the timing of adjustment of
the pass-through rate on the
Class A-1 Certificates as it
relates to the interest rates
on the mortgage loans, and
(3) other limitations on the
pass-through rate of such
certificate (other than the
Class A-IO Certificates), as
described further in this
prospectus supplement;
in addition, to the extent
that the shortfall by which a
certificateholder's interest
payment is reduced by
operation of the net rate cap
increases as a result of the
absence of correlation
between the mortgage rates on
the mortgage loans and the
Class A-1 Certificate Rate,
the yields of each other
class of Certificates will
also be sensitive to the
foregoing factors,
o the yield on your
certificates will also be
sensitive to limitations on
the pass-through rate of such
certificates (other than the
Class A-IO Certificates)
resulting from the net rate
cap, as described further in
this prospectus supplement,
and
o you bear the reinvestment
risks resulting from a
faster or slower rate of
principal payments than you
expected.
See "Yield, Prepayment and Maturity
Considerations" in this prospectus
supplement.
Distribution to and Rights of
Investors Could be Adversely
Affected by the Bankruptcy or
Insolvency of Certain Parties.... Countrywide Home Loans will treat its
transfer of the mortgage loans to the
depositor as a sale of the mortgage loans.
However, if Countrywide Home Loans becomes
bankrupt, the trustee in bankruptcy of
Countrywide Home Loans may argue that the
mortgage loans were not sold but were only
pledged to secure a loan to Countrywide Home
Loans. If that argument is made, you could
experience delays or reduction 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
losses 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 trustee
from appointing a successor master servicer.
Any related delays in servicing could result
in increased delinquencies or losses on the
mortgage loans.
Geographic Concentration of
Mortgaged Properties in
California Increases the Risk
That Certificate Yields
Could be Impaired................ No more than approximately 32.08% of the
mortgage loans to be included in the trust
fund will be secured by mortgaged properties
that are located in the State of California.
Property in California 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:
S-11
o economic conditions in California
(which may or may not affect real
property values) may affect the
ability of borrowers to repay their
loans,
o declines in the California
residential real estate market may
reduce the values of properties
located in California, which would
result in an increase in the
loan-to-value ratios, and
o any increase in the market value of
properties located in California
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.
Violations of Consumer
Protection Laws May Adversely
Affect You....................... Applicable state laws generally regulate
interest rates and other charges and require
specific disclosures. In addition, other
state laws, public policy and general
principles of equity relating to the
protection of consumers, unfair and
deceptive practices and debt collection
practices may apply to the origination,
servicing and collection of the mortgage
loans.
The mortgage loans are also subject to
federal laws, including:
o the federal Truth in Lending Act
and Regulation Z promulgated under
the Truth in Lending Act, which
require particular disclosures to
the borrowers regarding the terms
of the mortgage loans;
o the Equal Credit Opportunity Act
and Regulation B promulgated under
the Equal Credit Opportunity Act,
which 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 the Americans with Disabilities
Act, which, among other things,
prohibits discrimination on the
basis of disability in the full and
equal enjoyment of the goods,
services, facilities, privileges,
advantages or accommodations of any
place of public accommodation; and
o the Fair Credit Reporting Act,
which regulates the use and
reporting of information related to
the borrower's credit experience.
Depending on the provisions of the
applicable law and the specific facts and
circumstances involved, violations of these
laws, policies and principles may limit the
ability of the master servicer to collect
all or part of the principal of or interest
on the mortgage loans, may entitle the
borrower to a refund of amounts previously
paid and, in addition, could subject the
trust fund, as owner of the mortgage loans,
to damages and administrative enforcement.
S-12
You May Have Difficulty
Reselling Certificates........... 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; these
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.
Risk Regarding Mortgage
Rates............................ The pass-through rate on the Class A-1
Certificates adjusts monthly and is
generally based on one-month LIBOR. The
mortgage rates on the mortgage loans will
not adjust and therefore there is an absence
of correlation between the mortgage rates on
the mortgage loans and the pass-through rate
on the Class A-1 Certificates. The absence
of a correlation between the mortgage rates
on the mortgage loans and the pass-through
rate on the Class A-1 Certificates may
reduce the interest payable on the Class A-1
Certificates because of the imposition of a
pass-through rate cap called the "net rate
cap."
In addition, prepayments of mortgage loans
with relatively higher mortgage rates may
reduce the net rate cap and consequently
reduce the pass-through rate on some or all
of the Certificates. It is intended that the
amount by which a certificateholder's
interest payment has been reduced by
operation of the net rate cap will be paid
from amounts otherwise distributed on the
Class A-IO certificates as described herein.
However, we cannot assure you that such
funds will be available, or sufficient, to
make any such payments. In addition, since
such amounts will be distributed to each
class of Certificates (other than the Class
A-IO Certificates) on a pro rata basis among
all such classes on the basis of the related
shortfall, any increase in such shortfall
that results from the absence of correlation
between the mortgage rates on the mortgage
loans and the Class A-1 Certificate Rate
will be borne pro rata by all classes of
Certificates.
If the pass-through rates on all of the
Certificates (other than the Class A-IO
Certificates) were to be limited by the net
rate cap, the pass-through rate on the Class
A-IO Certificates would be zero.
Recent Events.................... On September 11, 2001 certain tragic events
occurred at the World Trade Center in New
York City and at the Pentagon in Arlington,
Virginia that have caused significant
uncertainty with respect to global markets.
The short term and long term impact of these
events is uncertain, but could have a
material effect on general economic
conditions, consumer confidence and market
liquidity. No assurance can be given as to
the effect of these events on the rate of
delinquencies and losses on the mortgage
loans and servicing decisions with respect
thereto. Any adverse impact on the mortgage
loans or servicing as a result of these
events would be borne by the holders of the
certificates.
S-13
In response to the events of September 11,
2001, the United States commenced military
operations in Afghanistan on October 7,
2001. The Soldiers' and Sailors Civil Relief
Act of 1940 (referred to herein as the
Relief Act) provides relief to borrowers who
enter active military service and to
borrowers in reserve status who are called
to active duty after the origination of
their mortgage loan. The Relief Act provides
generally that these borrowers may not be
charged interest on a mortgage loan in
excess of 6% per annum during the period of
the borrower's active duty. These shortfalls
are not required to be paid by the borrower
at any future time, will not be advanced by
the master servicer and, to the extent
excess interest is insufficient, will reduce
the amount of interest funds available for
distribution to the certificates in the
order and priority described under the
heading "Description of the Certificates --
Distributions -- Distributions of Interest."
In addition, the Relief Act imposes
limitations that would impair the ability of
the master servicer to foreclose on an
affected loan during the borrower's period
of active duty status, and, under some
circumstances during an additional period
thereafter.
S-14
The Mortgage Pool
General
The following discussion applies to the origination, sales and
servicing practices of Countrywide Home Loans, Inc. in effect at the time of the
origination of the Mortgage Loans.
Set forth below is certain statistical information concerning the pool
of fixed rate, conventional mortgage loans that are secured by closed-end second
liens on one- to four-family residential properties (the "Mortgage Loans") that
will be included in the trust (the "Trust Fund") at the Closing Date (such pool,
the "Mortgage Pool"). Such statistical information is based on the respective
Stated Principal Balances of the Mortgage Loans included in the Mortgage Pool as
of the later of (x) April 1, 2002 and (y) the date of origination of each such
Mortgage Loan (such date, the "Cut-off Date"). The aggregate of the Stated
Principal Balances of the Mortgage Loans in the Mortgage Pool as of the Cut-off
Date is referred to as the "Cut-off Date Principal Balance." The Cut-off Date
Principal Balance is $629,998,996. The Mortgage Pool will consist of 19,287
Mortgage Loans. When used in this prospectus supplement with respect to any
Mortgage Loan, the phrase "the Cut-off Date" means the related Cut-off Date for
that Mortgage Loan.
All of the Mortgage Loans to be included in the Trust Fund will be
evidenced by promissory notes (the "Mortgage Notes"). The Mortgage Notes will be
secured by second lien deeds of trust, security deeds or mortgages on one- to
four-family residential properties (the "Mortgaged Properties") which are
located in 50 states and the District of Columbia.
Except for balloon loans, the Mortgage Loans to be included in the
Trust Fund will provide for the full amortization of the amount financed over a
series of monthly payments, and a substantial majority of the Mortgage Loans are
expected to provide for payments due as of the first day of each month. The
Mortgage Loans to be included in the Trust Fund will have been originated or
purchased by the Seller and will have been originated substantially in
accordance with the Seller's underwriting criteria for closed-end second lien
mortgage loans described herein under "-- Underwriting Procedures Relating to
Closed-End Second Lien Mortgage Loans."
Scheduled monthly payments made by the Mortgagors on the Mortgage Loans
("Scheduled Payments") 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. All of the Mortgage Notes will provide
for a fifteen (15) day grace period for monthly payments. Any Mortgage Loan may
be prepaid in full or in part at any time; however, no less than approximately
7.52% of the Mortgage Loans to be included in the Trust Fund generally provide
for the payment by the borrower of a prepayment charge on full prepayments made
within five years from the date of execution of the related Mortgage Note. In
general, the related Mortgage Note will provide that a prepayment charge will
apply if, during the applicable period, the borrower prepays such Mortgage Loan
in full. The amount of the prepayment charge will generally be equal to six
months' advance interest calculated on the basis of the rate in effect at the
time of such prepayment on the amount prepaid in excess of 20% of the original
balance of such Mortgage Loan. The "Mortgage Rate" with respect to a Mortgage
Loan is the annual rate of interest borne by the Mortgage Loan pursuant to the
terms of the related Mortgage Note.
Stated Principal Balance. "Stated Principal Balance" means, for any
Mortgage Loan and (1) the Cut-off Date, the unpaid principal balance of the
Mortgage Loan as of such date, as specified in its amortization schedule at the
time (before any adjustment to the amortization schedule for any moratorium or
similar waiver or grace period), after giving effect to any partial prepayments
and Liquidation Proceeds received prior to such date and to the payment of
principal due on such date and irrespective of any delinquency in payment by the
related mortgagor or (2) any Distribution Date, the Stated Principal Balance of
the Mortgage Loan as of its Cut-off Date, minus the sum of (i) the principal
portion of scheduled payments due with respect to the Mortgage Loan on or prior
to the end of the most recent Due Period that were received by the Master
Servicer on or prior to the most recent Determination Date or were advanced by
the Master Servicer on or prior to the most recent Master Servicer Advance Date,
(ii) principal prepayments with respect to the Mortgage Loan received on or
prior to the end of the most recent Prepayment Period and (iii) Liquidation
Proceeds received by the Master Servicer prior to the end of the most recent Due
Period to the extent applied as recoveries of principal with respect to the
Mortgage Loan. When used with respect to the Mortgage Pool, "Stated Principal
Balance" means the aggregate Stated Principal Balances of all Mortgage Loans in
the Mortgage Pool.
S-15
Combined Loan-to-Value Ratio. The "Combined Loan-to-Value Ratio" of a
Mortgage Loan at any given time is the ratio, expressed as a percentage, of:
(1) the sum of:
(a) the original principal balance of the Mortgage
Loan and
(b) the outstanding principal balance at the date of
origination of the Mortgage Loan of the senior mortgage loan
or, in the case of any open-ended senior mortgage loan, the
maximum available line of credit with respect to such mortgage
loan, regardless of any lesser amount actually outstanding at
the date of origination of the Mortgage Loan, to
(2) the Collateral Value of the related Mortgaged Property.
The "Collateral Value" of a Mortgaged Property is the lesser of:
(1) the appraised value of the related Mortgaged Property,
which may be a full appraisal, drive-by appraisal or electronic
appraisal as specified by the underwriting guidelines, and
(2) in the case of a Mortgaged Property purchased within one
year of the origination of the related Mortgage Loan, the purchase
price of such Mortgaged Property.
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.
Additional Pool Characteristics
Further statistical information as of the Cut-off Date regarding the
Mortgage Loans to be included in the Mortgage Pool is set forth in Annex A
hereto. Unless otherwise indicated, information presented in Annex A expressed
as a percentage other than rates of interest are approximate percentages based
on the Cut-off Date Principal Balance.
Assignment of the Mortgage Loans
Pursuant to the pooling and servicing agreement dated as of April 1,
2002 (the "Pooling and Servicing Agreement"), among CWABS, Inc. (the
"Depositor"), the Master Servicer, the Seller, The Bank of New York, as trustee
(the "Trustee") and Wells Fargo Bank Minnesota, N.A., as co-trustee (the
"Co-Trustee"), the Depositor on the Closing Date will sell, transfer, assign,
set over and otherwise convey without recourse to the Trustee in trust for the
benefit of the Certificateholders all right, title and interest of the Depositor
in and to each Mortgage Loan and all right, title and interest in and to all
other assets included in the Trust Fund, including all principal and interest
received on or with respect to the Mortgage Loans after the Cut-off Date,
exclusive of any scheduled principal due on or prior to the Cut-off Date and any
interest accruing prior to the Cut-off Date.
In connection with such transfer and assignment of the Mortgage Loans,
the Depositor will deliver the following documents to the Trustee (collectively
constituting the "Trustee's Mortgage File") with respect to each Mortgage Loan:
(1) the original Mortgage Note, endorsed by the Seller or the
originator of the Mortgage Loan, without recourse in the following
form: "Pay to the order of ________ without recourse" with all
intervening endorsements that show a complete chain of endorsement from
the originator to the Seller,
S-16
(2) the original recorded Mortgage,
(3) a duly executed assignment of the Mortgage to
"Asset-Backed Certificates, Series 2002-S1 CWABS, Inc., by The Bank of
New York, a New York banking corporation, as trustee under the Pooling
and Servicing Agreement dated as of April 1, 2002, without recourse,"
in recordable form, as described in the Pooling and Servicing
Agreement,
(4) the original recorded assignment or assignments of the
Mortgage together with all interim recorded assignments of such
Mortgage,
(5) the original or copies of each assumption, modification,
written assurance or substitution agreement, if any, and
(6) the original or duplicate original lender's title policy
and all riders thereto or, in the event such original title policy has
not been received from the insurer, such original or duplicate original
lender's title policy and all riders thereto shall be delivered within
one year of the Closing Date.
Notwithstanding the foregoing, in lieu of providing the documents
described in clauses (3) and (4) above, the Depositor may at its discretion
provide evidence that the related Mortgage is held through the MERS(R) System.
In addition, the Mortgages for some or all of the Mortgage Loans in the Trust
Fund that are not already held through the MERS(R) System may, at the discretion
of the Master Servicer, in the future be held through the MERS(R) System. For
any Mortgage held through the MERS(R) System, the Mortgage is recorded in the
name of Mortgage Electronic Registration Systems, Inc., or MERS(R), as nominee
for the owner of the Mortgage Loan, and subsequent assignments of the Mortgage
were, or in the future may be, at the discretion of the Master Servicer,
registered electronically through the MERS(R) System. For each of these Mortgage
Loans, MERS(R) serves as mortgagee of record on the Mortgage solely as a nominee
in an administrative capacity on behalf of the Trustee, and does not have any
interest in the Mortgage Loan.
Pursuant to the Pooling and Servicing Agreement, the Depositor will be
required to deliver (or cause delivery of) the Trustee's Mortgage Files:
(A) not later than the Closing Date, with respect to at least
50% of the Mortgage Loans,
(B) not later than twenty days after the Closing Date, with
respect to at least an additional 40% of the Mortgage Loans, and
(C) not later than thirty days after the Closing Date, with
respect to the remaining 10% of the Mortgage Loans.
Assignments of the Mortgage Loans to the Trustee (or its nominee) will
be recorded in the appropriate public office for real property records, except
in states (such as California) as to which an opinion of counsel is delivered to
the effect that such recording is not required to protect the Trustee's
interests in the Mortgage Loan against the claim of any subsequent transferee or
any successor to or creditor of the Depositor or the Seller. As to any Mortgage
Loan, the recording requirement exception described in the preceding sentence is
applicable only so long as the related Trustee Mortgage File is maintained in
the possession of the Trustee in one of the states to which such exception
applies. In the event any such assignment is delivered to the Trustee in blank
and the related Trustee Mortgage File is released by the Trustee pursuant to
applicable provisions of the Pooling and Servicing Agreement, the Trustee shall
complete such assignment as provided in subparagraph (3) above prior to any such
release. In the event such recording is required to protect the interest of the
Trustee in the Mortgage Loans, the Master Servicer is required to cause each
previously unrecorded assignment to be submitted for recording.
The Trustee will review the Mortgage Loan documents on or prior to the
Closing Date (or promptly after the Trustee's receipt of any document permitted
to be delivered after the Closing Date), and the Trustee will hold such
documents in trust for the benefit of the holders of the Certificates. After
review of such Mortgage Loan documents, if any document is found to be missing
or defective in any material respect, the Trustee is required to notify the
Master Servicer and the Seller in writing. If the Seller cannot or does not cure
such omission or defect within 90 days of its receipt of notice from the
Trustee, the Seller is required to repurchase the related Mortgage Loan from the
Trust Fund at a price (the "Purchase Price") equal to 100% of the Stated
Principal Balance thereof plus accrued and unpaid interest thereon, at a rate
equal to the Mortgage Rate, to the first day of the month in which the Purchase
Price is to be distributed to holders of the Certificates. Rather than
repurchase the Mortgage Loan as provided above, the Seller may remove such
Mortgage Loan (a "Deleted Mortgage Loan") from the Trust Fund and substitute in
its place another Mortgage Loan of like kind (a "Replacement Mortgage Loan");
however, such substitution is only permitted within two years after the Closing
Date, and may not be made unless an opinion of counsel is provided to the effect
that such substitution would not disqualify any REMIC election made by the Trust
or result in a prohibited transaction tax under the Code. Any Replacement
Mortgage Loan generally will, on the date of substitution, among other
characteristics set forth in the Pooling and Servicing Agreement:
S-17
(1) have a Stated Principal Balance, after deduction of the
principal portion of the scheduled payment due in the month of
substitution, not in excess of, and not less than 90% of, the Stated
Principal Balance of the Deleted Mortgage Loan (the amount of any
shortfall to be forwarded by the Seller to the Master Servicer and
deposited by the Master Servicer in the Certificate Account not later
than the succeeding Determination Date and held for distribution to the
holders of the Certificates on the related Distribution Date),
(2) have the same or higher credit quality characteristics
than that of the Deleted Mortgage Loan,
(3) be accruing interest at a rate not more than 1% per annum
higher or lower than that of the Deleted Mortgage Loan,
(4) have a Combined Loan-to-Value Ratio no higher than that of
the Deleted Mortgage Loan,
(5) have a remaining term to maturity not greater than (and
not more than one year less than) that of the Deleted Mortgage Loan,
(6) not permit conversion of the Mortgage Rate from a fixed
rate to a variable rate,
(7) provide for a prepayment charge on terms substantially
similar to those of the prepayment charge, if any, of the Deleted
Mortgage Loan,
(8) constitute the same occupancy type as that which secured
the Deleted Mortgage Loan, and
(9) comply with all of the representations and warranties set
forth in the Pooling and Servicing Agreement as of the date of
substitution.
This cure, repurchase or substitution obligation 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.
Underwriting Procedures Relating to Closed-End Second Lien Mortgage Loans
The following is a description of the underwriting procedures
customarily employed by Countrywide Home Loans with respect to fixed rate
closed-end second lien mortgage loans. The underwriting process is intended to
assess the applicant's credit standing and repayment ability, and the value and
adequacy of the real property security as collateral for the proposed loan.
Exceptions to Countrywide Home Loans' underwriting guidelines will be made when
compensating factors are present. These factors include the borrower's
employment stability, favorable credit history, equity in the related property,
and the nature of the underlying first mortgage loan.
S-18
Each applicant for a closed-end second lien mortgage loan must complete
an application that lists the applicant's assets, liabilities, income,
employment history, and other demographic and personal information. If
information in the loan application demonstrates that the applicant has
sufficient income and there is sufficient equity in the real property to justify
making a closed-end second lien mortgage loan, Countrywide Home Loans will
conduct a further credit investigation of the applicant. This investigation
includes obtaining and reviewing an independent credit bureau report on the
credit history of the applicant to evaluate the applicant's ability and
willingness to repay. The credit report typically contains information relating
to such matters as credit history with local merchants and lenders, installment
and revolving debt payments, and any record of delinquencies, defaults,
bankruptcy, collateral repossessions, suits or judgments.
Countrywide Home Loans originates or acquires mortgage loans pursuant
to alternative sets of underwriting criteria under its Alternative Documentation
Loan Program, its Reduced Documentation Loan Program, and its Streamlined
Documentation Loan Program. Generally, the Alternative Documentation Program
permits a borrower to provide pay stubs and W-2 forms covering the most recent
two years, in lieu of providing a Verification of Employment. The Reduced
Documentation Program places more emphasis on property underwriting than on
credit underwriting. Therefore certain credit underwriting documentation
concerning income and employment verification is waived. The Reduced
Documentation Program requires applicants to list their assets and also permits
bank statements in lieu of verifications of deposits. Only self-employed
borrowers with credit histories that demonstrate an established ability to repay
indebtedness in a timely fashion are eligible for the Reduced Documentation
Program. The Streamlined Documentation program is available for first-lien
borrowers in good standing with Countrywide. The Streamlined Documentation Loan
Program is available for borrowers who have recently purchased or refinanced
(rate/term) with the Seller if they have not been 30 days delinquent in payment
during the previous twelve-month period. Under the Streamlined Documentation
Program, the value used in conjunction with obtaining the first lien from
Countrywide Home Loans is used in lieu of a new appraisal and is subsequently
used to determine the combined loan-to-value ratio. In most instances, the
maximum loan amount is limited to the lesser of 25% of the first-lien balance or
$50,000. In addition, a credit review is conducted, however no debt ratio
calculation, income documentation or asset verification is required. A
telephonic verification of employment is required before loan closing.
Full appraisals are generally performed on all closed-end second lien
mortgage loans that at origination had a loan amount greater than $100,000.
These appraisals are determined on the basis of a sponsor-approved, independent
third-party, fee-based appraisal completed on forms approved by Fannie Mae or
Freddie Mac. For certain closed-end second lien mortgage loans that had at
origination a loan amount less than or equal to $100,000, a drive-by evaluation
is generally completed by a state licensed, independent third-party,
professional appraiser on forms approved by either Fannie Mae or Freddie Mac.
The drive-by evaluation is an exterior examination of the premises by the
appraiser to determine that the property is in good condition. The appraisal is
based on various factors, including the market value of comparable homes and the
cost of replacing the improvements, and generally must have been made not
earlier than 180 days before the date of origination of the mortgage loan. For
certain closed-end second lien mortgage loans with loan amounts less than or
equal to $100,000, Countrywide Home Loans may have the related mortgaged
property appraised electronically. Electronic appraisals use
commercially-available home price indices and will only be completed on
mortgaged properties where Countrywide Home Loans also services the first-lien
mortgage. The minimum and maximum loan amounts for closed-end second lien
mortgage loans are generally $7,500 and $500,000, respectively.
After obtaining all applicable income, liability, asset, employment,
credit and property information, Countrywide Home Loans generally uses a
debt-to-income ratio to assist in determining whether the prospective borrower
has sufficient monthly income available to support the payments on the
closed-end second lien mortgage loan in addition to the senior mortgage loan
payments (including any escrows for property taxes and hazard insurance
premiums) and other monthly credit obligations. The "debt-to-income ratio" is
the ratio of the borrower's total monthly credit obligations to the borrower's
gross monthly income. Based on this, the maximum monthly debt-to-income ratio is
45%. Variations in the monthly debt-to-income ratios limits are permitted based
on compensating factors. Countrywide Home Loans currently offers closed-end
second lien mortgage loan products that allow maximum combined loan-to-value
ratios up to 100%.
It is generally Countrywide Home Loans' policy to require a title
search or limited coverage policy before it makes a closed-end second lien
mortgage loan for amounts less than or equal to $100,000. In addition, if the
closed-end second lien mortgage loan has an original principal balance of more
than $100,000, the Seller requires that the borrower obtain an ALTA policy, or
other assurance of title customary in the relevant jurisdiction. In addition,
ALTA title policies are generally obtained in situations where the property is
on leased land or there has been a change in title.
S-19
The Loan Insurer
United Guaranty Residential Insurance Company of North Carolina
("United Guaranty" or the "Loan Insurer"), a North Carolina insurance company
with corporate offices in Greensboro, North Carolina, is a wholly owned
subsidiary of United Guaranty Corporation, a North Carolina corporation, which
is a wholly owned subsidiary of American International Group, Inc. United
Guaranty is engaged in the business of insuring lenders against loss upon
defaults by mortgagors in the payment of insured second mortgage loans on one-
to four-family residential properties and unsecured loans. United Guaranty is
licensed in all states except Arizona, California, New Hampshire, New York, and
Wyoming. At December 31, 2001, United Guaranty reported, on an unaudited
statutory accounting basis, surplus as regards policyholders (consisting of
capital stock, gross paid in and contributed surplus, and unassigned surplus) of
$34,464,325, and a statutory contingency reserve of $57,487,068. At that date,
United Guaranty reported insurance in force covering $5,867,180,456 of
residential insured second mortgage loans and unsecured loans. An Annual
Statement for United Guaranty, on the Fire and Casualty Form promulgated by the
National Association of Insurance Commissioners, for the year ended December 31,
2000, is available from Countrywide Securities Corporation, 4500 Park Granada,
Calabasas, CA 91302 (telephone: (818) 225-3000).
Neither United Guaranty Corporation nor American International Group,
Inc. nor any affiliate of either has guaranteed or agreed to assume the
obligations of its subsidiary in connection with this mortgage guaranty
insurance program.
The information provided by United Guaranty with respect to its
mortgage guaranty insurance is limited to matters relating to the provision of
such insurance and is not intended to address matters respecting investment in
the certificates that are the subject of this document. United Guaranty offers
insurance on second mortgage loans and unsecured loans; it does not provide
financial guaranty insurance or any other type of insurance, nor does it offer
any form of credit enhancement.
United Guaranty furnished the information relating to it in the above
three paragraphs but has made no independent verification of any other
information in this prospectus supplement. All summaries of, and information
relating to, the second mortgage bulk insurance policy issued by United Guaranty
in this prospectus supplement, other than the above three paragraphs, were
prepared by the issuer which is solely responsible therefor, and United Guaranty
makes no representation as to the correctness or completeness thereof.
The financial strength of United Guaranty has been rated "AAA" by
Standard & Poor's. The rating agency issuing the rating can withdraw or change
its rating at any time.
The information under "The Loan Insurer" has been provided by United
Guaranty. None of the Seller, the Depositor, the Master Servicer, the Trustee,
the Co-Trustee or any of their respective affiliates makes any representation as
to the accuracy or completeness of this information.
Loan Insurance Policy
A second mortgage bulk insurance policy will be issued by United
Guaranty to provide coverage if a borrower defaults on a Mortgage Loan. Subject
to certain limitations, the second mortgage bulk insurance policy will be
available to cover losses from defaults in payment on all Mortgage Loans that
are not subject to a policy exclusion, and will be in an initial amount equal to
approximately $76,215,115. The Co-Trustee will be responsible for forwarding the
premiums for the second mortgage bulk insurance policy on behalf of the
certificateholders as provided in the Pooling and Servicing Agreement and the
Master Servicer will present claims and provide certain notices under the second
mortgage bulk insurance policy on behalf of itself, the Trustee, the Co-Trustee,
and the certificateholders.
S-20
The following summary describes certain provisions of the second
mortgage bulk insurance policy. The summary does not purport to be complete and
is subject to, and qualified in its entirety by reference to, the second
mortgage bulk insurance policy.
The second mortgage bulk insurance policy is not a blanket policy
against loss, since claims under it may only be made for particular defaulted
Mortgage Loans and only on satisfaction of certain conditions precedent. The
original amount of coverage under the second mortgage bulk insurance policy will
be reduced over the life of the certificates by the aggregate dollar amount of
claims paid and certain reductions in the coverage of the second mortgage bulk
insurance policy.
Defaults giving rise to a claim under the second mortgage bulk
insurance policy are:
o the failure by a borrower to pay when due a nonaccelerated
scheduled periodic payment due under the Mortgage Loan, or
o the failure by a borrower to pay the outstanding balance if
the Mortgage Loan has been accelerated due to a violation by
the borrower of any due-on-sale clause.
When a default occurs, the claim amount will be equal to the sum of
o the unpaid principal balance on the Mortgage Loan, as of the
date the last payment was made,
o accumulated delinquent interest due on the amount of unpaid
principal balance from the date of default until the earlier
of the date the claim is submitted or is required to be
submitted at the lesser of the contract rate and eighteen
percent, and
o up to $350.00 of court expenses;
less the sum of
o the amount of all rents and other payments (excluding proceeds
of fire and extended coverage insurance) collected or received
from the Mortgage Loan or the mortgaged property,
o the amount of cash in any escrow account for the Mortgage
Loan,
o the amount of cash held as security for the Mortgage Loan and
all sums as to which set-off is available, and
o the amount paid under applicable fire and extended coverage
policies in excess of the cost of restoring and repairing the
mortgaged property that has not been applied to the payment of
the Mortgage Loan.
In calculating these amounts, the unpaid principal balance of a
Mortgage Loan will not exceed the principal balance of the Mortgage Loan on the
Cut-off Date. In addition, the unpaid principal balance and interest will be
reduced by any reduction in any insolvency proceeding and any reduction under
the Soldiers' and Sailors' Civil Relief Act of 1940 and will be subject to the
provisions of the second mortgage bulk insurance policy on modifications of the
terms of the Mortgage Loans. When a loss becomes payable, United Guaranty will
pay the Co-Trustee for the benefit of the Certificateholders within 60 days
after the Master Servicer has filed a claim in accordance with the second
mortgage bulk insurance policy.
Generally, the Master Servicer must file a claim within 30 days after a
Mortgage Loan becomes six months in default or within 30 days after United
Guaranty has elected to accelerate filing of a claim. If the Master Servicer
files a claim within one year after the applicable event described in the first
sentence of this paragraph, United Guaranty will process the claim; provided,
however, that there will be no further interest or other expenses included in
the claim amount following the expiration of the 30-day period referenced in the
first sentence of this paragraph. If the Master Servicer fails to file a claim
within the one-year period referenced in the preceding sentence, the failure
will be deemed to have been an election by the Master Servicer to waive any
right to any benefit under second mortgage bulk insurance policy with respect to
that Mortgage Loan. In addition, the Master Servicer must notify United Guaranty
of Mortgage Loans as to which a default has existed for three months or a
foreclosure proceeding has been commenced.
S-21
The Mortgage Loan will be considered to remain in default until filing
of a claim so long as the scheduled periodic payment has not been made or
violation of the due-on-sale clause continues. For example, a Mortgage Loan is
"four months in default" if the monthly installments due on January 1 through
April 1 remain unpaid after the close of business on April 1 or if a basis for
acceleration exists for a continuous period of four months.
Claims involving certain specified circumstances are excluded from the
coverage of the second mortgage bulk insurance policy. United Guaranty will not
be liable for losses in connection with those claims except in certain
circumstances when the amount by which the loss increased because of the
excluded circumstances can be reasonably determined, in which case the loss will
be reduced to the extent of that increased amount. The exclusions, more
particularly described in the second mortgage bulk insurance policy, are:
o any claim resulting from a failure of a borrower to make a
balloon payment, which is any payment that is more than twice
the size of a normal amortizing payment, other than due to
acceleration of the Mortgage Loan;
o any claim resulting from a default that occurred before
coverage under the second mortgage bulk insurance policy
began;
o any claim resulting from a default that occurred in respect of
a Mortgage Loan that was, or was ever, 30 days or more
delinquent as of the Cut-off Date;
o any claim involving incomplete or incorrect (in accordance
with construction plans) construction on the mortgaged
property;
o any claim involving a lending transaction with the borrower
materially different from the description to United Guaranty
of the lending transaction;
o any claim involving any dishonest, fraudulent, criminal, or
knowingly wrongful act by the Seller, the Master Servicer, any
other insured or any other servicer; or any claim involving
negligence of the Seller or the Master Servicer;
o any claim occurring when, at the time of default or
thereafter, the servicer is not the Master Servicer on the
closing date and the change in the servicer has not been
approved by United Guaranty;
o any claim where there is physical damage to the mortgaged
property and the mortgaged property has not been restored to
its condition as of the effective date of the second mortgage
bulk insurance policy, reasonable wear and tear excepted, or
the property was not completed in accordance with the original
construction plans;
o any claim where there is environmental contamination affecting
the mortgaged property, including nuclear reaction,
radioactive containment, contamination by toxic waste,
chemicals or other hazardous substance or other pollution,
environmental or similar hazard not previously approved by
United Guaranty;
o any claim if the combined loan-to-value exceeded the maximum
percentage allowed at the time the Mortgage Loan was submitted
to United Guaranty;
o any claim involving a purchase money loan if the borrower did
not make the stated down payment;
S-22
o any claim, if the mortgage, executed by the borrower did not
create at origination a second deed of trust (as defined in
the second mortgage bulk insurance policy);
o any claim resulting from a default occurring after any
material breach by the Master Servicer in complying with the
second mortgage bulk insurance policy with respect to the
related Mortgage Loan;
o any claim, if, under applicable law, the borrower successfully
asserted or may have successfully asserted any defense against
the Master Servicer so as to release in whole or in part the
borrower's obligation to repay the loan;
o any claim if the Mortgage Loan did not meet the program
criteria in effect at the time the related application was
submitted to United Guaranty;
o any claim if the Master Servicer does not provide United
Guaranty with the Mortgage Loan file upon United Guaranty's
request for it; and
o any claim if the Master Servicer did not file, where permitted
and where a state does not require notification to the holder
of a second mortgage, a request for notice of default or
comparable form that provides for notice to the issuer if a
default occurs on a first mortgage.
The second mortgage bulk insurance policy will not provide coverage
against hazard losses, special hazard losses, or bankruptcy losses. The hazard
insurance policies covering the Mortgage Loans typically exclude from coverage
physical damage resulting from a number of causes and, even when the damage is
covered, may afford recoveries that are significantly less than full replacement
or restoration cost from the damages.
If the second mortgage bulk insurance policy is terminated for any
reason other than the exhaustion of its coverage, or if the claims-paying
ability rating of United Guaranty is reduced to below investment grade, the
Master Servicer will use its best efforts to obtain a comparable policy from an
insurer that is acceptable to the rating agencies. The replacement policy will
provide coverage equal to the then remaining coverage of the second mortgage
bulk insurance policy if available. However, if the premium cost of a
replacement policy exceeds the premium cost of the second mortgage bulk
insurance policy, the coverage amount of the replacement policy will be reduced
so that its premium cost will not exceed the premium cost of the second mortgage
bulk insurance policy.
In addition, the Pooling and Servicing Agreement permits the Master
Servicer to substitute a surety bond, letter of credit, another mortgage
guaranty pool insurance policy, or other form of credit enhancement for the
second mortgage bulk insurance policy so long as the substitution does not
adversely affect the ratings described under "Ratings."
Servicing of the Mortgage Loans
The Master Servicer
Countrywide Home Loans Servicing LP ("Countrywide Servicing" or the
"Master Servicer") will act as Master Servicer. The principal executive officers
of Countrywide Servicing are located at 7105 Corporate Drive, Plano, Texas
75024. Countrywide Servicing is a Texas limited partnership directly owned by
Countrywide GP, Inc. and Countrywide LP, Inc., each a Nevada corporation and a
direct wholly owned subsidiary of Countrywide Home Loans, Inc. a New York
corporation ("Countrywide Home Loans" or the "Seller"). Countrywide Home Loans
is a direct wholly owned subsidiary of Countrywide Credit Industries, Inc., a
Delaware corporation ("Countrywide Credit"). Countrywide GP, Inc. owns a 0.1%
interest in Countrywide Servicing and is the general partner. Countrywide LP,
Inc. owns a 99.9% interest in Countrywide Servicing and is a limited partner.
S-23
Countrywide Home Loans established Countrywide Servicing in February
2000 to service mortgage loans originated by Countrywide Home Loans that would
otherwise have been serviced by Countrywide Home Loans. In January and February,
2001, Countrywide Home Loans transferred to Countrywide Servicing all of its
rights and obligations relating to mortgage loans serviced on behalf of Freddie
Mac and Fannie Mae, respectively. In October 2001, Countrywide Home Loans
transferred to Countrywide Servicing all of its rights and obligations relating
to the bulk of its non-agency loan servicing portfolio (other than the servicing
of home equity lines of credit), including all of its rights and obligations
relating to that portion of that portfolio comprised of mortgage loans (other
than home equity lines of credit) formerly serviced by Countrywide Home Loans
and securitized by CWABS, Inc. While Countrywide Home Loans expects to continue
to directly service a portion of its loan portfolio, it is expected that the
servicing rights for most newly originated Countrywide Home Loans product will
be transferred to Countrywide Servicing upon sale or securitization of the
related mortgage loans. Countrywide Servicing is engaged in the business of
servicing mortgage loans and will not originate or acquire loans, an activity
that will continue to be performed by Countrywide Home Loans. In addition to
acquiring mortgage servicing rights from Countrywide Home Loans, it is expected
that Countrywide Servicing will service mortgage loans for non-Countrywide Home
Loans affiliated parties as well as subservice mortgage loans on behalf of other
master servicers.
In connection with the establishment of Countrywide Servicing, certain
employees of Countrywide Home Loans became employees of Countrywide Servicing.
Countrywide Servicing has engaged Countrywide Home Loans as a subservicer to
perform certain loan servicing activities on its behalf.
Countrywide Servicing is an approved mortgage loan servicer for Fannie
Mae, Freddie Mac, Ginnie Mae, HUD and VA and is licensed to service mortgage
loans in each state where a license is required. Its loan servicing activities
are guaranteed by Countrywide Credit and/or Countrywide Home Loans when required
by the owner of the mortgage loans. As of March 31, 2002, Countrywide Servicing
had a net worth of approximately $5.4 billion.
In its capacity as Master Servicer, Countrywide Servicing will be
responsible for servicing the mortgage loans in accordance with the terms set
forth in the Pooling and Servicing Agreement. Countrywide Servicing may perform
any of its obligations under the Pooling and Servicing Agreement through one or
more subservicers. It is expected that Countrywide Home Loans will initially
directly service approximately 100% of the mortgage loans to be included in the
Trust Fund. Notwithstanding any subservicing arrangement, Countrywide Servicing
will remain liable for its servicing duties and obligations under the Pooling
and Servicing Agreement as if Countrywide Servicing alone were servicing the
mortgage loans.
Countrywide Home Loans
Countrywide Home Loans is engaged primarily in the mortgage banking
business, and as such, originates, purchases, sells and services mortgage loans.
Countrywide Home Loans originates mortgage loans through a retail branch system
and through mortgage loan brokers and correspondents nationwide. Mortgage loans
originated by Countrywide Home Loans are principally first-lien, fixed or
adjustable rate mortgage loans secured by single-family residences. Except as
otherwise indicated, reference in the remainder of this prospectus supplement to
"Countrywide Home Loans" should be read to include Countrywide Home Loans and
its consolidated subsidiaries, including Countrywide Servicing.
The principal executive offices of Countrywide Home Loans are located
at 4500 Park Granada, Calabasas, California 91302.
Countrywide Home Loans services substantially all of the mortgage loans
it originates or acquires. In addition, Countrywide Home Loans has purchased in
bulk the rights to service mortgage loans originated by other lenders.
Countrywide Home Loans has in the past and may in the future sell to other
mortgage bankers a portion of its portfolio of loan servicing rights. As of
March 31, 2002, Countrywide Home Loans provided servicing for approximately
$353.52 billion aggregate principal amount of mortgage loans, substantially all
of which are being serviced for unaffiliated persons. As of March 31, 2002,
Countrywide Home Loans provided servicing for approximately $3.18 billion
aggregate principal amount of prime quality second lien mortgage loans
originated under the fixed rate second lien program.
S-24
Servicing of the Mortgage Loans
The Master Servicer has established standard policies for the servicing
and collection of the closed-end second lien mortgage loans. Servicing includes,
but is not limited to,
o the collection and aggregation of payments relating to the
mortgage loans;
o the supervision of delinquent mortgage loans, loss mitigation
efforts, foreclosure proceedings, and, if applicable, the
disposition of the mortgaged properties; and
o the preparation of tax related information in connection with
the mortgage loans.
The general policy of the Master Servicer is to initiate foreclosure in
the underlying property for a mortgage loan,
o after the loan is 60 days or more delinquent and satisfactory
arrangements cannot be made with the mortgagor; or
o if a notice of default on a senior lien is received by the
Master Servicer.
Foreclosure proceedings may be terminated if the delinquency is cured.
Mortgage loans to borrowers in bankruptcy proceedings may be restructured in
accordance with law and with a view to maximizing recovery on the loans,
including any deficiencies.
Once foreclosure is initiated by the Master Servicer, a foreclosure
tracking system is used to monitor the progress of the proceedings. The system
includes state specific parameters to monitor whether proceedings are
progressing within the time frame typical for the state in which the property is
located. During the foreclosure proceeding, the Master Servicer determines the
amount of the foreclosure bid and whether to liquidate the loan.
After foreclosure, if the mortgaged property securing the closed-end
second lien mortgage loan is also securing a first mortgage lien, the Master
Servicer may liquidate the mortgaged property and charge off the closed-end
second lien mortgage loan balance that was not recovered through liquidation
proceeds. If the mortgaged property was subject to a senior lien, the Master
Servicer will either directly manage the foreclosure sale of the property and
satisfy the lien at the time of sale or take other action deemed necessary to
protect the interest in the mortgaged property. If, in the judgment of the
Master Servicer, the cost of maintaining or purchasing the senior lien position
exceeds the economic benefit of such action, the Master Servicer will generally
charge off the entire closed-end second lien mortgage loan and may seek a money
judgment against the borrower. Generally, the Master Servicer will charge off
the entire closed-end second lien mortgage loan when that mortgage loan has been
delinquent for 180 days, even if the related mortgaged property has not been
liquidated by that date, unless the Master Servicer has determined that
liquidation proceeds in respect of such mortgaged property, which have not been
realized by that date, may be received by the Master Servicer subsequently.
Servicing and charge-off policies and collection practices may change
over time in accordance with, among other things, the Master Servicer's business
judgment, changes in the portfolio, and applicable laws and regulations, and, at
all times, such policies and practices with respect to the Mortgage Loans in the
Mortgage Pool will be consistent with the second mortgage bulk insurance policy.
Foreclosure and Delinquency Experience
The following table summarizes the delinquency and foreclosure
experience, respectively, on the dates indicated, of prime quality closed-end
second lien mortgage loans originated and serviced by Countrywide Home Loans.
The delinquency and foreclosure percentages may be affected by the size and
relative lack of seasoning of the servicing portfolio because many of such loans
were not outstanding long enough to give rise to some or all of the periods of
delinquency indicated in the chart below. Accordingly, the information should
not be considered as a basis for assessing the likelihood, amount, or severity
of delinquency or losses on the applicable Mortgage Loans, and no assurances can
be given that the delinquency or foreclosure experience presented in the table
below will be indicative of such experience on such Mortgage Loans. The sum of
the columns below may not equal the total indicated due to rounding.
S-25
For purposes of the following table:
o the period of delinquency is based on the number of days
payments are contractually past due,
o certain total percentages and dollar amounts may not equal the
sum of the percentages and dollar amounts indicated in the
columns due to differences in rounding,
o the "Foreclosure Rate" is the dollar amount of mortgage loans
in foreclosure as a percentage of the total principal balance
of mortgage loans outstanding as of the date indicated, and
o the "Bankruptcy Rate" is the dollar amount of mortgage loans
for which the related borrower has declared bankruptcy as a
percentage of the total principal balance of mortgage loans
outstanding as of the date indicated.
Delinquency and Foreclosure Experience
As of December 31, 1999 As of December 31, 2000
---------------------------- ----------------------------
Principal Principal
Balance Percentage Balance Percentage
----------------- ---------- ----------------- ----------
Total Portfolio ...... $1,794,622,626.37 100.00% $2,730,028,318.03 100.00%
Delinquency Percentage
30-59 Days ........... $ 8,599,706.89 0.48% $ 20,528,290.53 0.75%
60-89 Days ........... 997,360.53 0.06 2,282,705.64 0.08
90+ Days ............. 2,533,505.52 0.14 4,740,854.66 0.17
----------------- ------ ----------------- ------
Sub-Total ............ $ 12,130,572.94 0.68% $ 27,551,850.83 1.01%
----------------- ------ ----------------- ------
Foreclosure Rate ..... $ 640,789.56 0.04% $ 592,515.58 0.02%
Bankruptcy Rate ...... $ 2,252,522.88 0.13% $ 5,104,335.24 0.19%
As of December 31, 2001 As of March 31, 2002
---------------------------- ----------------------------
Principal Principal
Balance Percentage Balance Percentage
----------------- ---------- ----------------- ----------
Total Portfolio ...... $3,017,257,168.98 100.00% $2,984,469,495.10 100.00%
Delinquency Percentage
30-59 Days ........... 37,722,636.27 1.25% $ 36,411,252.36 1.22%
60-89 Days ........... 6,553,870.99 0.22 6,385,095.40 0.21
90+ Days ............. 10,676,444.98 0.35 11,779,518.21 0.39
----------------- ------ ----------------- ------
Sub-Total ............ $ 54,952,952.24 1.82% 54,575,865.97 1.83%
----------------- ------ ----------------- ------
Foreclosure Rate ..... $ 624,444.33 0.02% $ 692,049.47 0.02%
Bankruptcy Rate ...... $ 5,935,277.19 0.20% $ 7,577,802.99 0.25%
Servicing Compensation and Payment of Expenses
The Master Servicer will be paid a monthly fee from interest collected
with respect to each Mortgage Loan (as well as from any liquidation proceeds
from a liquidated Mortgage Loan that are applied to accrued and unpaid interest)
equal to one-twelfth of the Stated Principal Balance thereof multiplied by the
Servicing Fee Rate (such product, the "Servicing Fee"). The "Servicing Fee Rate"
for each Mortgage Loan will equal 0.50% per annum. The amount of the monthly
Servicing Fee is subject to adjustment with respect to each prepaid Mortgage
Loan, as described herein under "-- Adjustment to Servicing Fee in Connection
with Certain Prepaid Mortgage Loans." The Master Servicer is also entitled to
receive, as additional servicing compensation, amounts in respect of interest
paid on Principal Prepayments received from the 2nd day through the 15th day of
a month ("Prepayment Interest Excess"), all late payment fees, assumption fees,
prepayment penalties and other similar charges and all reinvestment income
earned on amounts on deposit in the Certificate Account and Distribution
Account.
S-26
Adjustment to Servicing Fee in Connection With Certain Prepaid Mortgage Loans
When a borrower prepays all or a portion of a Mortgage Loan between
scheduled monthly payment dates ("Due Dates"), the borrower pays interest on the
amount prepaid only to the date of prepayment. Principal Prepayments received
from the 2nd day through the 15th day of a month are included in the related
distribution on the 25th day of the same month, and accordingly no shortfall in
interest otherwise distributable to holders of the Certificates results.
Conversely, Principal Prepayments received from the 16th day of a month to the
first day of the following month are not distributed until the 25th day of such
following month, and accordingly an interest shortfall (a "Prepayment Interest
Shortfall") would result. The period from the 16th day of the month prior to a
Distribution Date (or, in the case of the first Distribution Date, from the
Cut-off Date) to and including the 15th day of the month in which such
Distribution Date occurs is herein referred to as the "Prepayment Period." In
order to mitigate the effect of any such shortfall in interest distributions to
holders of the Certificates on any Distribution Date, one-half of the amount of
the Servicing Fee otherwise payable to the Master Servicer with respect to the
related Due Period ("Compensating Interest") will, to the extent of such
shortfall, be deposited by the Master Servicer in the Certificate Account for
distribution to holders of the Certificates entitled thereto on such
Distribution Date. Any such deposit by the Master Servicer will be reflected in
the distributions to holders of the Certificates entitled thereto made on the
Distribution Date on which the Principal Prepayment received would be
distributed.
Advances
Subject to the following limitations, on the Business Day prior to each
Distribution Date, the Master Servicer will be required to advance its own
funds, or funds in the Certificate Account that are not required to be
distributed on such Distribution Date, in an amount equal to the aggregate of
payments of principal and interest on the Mortgage Loans (with the Mortgage Rate
adjusted to a rate equal to the Mortgage Rate minus the Servicing Fee Rate (as
so adjusted, the "Net Mortgage Rate")) that were due on the related Due Date and
delinquent on the related Determination Date, together with an amount equivalent
to interest (adjusted to the applicable Net Mortgage Rate) deemed due on each
Mortgage Loan as to which the related Mortgaged Property has been acquired by
the Master Servicer through foreclosure or deed-in-lieu of foreclosure in
connection with a defaulted Mortgage Loan ("REO Property"), such latter amount
to be calculated after taking into account any rental income from such Mortgaged
Property (any such advance, an "Advance" and the date of any such Advance, as
described herein, a "Master Servicer Advance Date").
Advances are intended to maintain a regular flow of scheduled interest
and principal payments on the Certificates rather than to guarantee or insure
against losses. The Master Servicer is obligated to make Advances with respect
to delinquent payments of principal of or interest on each Mortgage Loan (with
such payments of interest adjusted to the related Net Mortgage Rate) to the
extent that such Advances are, in its judgment, reasonably recoverable from
future payments and collections or insurance payments or proceeds of liquidation
of the related Mortgage Loan. If the Master Servicer determines on any
Determination Date to make an Advance, such Advance will be included with the
distribution to holders of the Certificates on the related Distribution Date.
Any failure by the Master Servicer to make an Advance as required under the
Pooling and Servicing Agreement will constitute an event of default thereunder,
in which case the Trustee, as successor master servicer, or such other entity as
may be appointed as successor master servicer, will be obligated to make any
such Advance in accordance with the terms of the Pooling and Servicing
Agreement.
Additional Required Interest Advances
In addition to (but without duplication of) the Advances described
above, on each Master Servicer Advance Date, the Master Servicer will be
required to advance its own funds, or funds in the Certificate Account that are
not required to be distributed on the related Distribution Date, in an amount
equal to the aggregate of payments of interest on the Mortgage Loans (in each
case, at the applicable Net Mortgage Rate) that were due on the related Due Date
and delinquent on the related Determination Date, to the extent that:
S-27
o such due and unpaid interest amounts constitute losses that
are payable under the second mortgage bulk insurance policy,
for which losses the Master Servicer has filed a claim that
the Loan Insurer has not yet paid,
o the coverage amount under the second mortgage bulk insurance
policy has not been exhausted, but such due and unpaid
interest amounts do not constitute losses that are payable
under that policy, as a result of a coverage exclusion under
that policy, and the amount of the Loss Coverage Obligation of
the Seller has not been reduced to zero, or
o the coverage amount under the second mortgage bulk insurance
policy has been exhausted, but the amount of the Loss Coverage
Obligation of the Seller has not been reduced to zero.
The Master Servicer is required to make these additional advances (any such
additional advance, an "Additional Required Interest Advance") regardless of
whether such Additional Required Interest Advances are recoverable from future
payments and collections or insurance payments or proceeds of liquidation of the
related Mortgage Loan. However, in the case of any Additional Required Interest
Advance of amounts described in the first bullet point above, the Trustee will
reimburse the Master Servicer for such advance from proceeds of the second
mortgage bulk insurance policy in respect of the related claim under that
policy. In addition, with respect to Additional Required Interest Advances of
amounts described in the second or third bullet points above, the Master
Servicer will be entitled to receive certain Additional Interest Advance
Reimbursement Amounts, to the extent described in clause (4) under "Description
of the Certificates--Withdrawals from the Distribution Account" in this
prospectus supplement.
Description of the Certificates
General
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement. Set forth below are summaries of the material terms and provisions
pursuant to which the Certificates will be issued. The following summaries are
subject to, and are qualified in their entirety by reference to, the provisions
of the Pooling and Servicing Agreement. When particular provisions or terms used
in the Pooling and Servicing Agreement are referred to, the actual provisions
(including definitions of terms) are incorporated by reference.
The CWABS, Inc., Asset-Backed Certificates, Series 2002-S1 (the
"Certificates") will consist of:
o Class A-1, Class A-2A, Class A-2B, Class A-3, Class A-4 and
Class A-5 Certificates (collectively the "Class A
Certificates"),
o Class A-R and Class A-IO Certificates (together with the Class
A Certificates, the "Senior Certificates"),
o Class M-1 Certificates, and
o Class M-2 Certificates.
As used herein, the "Certificate Principal Balance" for any class of
Certificates (other than a class of Certificates with no principal balance or
with a Notional Balance) is the aggregate outstanding principal balance of all
Certificates of such class. The Class A-IO Certificates are interest-only
Certificates issued with a notional balance (the "Notional Balance") equal to
the principal balance of the Mortgage Loans in the Trust Fund. Distributions on
the Certificates will be based primarily on amounts available for distribution
in respect of the Mortgage Loans.
S-28
The Certificates (other than the Class A-R Certificates) will be issued
in book-entry form as described below. The Certificates will be issued in
minimum dollar denominations of $20,000 and integral multiples of $1,000 in
excess thereof, except that the Class A-R Certificates will be issued as two
certificates in the denominations specified in the Pooling and Servicing
Agreement.
Book-Entry Certificates
The Certificates (other than the Class A-R Certificates) will be
book-entry Certificates (the "Book-Entry Certificates"). The Class A-R
Certificates will be issued as two certificates in fully registered certificated
form. Persons acquiring beneficial ownership interests in the Book-Entry
Certificates ("Certificate Owners") may elect to hold their Book-Entry
Certificates through the Depository Trust Company ("DTC") in the United States,
or Clearstream, Luxembourg (as defined herein) or the Euroclear System
("Euroclear"), in Europe, if they are participants of such systems, or
indirectly through organizations which are participants in such systems. The
Book-Entry Certificates will be issued in one or more certificates which equal
the aggregate principal balance of the Certificates and will initially be
registered in the name of Cede & Co., the nominee of DTC. Clearstream,
Luxembourg and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in Clearstream Banking's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank will act as depositary for Clearstream,
Luxembourg and Chase will act as depositary for Euroclear (in such capacities,
individually the "Relevant Depositary" and collectively the "European
Depositaries"). Investors may hold such beneficial interests in the Book-Entry
Certificates in minimum denominations representing Certificate Principal
Balances of $20,000 and integral multiples of $1,000 in excess thereof. Except
as described below, no person acquiring a Book-Entry Certificate (each, a
"beneficial owner") will be entitled to receive a physical certificate
representing such Certificate (a "Definitive Certificate"). Unless and until
Definitive Certificates are issued, it is anticipated that the only
Certificateholder of the Certificates will be Cede & Co., as nominee of DTC.
Certificate Owners will not be Certificateholders as that term is used in the
Pooling and Servicing Agreement. Certificate Owners are only permitted to
exercise their rights indirectly through the participating organizations that
utilize the services of DTC, including securities brokers and dealers, banks and
trust companies and clearing corporations and certain other organizations
("Participants") and DTC.
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC participant and on
the records of Clearstream, Luxembourg or Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of, and
interest on, the Certificates from the Trustee through DTC and DTC participants.
While the Certificates are outstanding (except under the circumstances described
below), under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
among Participants on whose behalf it acts with respect to the Certificates and
is required to receive and transmit distributions of principal of, and interest
on, the Certificates. Participants and organizations which have indirect access
to the DTC system, such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly ("Indirect Participants"), with whom Certificate Owners
have accounts with respect to Certificates are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Certificate Owners. Accordingly, although Certificate Owners
will not possess certificates, the Rules provide a mechanism by which
Certificate Owners will receive distributions and will be able to transfer their
interest.
Certificate Owners will not receive or be entitled to receive
certificates representing their respective interests in the Certificates, except
under the limited circumstances described below. Unless and until Definitive
Certificates are issued, Certificate Owners who are not Participants may
transfer ownership of Certificates only through Participants and Indirect
Participants by instructing such Participants and Indirect Participants to
transfer Book-Entry Certificates, by book-entry transfer, through DTC for the
account of the purchasers of such Book-Entry Certificates, which account is
maintained with their respective Participants. Under the Rules and in accordance
with DTC's normal procedures, transfers of ownership of Book-Entry Certificates
will be executed through DTC and the accounts of the respective Participants at
DTC will be debited and credited. Similarly, the Participants and Indirect
Participants will make debits or credits, as the case may be, on their records
on behalf of the selling and purchasing Certificate Owners.
S-29
Because of time zone differences, credits of securities received in
Clearstream, Luxembourg or Euroclear as a result of a transaction with a
Participant will be made during, subsequent securities settlement processing and
dated the business day following, the DTC settlement date. Such credits or any
transactions in such securities, settled during such processing will be reported
to the relevant Euroclear or Clearstream, Luxembourg Participants on such
business day. Cash received in Clearstream, Luxembourg or Euroclear, as a result
of sales of securities by or through a Clearstream, Luxembourg Participant or
Euroclear Participant to a DTC Participant, will be received with value on the
DTC settlement date but will be available in the relevant Clearstream,
Luxembourg or Euroclear cash account only as of the business day following
settlement in DTC. For information with respect to tax documentation procedures,
relating to the Certificates, see "Material Federal Income Tax Consequences --
Tax Treatment of Foreign Investors" in the Prospectus and "Global, Clearance,
Settlement And Tax Documentation Procedures -- Material U.S. Federal Income Tax
Documentation Requirements" in Annex B hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Clearstream, Luxembourg Participants and Euroclear
Participants will occur in accordance with their respective rules and operating
procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream,
Luxembourg Participants or Euroclear Participants, on the other, will be
effected in DTC in accordance with DTC rules on behalf of the relevant European
international clearing system by the Relevant Depositary; however, such cross
market transactions will require delivery of instructions to the relevant
European international clearing system by the counterpart 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, Luxembourg Participants and Euroclear Participants may not
deliver instructions directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company,
performs services for its participants, some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC participant in the Book-Entry
Certificates, whether held for its own account or as a nominee for another
person. In general, beneficial ownership of Book-Entry Certificates will be
subject to the rules, regulations and procedures governing DTC and DTC
participants as in effect from time to time.
Clearstream Banking, societe anonyme, 67 Bd Grande-Duchesse Charlotte,
L-2967 Luxembourg ("Clearstream, Luxembourg"), was incorporated in 1970 as
"Clearstream, Luxembourg S.A." a company with limited liability under Luxembourg
law (a societe anonyme). Clearstream, Luxembourg S.A. subsequently changed its
name to Cedelbank. On 10 January 2000, Cedelbank's parent company, Clearstream,
Luxembourg International, societe anonyme ("CI") merged its clearing, settlement
and custody business with that of Deutsche Borse Clearing AG ("DBC"). The merger
involved the transfer by CI of substantially all of its assets and liabilities
(including its shares in CB) to a new Luxembourg company, New Clearstream,
Luxembourg International, societe anonyme ("New CI"), which is 50% owned by CI
and 50% owned by DBC's parent company Deutsche Borse AG. The shareholders of
these two entities are banks, securities dealers and financial institutions.
Clearstream, Luxembourg International currently has 92 shareholders, including
U.S. financial institutions or their subsidiaries. No single entity may own more
than 5 percent of Clearstream, Luxembourg International's stock.
Further to the merger, the Board of Directors of New Clearstream,
Luxembourg International decided to re-name the companies in the group in order
to give them a cohesive brand name. The new brand name that was chosen is
"Clearstream" With effect from January 14, 2000 New CI has been renamed
"Clearstream International, societe anonyme." On January 18, 2000, Cedelbank was
renamed "Clearstream Banking, societe anonyme" and Clearstream, Luxembourg
Global Services was renamed "Clearstream Services, societe anonyme."
S-30
On January 17, 2000 DBC was renamed "Clearstream Banking AG." This
means that there are now two entities in the corporate group headed by
Clearstream International which share the name "Clearstream Banking," the entity
previously named "Cedelbank" and the entity previously named "Deutsche Borse
Clearing AG."
Clearstream, Luxembourg holds securities for its customers and
facilitates the clearance and settlement of securities transactions between
Clearstream, Luxembourg customers through electronic book-entry changes in
accounts of Clearstream, Luxembourg customers, thereby eliminating the need for
physical movement of certificates. Transactions may be settled by Clearstream,
Luxembourg in any of 36 currencies, including United States Dollars.
Clearstream, Luxembourg provides to its customers, among other things, services
for safekeeping, administration, clearance and settlement of internationally
traded securities and securities lending and borrowing. Clearstream, Luxembourg
also deals with domestic securities markets in over 30 countries through
established depository and custodial relationships. Clearstream, Luxembourg is
registered as a bank in Luxembourg, and as such is subject to regulation by the
Commission de Surveillance du Secteur Financier, "CSSF," which supervises
Luxembourg banks. Clearstream, Luxembourg's customers are world-wide financial
institutions including underwriters, securities brokers and dealers, banks,
trust companies and clearing corporations. Clearstream, Luxembourg's U.S.
customers are limited to securities brokers and dealers, and banks. Currently,
Clearstream, Luxembourg has approximately 2,000 customers located in over 80
countries, including all major European countries, Canada, and the United
States. Indirect access to Clearstream, Luxembourg is available to other
institutions that clear through or maintain a custodial relationship with an
account holder of Clearstream, Luxembourg. Clearstream, Luxembourg has
established an electronic bridge with Euroclear Bank S.A./N.V. as the Operator
of the Euroclear System (the "Euroclear Operator") in Brussels to facilitate
settlement of trades between Clearstream, Luxembourg and the Euroclear Operator.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of the
Euroclear Operator, under contract with Euroclear Clearance Systems S.C., a
Belgian cooperative corporation (the "Cooperative"). All operations are
conducted by the Euroclear Operator, and all Euroclear securities clearance
accounts and Euroclear cash accounts are accounts with the Euroclear Operator,
not the Cooperative. The Cooperative establishes policy for Euroclear on behalf
of Euroclear Participants. Euroclear Participants include banks (including
central banks), securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
The Euroclear Operator has a banking license from the Belgian Banking
and Finance Commission. This license authorizes the Euroclear Operator to carry
out banking activities on a global basis.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable DTC participants
in accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payments to the beneficial owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the beneficial owners of the Book-Entry Certificates
that it represents.
S-31
Under a book-entry format, beneficial owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede & Co. Distributions with
respect to Certificates held through Clearstream, Luxembourg or Euroclear will
be credited to the cash accounts of Clearstream, Luxembourg Participants or
Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by the Relevant Depositary. Such
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. See "Material Federal Income Tax
Consequences -- Tax Treatment of Foreign Investors" and "Miscellaneous Tax
Aspects -- Backup Withholding" in the Prospectus. Because DTC can only act on
behalf of Financial Intermediaries, the ability of a beneficial owner to pledge
Book-Entry Certificates to persons or entities that do not participate in the
depository system, or otherwise take actions in respect of such Book-Entry
Certificates, may be limited due to the lack of physical certificates for such
Book-Entry Certificates. In addition, issuance of the Book-Entry Certificates in
book-entry form may reduce the liquidity of such Certificates in the secondary
market since certain potential investors may be unwilling to purchase
certificates for which they cannot obtain physical certificates.
Monthly and annual reports on the Trust Fund provided by the Master
Servicer to Cede & Co., as nominee of DTC, may be made available to beneficial
owners upon request, in accordance with the rules, regulations and procedures
creating and affecting DTC or the Relevant Depositary, and to the Financial
Intermediaries to whose DTC accounts the Book-Entry Certificates of such
beneficial owners are credited.
DTC has advised the Depositor and the Trustee that, unless and until
Definitive Certificates are issued, DTC will take any action permitted to be
taken by the holders of the Book-Entry Certificates under the Pooling and
Servicing Agreement only at the direction of one or more Financial
Intermediaries to whose DTC accounts the Book-Entry Certificates are credited,
to the extent that such actions are taken on behalf of Financial Intermediaries
whose holdings include such Book-Entry Certificates. Clearstream, Luxembourg or
the Euroclear Operator, as the case may be, will take any other action permitted
to be taken by a holder of a Book-Entry Certificate under the Pooling and
Servicing Agreement on behalf of a Clearstream, Luxembourg Participant or
Euroclear Participant only in accordance with its relevant rules and procedures
and subject to the ability of the Relevant Depositary to effect such actions on
its behalf through DTC. DTC may take actions, at the direction of the related
Participants, with respect to some Book-Entry Certificates which conflict with
actions taken with respect to other Book-Entry Certificates.
Definitive Certificates will be issued to beneficial owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Depositor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as nominee and
depositary with respect to the Book-Entry Certificates and the Depositor or the
Trustee is unable to locate a qualified successor, (b) the Depositor at its sole
option, elects to terminate a book-entry system through DTC or (c) after the
occurrence of an Event of Default (as defined herein), beneficial owners having
not less than 51% of the Voting Rights (as defined herein) evidenced by the
Certificates advise the Trustee and DTC through the Financial Intermediaries and
the DTC participants in writing that the continuation of a book-entry system
through DTC (or a successor thereto) is no longer in the best interests of
beneficial owners of such class.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as
holders of the related Certificates under the Pooling and Servicing Agreement.
Although DTC, Clearstream, Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of Certificates among
participants of DTC, Clearstream, Luxembourg and Euroclear, they are under no
obligation to perform or continue to perform such procedures and such procedures
may be discontinued at any time.
S-32
Deposits to the Certificate Account
The Master Servicer will establish and initially maintain a certificate
account (the "Certificate Account") for the benefit of the Trustee on behalf of
the Certificateholders. On a daily basis within two Business Days after receipt,
the Master Servicer will deposit or cause to be deposited into the Certificate
Account the following payments and collections received or made or to be applied
by it on or subsequent to the Cut-off Date, including all principal and interest
received with respect to the Mortgage Loans after the Cut-off Date (exclusive of
any scheduled principal due on or prior to such Cut-off Date and any interest
accruing prior to the Cut-off Date):
(1) all payments on account of principal, including Principal
Prepayments, on the Mortgage Loans,
(2) all payments on account of interest (other than interest
accruing on the Mortgage Loans prior to the Cut-off Date) on the
Mortgage Loans, net of the related Servicing Fees on the Mortgage
Loans,
(3) all Insurance Proceeds (other than proceeds of the second
mortgage bulk insurance policy) and all other Liquidation Proceeds,
(4) all payments made by the Master Servicer in respect of
Prepayment Interest Shortfalls,
(5) any amount required to be deposited by the Master Servicer
in connection with any losses on investment of funds in the Certificate
Account,
(6) any amounts required to be deposited by the Master
Servicer with respect to any deductible clause in any blanket hazard
insurance policy maintained by the Master Servicer in lieu of requiring
each mortgagor to maintain a primary hazard insurance policy,
(7) all amounts required to be deposited in connection with
shortfalls in the principal amount of Replacement Mortgage Loans,
(8) all Advances, and
(9) all Additional Required Interest Advances.
"Insurance Proceeds" are all proceeds of any insurance
policies, including, without limitation, the second mortgage bulk
insurance policy (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 or, in the case of the second mortgage bulk
insurance policy, proceeds that represent reimbursement to the Master
Servicer of Additional Required Interest Advances.
"Liquidation Proceeds" are Insurance Proceeds and all other
net 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). To the extent
that any proceeds of the liquidation of a Mortgage Loan are recovered
by United Guaranty in connection with a claim paid under the second
mortgage bulk insurance policy, pursuant to United Guaranty's
subrogation rights under the terms of that policy, such proceeds will
not be included in the Liquidation Proceeds available to the Trust
Fund.
S-33
Withdrawals from the Certificate Account
The Master Servicer may from time to time withdraw funds from the
Certificate Account prior to the related Distribution Account Deposit Date for
the following purposes:
(1) to pay to the Master Servicer the Servicing Fees on the
Mortgage Loans to the extent not previously paid to or withheld by the
Master Servicer (subject to reduction as described above under
"Servicing of the Mortgage Loans -- Adjustment to Servicing Fee in
Connection with Prepaid Mortgage Loans") and, as additional servicing
compensation, prepayment penalties, assumption fees, late payment
charges, net earnings on or investment income with respect to funds in
or credited to the Certificate Account and the amount of Prepayment
Interest Excess for the related Prepayment Period,
(2) to reimburse the Master Servicer for Advances, such right
of reimbursement with respect to any Mortgage Loan pursuant to this
clause (2) being limited to amounts received that represent late
recoveries of payments of principal and/or interest on the related
Mortgage Loan (or Insurance Proceeds or Liquidation Proceeds with
respect thereto, other than proceeds of the second mortgage bulk
insurance policy) with respect to which such Advance was made,
(3) to pay the Co-Trustee, for payment to the Loan Insurer,
the premiums payable under the second mortgage bulk insurance policy
and any other amounts payable to the Loan Insurer under the second
mortgage bulk insurance policy;
(4) to reimburse the Master Servicer from Insurance Proceeds
(other than proceeds of the second mortgage bulk insurance policy) for
expenses incurred by the Master Servicer and covered by the related
insurance policies,
(5) to pay the Master Servicer any unpaid Servicing Fees and
to reimburse it for any unreimbursed ordinary and necessary
out-of-pocket costs and expenses incurred by the Master Servicer in the
performance of its master servicing obligations, such right of
reimbursement pursuant to this clause (5) being limited to amounts
received representing late recoveries of the payments of such costs and
expenses (or Liquidation Proceeds, purchase proceeds or repurchase
proceeds with respect thereto),
(6) to pay to the Seller or the Master Servicer, as
applicable, with respect to each Mortgage Loan or Mortgaged Property
acquired in respect thereof that has been purchased by the Seller or
the Master Servicer from the Trust Fund pursuant to the Pooling and
Servicing Agreement, all amounts received thereon and not taken into
account in determining the related Stated Principal Balance of such
repurchased Mortgage Loan,
(7) to reimburse the Seller, the Master Servicer or the
Depositor for fees and expenses incurred and reimbursable pursuant to
the Pooling and Servicing Agreement,
(8) to withdraw any amount deposited in the Certificate
Account and not required to be deposited therein, and
(9) to clear and terminate the Certificate Account upon
termination of the Pooling and Servicing Agreement.
In addition, not later than 1:00 p.m. Pacific Time on the Business Day
immediately preceding each Distribution Date (the "Distribution Account Deposit
Date"), the Master Servicer shall withdraw from the Certificate Account and
remit to the Trustee the amount of the Interest Remittance Amount and the
Principal Remittance Amount to the extent on deposit in the Certificate Account,
and the Trustee shall deposit such amount in the Distribution Account, as
described below.
S-34
The "Interest Remittance Amount" is equal to:
(a) the sum, without duplication, of:
(1) all scheduled interest collected during the
related Due Period, less the related Servicing Fees,
(2) all Advances relating to interest,
(3) all Additional Required Interest Advances,
(4) all Compensating Interest,
(5) Liquidation Proceeds (to the extent such
Liquidation Proceeds relate to interest),
(6) any payments received under the second mortgage
bulk insurance policy attributable to interest for the related
Due Period, and
(7) any Seller Shortfall Interest Requirements for
the Master Servicer Advance Dates in May 2002,
(b) less, all non-recoverable Advances relating to interest,
all Additional Interest Advance Reimbursement Amounts and certain
expenses reimbursed during the related Due Period.
A "Seller Shortfall Interest Requirement" for the Master Servicer
Advance Date in May 2002, is a payment in an amount equal to the product of:
(a) the excess of the aggregate Stated Principal Balance of
the Mortgage Loans over the aggregate Stated Principal Balance of the
Mortgage Loans that have a scheduled payment of interest due in the
related Due Period, and
(b) a fraction, the numerator of which is the weighted average
Adjusted Net Mortgage Rates of the Mortgage Loans (weighted on the
basis of the respective Stated Principal Balances thereof) as of the
beginning of the Due Period for the related Distribution Date and the
denominator of which is 12.
The "Principal Remittance Amount" is equal to:
(a) the sum, without duplication, of:
(1) the scheduled principal collected during the
related Due Period or advanced on or before the related Master
Servicer Advance Date,
(2) prepayments collected in the related Prepayment
Period,
(3) the Stated Principal Balance of each Mortgage
Loan that was repurchased by the Seller or the Master
Servicer,
(4) 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 Seller in connection with a
substitution of a Mortgage Loan,
(5) any payments received under the second mortgage
bulk insurance policy attributable to principal for the
related Due Period, and
S-35
(6) all Liquidation Proceeds collected during the
related Due Period (to the extent such Liquidation Proceeds
related to principal),
(b) less, all non-recoverable Advances relating to principal
and certain expenses reimbursed during the related Due Period.
A "Due Period" with respect to any Distribution Date is the period
beginning on the second day of the calendar month preceding the calendar month
in which such Distribution Date occurs and ending on the Due Date in the month
in which such Distribution Date occurs.
Deposits to the Distribution Account
The Trustee will establish and maintain a distribution account (the
"Distribution Account") on behalf of the Certificateholders. The Trustee will,
promptly upon receipt, deposit in the Distribution Account and retain therein:
(1) the aggregate amount remitted by the Master Servicer to
the Trustee,
(2) any Enhancement Payments made by the Seller,
(3) any amount required to be deposited by the Master Servicer
in connection with any losses on investment of funds in the
Distribution Account; and
(4) any proceeds paid in respect of the Mortgage Loans
pursuant to the second mortgage bulk insurance policy.
Withdrawals from the Distribution Account
The Trustee will withdraw funds from the Distribution Account for
distribution to the Certificateholders as described below under "--
Distributions" and may from time to time make withdrawals from the Distribution
Account:
(1) to pay the trustee fee (the "Trustee Fee") to the Trustee,
(2) to pay to the Master Servicer, as additional servicing
compensation, earnings on or investment income with respect to funds in
or credited to the Distribution Account,
(3) to reimburse the Master Servicer for any Additional
Required Interest Advance of amounts described in the first bullet
point under "Servicing of the Mortgage Loans -- Additional Required
Interest Advances," such right of reimbursement pursuant to this clause
(3) being limited to the proceeds of the second mortgage bulk insurance
policy in respect of the related claim under that policy that represent
recoveries of payments of interest on the related Mortgage Loan with
respect to which such Additional Required Interest Advance was made,
(4) to reimburse the Master Servicer for any Additional
Required Interest Advance of amounts described in the second or third
bullet points under "Servicing of the Mortgage Loans -- Additional
Required Interest Advances," such right of reimbursement pursuant to
this clause (4) being limited to the portion of any Enhancement Payment
that is applied to the recovery of accrued and unpaid interest on the
related Mortgage Loan with respect to which such Additional Required
Interest Advance was made (the amount of any such reimbursement, an
"Additional Interest Advance Reimbursement Amount"),
(5) to withdraw any amount deposited in the Distribution
Account and not required to be deposited therein, and
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(6) to clear and terminate the Distribution Account upon the
termination of the Pooling and Servicing Agreement.
Distributions
General. Distributions on the Certificates will be made by the Trustee
on each Distribution Date to the persons in whose names such Certificates are
registered at the close of business on the Record Date. The "Record Date" is,
with respect to the Class A-1 Certificates, the business day immediately
preceding a distribution date, or if the Class A-1 Certificates are no longer
book-entry certificates, the last business day of the month preceding the month
of a distribution date and, with respect to each class of Certificates other
than, the Class A-1 Certificates, the last business day of the month preceding
the month of a distribution date.
A "Distribution Date" is the 25th day of each month, or if such day is
not a Business Day, on the first Business Day thereafter, commencing in May
2002.
A "Business Day" is any day other than:
o A Saturday or Sunday or
o A day on which banking institutions in the state of New York,
California, Minnesota or Maryland are required or authorized
by law to be closed.
Distributions will be made by check mailed to the address of the person
entitled thereto as it appears on the Certificate Register or, in the case of
any Certificateholder that holds 100% of a class of Certificates or who holds a
class of Certificates with an aggregate initial Certificate Principal Balance of
$1,000,000 or more and that has so notified the Trustee in writing in accordance
with the Pooling and Servicing Agreement, by wire transfer in immediately
available funds to the account of such Certificateholder at a bank or other
depository institution having appropriate wire transfer facilities; provided,
however, that the final distribution in retirement of the Certificates will be
made only upon presentation and surrender of such Certificates at the Corporate
Trust Office of the Trustee. 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.
Distributions of Interest. On each Distribution Date, the interest
distributable with respect to the Certificates is the interest which has accrued
thereon at the then applicable related Pass-Through Rate during the applicable
Accrual Period. For the Class A-1 Certificates and any Distribution Date, the
"Accrual Period" is 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. For each class of
Certificates other than the Class A-1 Certificate and any Distribution Date, the
"Accrual Period" is the calendar month immediately preceding the calendar month
in which such Distribution Date occurs.
All calculations of interest on the Class A-1 Certificates will be made
on the basis of a 360-day year and the actual number of days elapsed in the
applicable Accrual Period. All calculations of interest on each class of
Certificates other than the Class A-1 Certificates will be made on the basis of
a 360-day year that consists of twelve 30-day months.
On each Distribution Date, the Interest Funds for such Distribution
Date are required to be distributed in the following order of priority, until
such Interest Funds have been fully distributed:
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(1) concurrently to the Class A-1, Class A-2A, Class A-2B,
Class A-3, Class A-4, Class A-5, Class A-R and Class A-IO Certificates,
the Current Interest and any Interest Carry Forward Amount for each
such class; provided, however, that Current Interest and any Interest
Carry Forward Amount payable to the Class A-IO Certificates shall be
deposited in the Carryover Reserve Fund in an amount equal to the sum
of the Primary Carryover Reserve Fund Deposit and the Secondary
Carryover Reserve Fund Deposit (each as defined below), and any amounts
remaining thereafter shall be distributed to the Class A-IO
Certificates, and provided, further, that if the Interest Funds are not
sufficient to make a full distribution of the aggregate Current
Interest and the aggregate Interest Carry Forward Amount for each class
of Senior Certificates, such Interest Funds will be distributed pro
rata among each such class, based on the ratio of (x) the portion of
the Current Interest and the portion of any Interest Carry Forward
Amount attributable to such class to (y) the portion of Current
Interest and the portion of any Interest Carry Forward Amount
attributable to all such classes;
(2) to the Class M-1 Certificates, the Current Interest and
any Interest Carry Forward Amount for such class,
(3) to the Class M-2 Certificates, the Current Interest and
any Interest Carry Forward Amount for such class, and
(4) any remainder to the Class A-R Certificates.
The "Interest Funds" are equal to (1) the Interest Remittance Amount
plus (2) the portion of any Enhancement Payment that is applied to accrued and
unpaid interest on a defaulted Mortgage Loan, less (3) the premiums payable
under the second mortgage bulk insurance policy, less (4) the Trustee Fee.
"Current Interest" with respect to each class of the 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
the 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.
"Interest Carry Forward Amount," with respect to each class of the
Certificates and each Distribution Date, is 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.
The "Pass-Through Rate" per annum for the Class A-1 Certificates will
be equal to the lesser of (1) One-Month LIBOR calculated as described below
under "Calculation of One-Month LIBOR" plus 0.15% per annum, and (2) the Net
Rate Cap.
The "Pass-Through Rate" per annum for each class of Certificates (other
than the Class A-1 Certificates and the Class A-IO Certificates) will be equal
to the lesser of (1) the respective per annum fixed rate set forth and described
on the cover page of this prospectus supplement and under "Summary --
Description of the Certificates -- General" in this prospectus supplement and
(2) the Net Rate Cap.
The "Pass-Through Rate" on the Class A-IO Certificates will be equal to
the excess of (i) the weighted average Adjusted Net Mortgage Rate of the
Mortgage Loans (weighted on the basis of the Stated Principal Balances thereof)
over (ii) the weighted average Pass-Through Rate of the Class A-1, Class A-2A,
Class A-2B, Class A-3, Class A-4, Class A-5, Class A-R, Class M-1 and Class M-2
Certificates (weighted on the basis of the respective Certificate Principal
Balances thereof and, in the case of the Pass-Through Rate of the Class A-1
Certificates, adjusted to an effective rate reflecting the calculation of
interest on the basis of a 360-day year that consists of twelve 30-day months).
The "Adjusted Net Mortgage Rate" with respect to each Mortgage Loan is
equal to the Mortgage Rate less the Expense Fee Rate.
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The "Expense Fee Rate" with respect to each Mortgage Loan is equal to
the sum of (i) the Servicing Fee Rate, (ii) the trustee fee rate as provided in
the Pooling and Servicing Agreement and (iii) the Loan Insurance Policy Premium
Rate. The "Loan Insurance Policy Premium Rate" with respect to each Mortgage
Loan and any Distribution Date is a per annum rate equal to a quotient
(expressed as a percentage), (x) the numerator of which is equal to the portion
of the premiums payable under the second mortgage bulk insurance policy with
respect to the related Distribution Date attributable to such Mortgage Loan,
times twelve, and (y) the denominator of which is equal to the Stated Principal
Balance of such Mortgage Loan. As the Cut-off Date, the weighted average Expense
Fee Rate was equal to approximately 1.69%.
The "Net Rate Cap" for any Distribution Date with respect to the
Certificates (other than the Class A-IO Certificates) will be the weighted
average Adjusted Net Mortgage Rate on the Mortgage Loans in the Trust Fund,
adjusted, in the case of the Class A-1 Certificates, to an effective rate for
the related Accrual Period reflecting the calculation of interest on the basis
of the actual number of days elapsed during the related interest accrual period
and a 360-day year.
The "Net Rate Carryover" for a class of Certificates (other than the
Class A-IO Certificates) on any Distribution Date on which the Pass-Through Rate
for such class is based upon the Net Rate Cap is the excess of:
(1) the amount of interest that such class would have been
entitled to receive on such Distribution Date had the Pass-Through Rate
for that class not been calculated based on the applicable Net Rate
Cap, over
(2) the amount of interest such class received on such
Distribution Date based on the Net Rate Cap,
plus the unpaid portion of any such excess from prior Distribution Dates (and
interest accrued thereon at the then applicable Pass-Through Rate, without
giving effect to the Net Rate Cap).
Distributions of Principal. On each Distribution Date, the Principal
Distribution Amount for such Distribution Date is required to be distributed as
follows until such Principal Distribution Amount has been fully distributed:
(1) For each Distribution Date prior to the Stepdown Date or
on which a Trigger Event is in effect:
(A) to the Class A-R Certificates, until the
Certificate Principal Balance thereof is reduced to zero,
(B) to the Class A Certificates, in the order and the
priorities set forth below,
(C) to the Class M-1 Certificates, until the
Certificate Principal Balance thereof is reduced to zero,
(D) to the Class M-2 Certificates, until the
Certificate Principal Balance thereof is reduced to zero, and
(E) any remainder to the Class A-R Certificates.
(2) For each Distribution Date on or after the Stepdown Date
and so long as a Trigger Event is not in effect:
(A) to the Class A Certificates, the Class A
Principal Distribution Amount, in the order and the priorities
set forth below,
(B) to the Class M-1 Certificates, the Class M-1
Principal Distribution Amount until the Certificate Principal
Balance thereof is reduced to zero,
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(C) to the Class M-2 Certificates, the Class M-2
Principal Distribution Amount until the Certificate Principal
Balance thereof is reduced to zero, and
(D) any remainder to the Class A-R Certificates.
On each Distribution Date, the Principal Distribution Amount or the
Class A Principal Distribution Amount, as applicable, is required to be
distributed to the Class A Certificates in the following order of priority:
(1) concurrently, 10.79365079% of the NAS Principal
Distribution Amount for that Distribution Date to the Class A-4
Certificates and 89.20634921% of the NAS Principal Distribution Amount
for that Distribution Date to the Class A-5 Certificates, until the
Certificate Principal Balance of the Class A-5 Certificates is reduced
to zero, and
(2) sequentially, in the following order:
(A) concurrently, 90.27102154% to the Class A-1
Certificates and 9.72897846% to the Class A-2A Certificates,
until the Certificate Principal Balance of the Class A-1
Certificates is reduced to zero,
(B) concurrently, 33.14393939% to the Class A-2A
Certificates and 66.85606061% to the Class A-2B Certificates,
until the respective Certificate Principal Balances of the
Class A-2A Certificates and Class A-2B Certificates are
reduced to zero,
(C) to the Class A-3 Certificates, until the
Certificate Principal Balance thereof has been reduced to
zero,
(D) to the Class A-4 Certificates, in an amount up to
the amount necessary to reduce the Certificate Principal
Balance thereof to 10.79365079% of the NAS Amount for that
Distribution Date, and
(E) to the Class A-4 Certificates and the Class A-5
Certificates, pro rata, until the respective Certificate
Principal Balances thereof are reduced to zero.
Notwithstanding the foregoing order of priority, on any Distribution
Date on which the aggregate Certificate Principal Balances of the Class A
Certificates are greater than the Stated Principal Balances of all Mortgage
Loans, the Principal Distribution Amount or the Class A Principal Distribution
Amount, as applicable, will be distributed pro rata and not sequentially.
"NAS Principal Distribution Amount" for any Distribution Date, is the
product of:
(1) a fraction, the numerator of which is the NAS
Amount for such Distribution Date and the denominator of which
is the aggregate Certificate Principal Balances of the Class A
Certificates immediately prior to such Distribution Date,
(2) the Principal Distribution Amount or the Class A
Principal Distribution Amount, as applicable, for such
Distribution Date and
(3) the applicable percentage for such Distribution
Date set forth in the following table:
Distribution Date Percentage
----------------- ----------
May 2002-- April 2005..............0%
May 2005-- April 2007.............45%
May 2007-- April 2008.............80%
May 2008-- April 2009............100%
May 2009 and thereafter..........300%
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"NAS Amount" for any Distribution Date, is the product of:
(1) a fraction, the numerator of which is the
Certificate Principal Balance of the Class A-5 Certificates
immediately prior to such Distribution Date and the
denominator of which is the original Certificate Principal
Balance of the Class A-5 Certificates, and
(2) $63,000,000.
"Principal Distribution Amount" with respect to each Distribution Date
is an amount equal to the Principal Funds for such Distribution Date. The
"Principal Funds" with respect to each Distribution Date are equal to the
Principal Remittance Amount plus the portion of any Enhancement Payment that is
applied to Realized Losses. For the first Distribution Date, Principal Funds
will also include the amount on deposit in the Principal Reserve Fund as of such
date. The "Principal Reserve Fund" is an account that the Trustee will establish
and maintain on behalf of the Certificateholders, into which the Seller will
deposit, on or before the Closing Date, $1,104, which is an amount equal to the
excess of the aggregate initial Certificate Principal Balances of the
Certificates over the Cut-off Date Principal Balance of the Mortgage Loans.
"Class A Principal Distribution Amount," is the excess of (1) the
aggregate Certificate Principal Balances the Class A Certificates immediately
prior to such Distribution Date over (2) 89.00% of the aggregate Stated
Principal Balances of the Mortgage Loans for such Distribution Date.
"Class M-1 Principal Distribution Amount" is the excess of:
(1) the sum of:
(a) the aggregate Certificate Principal Balances the
Class A Certificates (after taking into account distributions
of the Class A Principal Distribution Amount for such
Distribution Date) and
(b) the Certificate Principal Balance of the Class
M-1 Certificates immediately prior to such Distribution Date
over
(2) 98.00% of the aggregate Stated Principal Balances of the
Mortgage Loans for such Distribution Date.
"Class M-2 Principal Distribution Amount" is the excess of:
(1) of the sum of:
(a) the aggregate Certificate Principal Balances the
Class A Certificates (after taking into account distributions
of the Class A Principal Distribution Amount for such
Distribution Date),
(b) the Certificate Principal Balance of the Class
M-1 Certificates (after taking into account distribution of
the Class M-1 Principal Distribution Amount for such
Distribution Date) and
(c) the Certificate Principal Balance of the Class
M-2 Certificates immediately prior to such Distribution Date
over
(2) the aggregate Stated Principal Balances of the Mortgage
Loans for such Distribution Date.
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"Stepdown Date" is the later to occur of:
(1) the Distribution Date in May 2005 or
(2) the first Distribution Date on which the aggregate
Certificate Principal Balances of the Class A Certificates (after
calculating anticipated distributions on such Distribution Date) is
less than or equal to 89.00% of the aggregate Stated Principal Balances
of the Mortgage Loans for such Distribution Date.
A "Trigger Event" with respect to a Distribution Date after the
Stepdown Date consists of either a Delinquency Trigger Event with respect to
that Distribution Date or a Cumulative Loss Trigger Event with respect to that
Distribution Date.
A "Delinquency Trigger Event" with respect to a Distribution Date after
the Stepdown Date exists if the product of:
(1) 0.75 times and
(2) the quotient (expressed as a percentage) of:
(a) the numerator of which is the aggregate Stated
Principal Balance for such Distribution Date of Mortgage Loans
that were 60 or more days delinquent as of the close of
business on the last day of the calendar month preceding such
Distribution Date (including Mortgage Loans in foreclosure and
REO Properties) and
(b) the denominator of which is the aggregate Stated
Principal Balance of the Mortgage Loans for such Distribution
Date
equals or exceeds the Required Percentage.
The "Required Percentage" with respect to a Distribution Date after the
Stepdown Date is equal to the quotient (expressed as a percentage) of:
(1) the excess of:
(a) the aggregate Stated Principal Balance of the
Mortgage Loans for the preceding Distribution Date over
(b) the Certificate Principal Balance of the most
senior class of Certificates outstanding as of the preceding
Master Servicer Advance Date and
(2) the aggregate Stated Principal Balance of the Mortgage
Loans for the preceding Distribution Date.
A "Cumulative Loss Trigger Event" with respect to a Distribution Date
after the Stepdown Date exists if the aggregate amount of Trigger Event Realized
Losses on the Mortgage Loans from (and including) the Cut-off Date for each
Mortgage Loan to (and including) the last day of the related Due Period exceeds
the applicable percentage for such Distribution Date, as set forth below:
Distribution Date Percentage
----------------- ----------
May 2005-- April 2006..............200%
May 2006-- April 2007.............2.75%
May 2007-- April 2008.............3.25%
May 2008 and thereafter...........4.00%
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A "Trigger Event Realized Loss" with respect to any Distribution Date
after the Stepdown Date is the excess of the Stated Principal Balance of a
defaulted Mortgage Loan over the Liquidation Proceeds allocated to principal
that have been received with respect to that Mortgage Loan on or at any time
prior to the last day of the related Due Period.
Residual Certificates. The Class A-R Certificates will remain
outstanding for so long as the trust fund shall exist, whether or not they are
receiving current distributions of principal or interest. In addition to
distributions of interest and principal as described above, on each Distribution
Date, the holders of the Class A-R Certificates will be entitled to receive any
Available Funds remaining after payment of interest and principal on the senior
certificates and interest and principal on the subordinated certificates, as
described above. It is not anticipated that there will be any significant
amounts remaining for that distribution.
Seller Loss Coverage Obligation
The Seller will provide coverage (the "Loss Coverage Obligation`")
against losses realized on the Mortgage Loans that would otherwise be absorbed
by the Certificates. Each payment required to be made by the Seller under the
Loss Coverage Obligation is referred to as an "Enhancement Payment." On or prior
to the Distribution Date on which the Loss Coverage Obligation is reduced to
zero, the Enhancement Payment for any Distribution Date will equal (1) the
amount of Realized Losses with respect to Mortgage Loans plus (2) the aggregate
amount of accrued and unpaid interest on defaulted Mortgage Loans as of the
respective dates of liquidation of those Mortgage Loans.
A "Realized Loss" is the excess of the Stated Principal Balance of a
defaulted Mortgage Loan over the Liquidation Proceeds allocated to principal
that are received with respect to that Mortgage Loan during the Due Period in
which that Mortgage Loan was liquidated.
The amount of the Loss Coverage Obligation will initially equal 2.30%
of the aggregate original Certificate Principal Balances of the Certificates and
will be reduced by the amount of any Enhancement Payments made by the Seller. In
addition, with respect to any Distribution Date on or after the Stepdown Date
and for so long as a Trigger Event is not in effect for such Distribution Date,
the amount of the Loss Coverage Obligation will decrease to the lesser of (i)
the amount of the Loss Coverage Obligation on the immediately preceding
Distribution Date, and (ii) 4.60% of the aggregate Stated Principal Balance of
the Mortgage Loans for such Distribution Date, subject, in the case of clause
(ii), to a floor of 0.25% of the aggregate original Certificate Principal
Balances of the Certificates.
The Loss Coverage Obligation will be an unsecured general obligation of
the Seller and will not be supported by any letter of credit or other credit
enhancement arrangement. The long term debt obligations of the Seller are
currently rated "A" by S&P, "A--" by Fitch Ratings, Inc. and "A3" by Moody's.
Calculation of One-Month LIBOR
On the second LIBOR Business Day (as defined below) preceding the
commencement of each Accrual Period for the Class A-1 Certificates (each such
date, an "Interest Determination Date"), the Trustee will determine the London
interbank offered rate for one-month United States dollar deposits ("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 as defined herein. 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 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
Certificate Principal Balance of the Class A-1 Certificates 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 the Class
A-1 Certificates 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:
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(1) with an established place of business in London,
(2) which have been designated as such by the Trustee and
(3) which are not controlling, controlled by, or under common
control with, the Depositor, the Seller or any successor 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 Class A-1 Certificates for the related Accrual Period shall
(in the absence of manifest error) be final and binding.
Carryover Reserve Fund
The Pooling and Servicing Agreement establishes an account (the
"Carryover Reserve Fund"), which is held in trust by the Trustee on behalf of
the Certificateholders. On the Closing Date, the Seller will deposit $10,000 in
the Carryover Reserve Fund. The Carryover Reserve Fund will not be an asset of
any REMIC.
As described above, on each Distribution Date, the Trustee shall
deposit in the Carryover Reserve Fund from the Current Interest and any Interest
Carry Forward Amount otherwise payable to the Class A-IO Certificates for such
Distribution Date (to the extent available), an amount (the "Primary Carryover
Reserve Fund Deposit") equal to the Net Rate Carryover for such Distribution
Date.
Following such deposits, on each Distribution Date, amounts in the
Carryover Reserve Fund shall be distributed to each class of Certificates (other
than the Class A-IO Certificates), on a pro rata basis among all such classes
(on the basis of the related Net Rate Carryover for each such class), to pay any
Net Rate Carryover on such Certificates.
On each Distribution Date, following all other deposits to, and
distributions from, the Carryover Reserve Fund, the Trustee shall deposit (the
"Secondary Carryover Reserve Fund Deposit") funds in the Carryover Reserve Fund
in an amount that will equal the excess, if any, of (i) $10,000 over (ii) the
amount of funds on deposit in the Carryover Reserve Fund.
Applied Realized Loss Amounts
If on any Distribution Date, after giving effect to the distributions
described above, the aggregate Certificate Principal Balances of the
Certificates exceed the Stated Principal Balances of the Mortgage Loans, the
Certificate Principal Balances of the Subordinate Certificates will be reduced,
in inverse order of seniority (beginning with the Class M-2 Certificates) by an
amount equal to such excess. Any such reduction is an "Applied Realized Loss
Amount." Applied Realized Loss Amounts will not be paid at a later date and
interest will accrue for the related class of Certificates on the Certificate
Principal Balance as so reduced.
Reports to Certificateholders
On each Distribution Date, the Trustee will forward to each
Certificateholder, the Master Servicer and the Depositor a statement generally
setting forth, among other information:
(1) the amount of the related distribution to holders of the
Certificates allocable to principal, separately identifying:
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(a) the aggregate amount of any Principal Prepayments
included therein, and
(b) the aggregate of all scheduled payments of
principal included therein,
(2) the amount of such distribution to holders of the
Certificates allocable to interest,
(3) the Interest Carry Forward Amounts for each class of
Certificates (if any),
(4) the Certificate Principal Balance of each class of
Certificates after giving effect to (A) all distributions allocable to
principal on such Distribution Date and (B) the allocation of any
Applied Realized Loss Amounts for such Distribution Date,
(5) the Pool Stated Principal Balance for the following
Distribution Date,
(6) the amount of the Servicing Fees paid to or retained by
the Master Servicer for the related Due Period,
(7) the Pass-Through Rate for each class of Certificates for
such Distribution Date,
(8) the amount of Advances included in the distribution on
such Distribution Date,
(9) the amount of Additional Required Interest Advances
included in the distribution on such Distribution Date,
(10) the number and aggregate principal amounts of Mortgage
Loans:
(a) delinquent (exclusive of related Mortgage Loans
in foreclosure):
30 to 59 days,
60 to 89 days and
90 or more days, and
(b) in foreclosure and delinquent:
30 to 59 days,
60 to 89 days and
90 or more days,
in each case as of the close of business on the last day of the
calendar month preceding such Distribution Date,
(11) with respect to any Mortgage Loan that became an REO
Property during the preceding calendar month, the loan number and
Stated Principal Balance for such Distribution Date of such Mortgage
Loan and the date of acquisition thereof,
(12) whether a Trigger Event exists,
(13) the total number and principal balance of any REO
Properties as of the close of business on the Determination Date
preceding such Distribution Date,
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(14) any Net Rate Carryover paid and all remaining Net Rate
Carryover remaining on each class of the Certificates (other than the
Class A-IO Certificates) on such Distribution Date,
(15) the amount of any payment under the second mortgage bulk
insurance policy and the remaining amount available under the second
mortgage bulk insurance policy, and
(16) the amount of any payments under the Seller's Loss
Coverage Obligation and the amount remaining under the Seller's Loss
Coverage Obligation.
In addition, within 60 days after the end of each calendar year, the
Trustee will prepare and deliver 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, the Co-Trustee and the Trustee, without the
consent of Certificateholders, for any of the purposes set forth under "The
Agreements -- Amendment" in the Prospectus. In addition, the Pooling and
Servicing Agreement may be amended by the Depositor, the Master Servicer, the
Seller, the Co-Trustee and the Trustee and 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:
(1) 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,
(2) adversely affect in any material respect the interests of
the holders of any class of Certificates in a manner other than as
described in clause (1) above, without the consent of the holders of
Certificates of such class evidencing, as to such class, Percentage
Interests aggregating 66%, or
(3) 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.
Optional Termination
The Master Servicer will have the right, subject to certain conditions
specified in the Pooling and Servicing Agreement, to repurchase all remaining
Mortgage Loans and REO Properties in the Trust Fund and thereby effect early
retirement of all the Certificates, subject to the Stated Principal Balance of
the Mortgage Loans and REO Properties in the Trust Fund at the time of
repurchase being less than or equal to 10% of the Cut-off Date Pool Principal
Balance (the "Optional Termination Date"). In the event such option is exercised
by the Master Servicer, the repurchase will be made at a price equal to the sum
of:
(1) 100% of the Stated Principal Balance of each Mortgage Loan
in the Trust Fund (other than in respect of REO Property) plus accrued
interest thereon at the applicable Mortgage Rate, net of the Servicing
Fee,
(2) the appraised value of any REO Property (up to the Stated
Principal Balance of the related Mortgage Loan) in the Trust Fund, and
(3) any unreimbursed out-of-pocket costs and expenses and the
principal portion of Advances, in each case previously incurred by the
Master Servicer in the performance of its servicing obligations.
S-46
Proceeds from such repurchase will be distributed to the
Certificateholders in the priority described above. 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 repurchase of the
Mortgage Loans and REO Properties will result in an early retirement of the
Certificates.
Optional Purchase of Defaulted Loans
As to any Mortgage Loan which is delinquent in payment by 150 days or
more, the Master Servicer may, at its option but subject to certain conditions
specified in the Pooling and Servicing Agreement, purchase such Mortgage Loan at
a price equal to 100% of the 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.
Events of Default
Events of Default will consist of:
(1) any failure by the Master Servicer to deposit in the
Certificate Account or the Distribution Account the required amounts or
remit to the Trustee any payment (including an Advance required to be
made under the terms of the Pooling and Servicing Agreement, but not
including any Additional Required Interest Advance) which continues
unremedied for five days (or one day, in the case of an Advance
required to be made under the terms of the Pooling and Servicing
Agreement) 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,
(2) 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 in each case, materially
and adversely affects the interests of the Certificateholders and
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
(3) 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.
As of any date of determination:
o holders of the Certificates (other than the Class A-IO and
Class A-R Certificates) will be allocated 95% of all Voting
Rights, allocated among the Certificates in proportion to
their respective outstanding Certificate Principal Balances
and
o holders of the Class A-IO Certificates and the Class A-R
Certificates will be allocated all of the remaining Voting
Rights as described in the Pooling and Servicing Agreement.
Voting Rights will be allocated among the Certificates of each such
class in accordance with their respective Percentage Interests.
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
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 will succeed to all of the
responsibilities and duties of the Master Servicer under the Pooling and
Servicing Agreement, including the obligation to make Advances, except that the
Trustee will not be obligated to make any Additional Required Interest Advances.
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.
S-47
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 a 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
The Bank of New York will be the Trustee under the Pooling and
Servicing Agreement. The Depositor and Countrywide Home Loans may maintain other
banking relationships in the ordinary course of business with the Trustee.
Certificates may be surrendered at the Corporate Trust Office of the Trustee
located at 5 Penn Plaza, 16th Floor, New York, New York 10001. Attention:
Corporate Trust MBS Administration or at such other addresses as the Trustee may
designate from time to time.
Co-Trustee
Pursuant to the Pooling and Servicing Agreement, Wells Fargo Bank
Minnesota, N.A., a national banking association with its principal place of
business in Minnesota, will be appointed as Co-Trustee to hold the second
mortgage bulk insurance policy for the benefit of the Certificateholders. The
Co-Trustee will not have any duties of the Trustee and will have no duties under
the Pooling and Servicing Agreement other than holding the second mortgage bulk
insurance policy for the benefit of the Certificateholders and forwarding
premium payments and receiving proceeds of claims under the second mortgage bulk
insurance policy.
The Co-Trustee may resign at any time, in which event the issuer must
appoint a successor co-trustee with the consent of the Depositor and the Loan
Insurer. The issuer (or the Depositor if the issuer fails to do so) shall remove
the Co-Trustee and appoint a successor reasonably acceptable to the Loan Insurer
if the Co-Trustee becomes insolvent or if the Co-Trustee otherwise becomes
incapable of acting. Any resignation or removal of the Co-Trustee and
appointment of a successor co-trustee will not become effective until acceptance
of the appointment by the successor co-trustee.
The Co-Trustee may own securities and have normal banking relationships
with the Seller, the Master Servicer, the Depositor, the Loan Insurer, and their
respective affiliates.
Restrictions on Transfer of the Class A-R Certificates
The Class A-R Certificates will be subject to the restrictions on
transfer described in the prospectus under "Material Federal Income Tax
Consequences -- Taxation of Holders of Residual Interest Securities --
Restrictions on Ownership and Transfer of Residual Interest Securities." The
Pooling and Servicing Agreement provides that the Class A-R Certificates, in
addition to other classes of certificates, may not be acquired by a Plan or with
assets of such a Plan unless certain conditions are met. See "ERISA
Considerations" in this prospectus supplement. Each Class A-R Certificate will
contain a legend describing the foregoing restrictions.
S-48
Yield, Prepayment and Maturity Considerations
General
The weighted average life of, and the yield to maturity on, each class
of the 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 mortgagor's
equity in such properties, and changes in the mortgagors' housing needs, job
transfers and employment status. Furthermore, as described under "The Mortgage
Pool -- Assignment of the Mortgage Loans" with respect to up to 50% of the
Mortgage Loans (the "Delay Delivery Mortgage Loans"), the Depositor may deliver
the related Trustee Mortgage Files after the Closing Date. Should the Seller
fail to deliver all or a portion of any such Trustee Mortgage Files to the
Depositor or other designee of the Depositor or, at the Depositor's direction,
to the Trustee within the time periods described under "The Mortgage Pool --
Assignment of the Mortgage Loans" the Seller will be required to use its best
efforts to deliver a Substitute Mortgage Loan for the related Delay Delivery
Mortgage Loan or repurchase the related Delay Delivery Mortgage Loan. Any
repurchases pursuant to this provision would also have the effect of
accelerating the rate of prepayments on the Mortgage Loans. In addition, no less
than approximately 7.52% of the Mortgage Loans require the payment of a penalty
in connection with certain prepayments, generally no later than the first five
years following origination of the related Mortgage Loan. These penalties, if
enforced by the Master Servicer, may affect the rate of prepayments on the
Mortgage Loans.
The timing of changes in the rate of prepayments may significantly
affect the actual yield to investors who purchase the 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
Certificates may not be offset by a subsequent like reduction (or increase) in
the rate of principal prepayments. Investors must make their own decisions as to
the appropriate prepayment assumptions to be used in deciding whether to
purchase any of the 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 determinations.
Neither the Class A-4 Certificates nor the Class A-5 Certificates will
be entitled to distributions of principal until the Distribution Date in May
2005 (except as otherwise described herein). Thereafter, the relative
entitlements of the Class A-4 Certificates and the Class A-5 Certificates,
respectively, to payments in respect of principal are subject to increase in
accordance with the calculation of the NAS Principal Distribution Amount. See
"Description of the Certificates -- Distributions" herein.
Prepayments and Yields for Certificates
The extent to which the yield to maturity of the Certificates 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 a 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 a Certificate purchased at a premium and
particularly the Class A-IO Certificates, 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.
S-49
All of the Mortgage Loans are fixed rate mortgage loans. In general, if
prevailing interest rates fall significantly below the interest rates on fixed
rate mortgage loans, such mortgage loans are likely to be subject to higher
prepayment rates than if prevailing rates remain at or above the interest rates
on such mortgage loans. Conversely, if prevailing interest rates rise
appreciably above the interest rates on fixed rate mortgage loans, such mortgage
loans are likely to experience a lower prepayment rate than if prevailing rates
remain at or below the interest rates on such mortgage loans. In the event that
Mortgage Loans with higher Mortgage Rates prepay at rates higher than other
Mortgage Loans, the Net Rate Cap may be lower than otherwise would be the case.
As a result, the interest payable on the Certificates on a Distribution Date
could be reduced because of the imposition of the Net Rate Cap. No assurance can
be given as to the level of prepayment that the Mortgage Loans will experience.
Although interest amounts accrued on the Class A-IO Certificates will
be available to pay Net Rate Carryover on the Certificates (other than the Class
A-IO Certificates) as described herein, there is no assurance that funds will be
available or sufficient to pay such amounts. The ratings assigned to the
Certificates do not address the likelihood of the payment of Net Rate Carryover.
Sensitivity of the Class A-IO Certificates
As indicated in the following tables, the yield to investors in the
Class A-IO Certificates will be sensitive to the rate of principal payments
(including prepayments) of the Mortgage Loans and the level of One-Month LIBOR.
The mortgage loans generally can be prepaid at any time, subject to the payment
of any applicable prepayment penalty. The following table indicates the
sensitivity of the pre-tax corporate bond equivalent yields to maturity of the
illustrated classes of certificates to various constant percentages of the
prepayment assumption. The yields set forth in the table were calculated by
determining the monthly discount rates that, when applied to the assumed streams
of cash flows to be paid on the applicable classes of certificates, would cause
the discounted present value of the assumed streams of cash flows to equal the
assumed aggregate purchase prices of the applicable classes and converting the
monthly rates to corporate bond equivalent rates. Those calculations do not take
into account variations that may occur in the interest rates at which investors
may be able to reinvest funds received by them as distributions on the
certificates and consequently do not purport to reflect the return on any
investment in any class of certificates when the reinvestment rates are
considered.
As described under "Description of the Certificates -- Distributions,"
the Pass-Through Rates of the Class A-IO Certificates in effect from time to
time are calculated by reference to the Pass-Through Rates of the other classes
of Certificates. In the event that the Pass-Through Rates of those other
Certificates were limited by the Net Rate Cap, the Pass-Through Rate of the
Class A-IO Certificates would be equal to zero.
The information set forth in the following tables has been prepared on
the basis of the Modeling Assumptions and on the assumption that the purchase
prices of the Class A-IO Certificates (expressed as percentages of their initial
Notional Amount) are as indicated.
Sensitivity of the Class A-IO Certificates to Prepayments
(Pre-Tax Yields to Maturity)
CPR Prepayment Assumption
--------------------------------------------------
Price* (%) 0% 20% 30% 40% 50%
- ---------- ------ ------ ------ -------- --------
5.00................... 84.36% 41.45% 18.27% (4.09)% (25.64)%
5.50................... 75.69% 33.78% 11.48% (9.78)% (30.27)%
6.00................... 68.56% 27.51% 5.98% (14.36)% (33.97)%
- ----------
* The prices do not include accrued interest. Accrued interest has been
added to the prices in calculating the yields.
It is unlikely that the Mortgage Loans will have the precise
characteristics described in this prospectus supplement or that the Mortgage
Loans will prepay at the same rate until maturity or at the same rate or time.
As a result of these factors, the pre-tax yields on the Class A-IO Certificates
are likely to differ from those shown in the table above, even if the Mortgage
Loans prepay at the indicated percentages of the prepayment assumption. In
addition, increases in One-Month LIBOR which are not reflected in the preceding
table may have a material adverse effect on the pre-tax yields on the Class A-IO
Certificates even if the characteristics and/or performance of the Mortgage
Loans were to be consistent with the Modeling Assumptions. No representation is
made as to the actual rate of principal payments on the mortgage loans for any
period or over the lives of the Class A-IO Certificates. Investors must make
their own decisions as to the appropriate prepayment assumptions to be used in
deciding whether to purchase the Class A-IO Certificates.
S-50
Last Scheduled Distribution Date
The "Last Scheduled Distribution Date" for a class of Certificates is
the Distribution Date on which the Certificate Principal Balance of that class
of Certificates would be reduced to zero assuming, among other things, that:
o no prepayments are received on the Mortgage Loans, and
o scheduled monthly payments of principal of and interest on
each of such Mortgage Loans are timely received.
The Last Scheduled Distribution Date for each class of Certificates is as
follows:
o for the Class A-1, Class A-2A, Class A-2B, Class A-3 and Class
A-5 Certificates, the Distribution Date in November 2016,
o for the Class A-4, Class A-IO, Class M-1 and Class M-2
Certificates, the Distribution Date in April 2031, and
o for the Class A-R Certificates, the Distribution Date in May
2002.
The actual final Distribution Date with respect to each class of
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, and
o the Master Servicer may, subject to certain limitations
specified in the Pooling and Servicing Agreement, purchase all
the Mortgage Loans in the Trust Fund when the outstanding
Stated Principal Balances thereof have declined to 10% or less
of the Cut-off Date Pool Principal Balance.
Prepayments on mortgage loans are commonly measured relative to a prepayment
model or standard. The prepayment model used in this prospectus supplement
("Prepayment Model") is based on an assumed rate of prepayment each month of the
then unpaid principal balance of a pool of mortgage loans similar to the
Mortgage Loans. The Prepayment Model used in this prospectus supplement ("CPR")
assumes that the outstanding principal balance of the Mortgage Loans prepays at
a constant annual rate of 30% CPR. In generating monthly cash flows, this rate
is converted to an equivalent constant monthly rate. To assume a 30% CPR or any
other CPR percentage is to assume that the stated percentage of the outstanding
principal balance of the pool is prepaid over the course of a year.
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 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 (collectively, the "Modeling Assumptions"):
(1) the Mortgage Loans prepay at the indicated percentage of
the Prepayment Model,
(2) distributions on the Certificates are received, in cash,
on the 25th day of each month, commencing in May 2002, in accordance
with the payment priorities defined herein,
S-51
(3) 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,
(4) Scheduled Payments are assumed to be received on the first
day of each month commencing in May 2002, 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 April 2002, and
include 30 days' interest thereon,
(5) the level of One-Month LIBOR remains constant at 1.870%
per annum,
(6) the Pass-Through Rates for the Certificates remain
constant at the rates applicable prior to the Optional Termination Date
and the Pass-Through Rates for the Certificates are adjusted
accordingly on any Distribution Date following the Optional Termination
Date,
(7) the Closing Date for the Certificates is April 30, 2002,
(8) except as indicated with respect to the weighted average
lives, no optional termination is exercised on the Optional Termination
Date, and
(9) the Mortgage Loans have the approximate characteristics
described below:
Adjusted
Gross Net Original Amortization Remaining Term
Principal Mortgage Mortgage Term to Maturity Age Amortization
Balance($) Rate (%) Rate (%) (months) (months) (months) Method
- -------------- ------------ ----------- --------------------- -------------- -------- -------------
57,992.49 9.688825882 7.948825882 60 54 6 Level Pay
16,193,714.25 8.930442966 7.190442966 120 117 3 Level Pay
209,621,979.20 9.278751830 7.589230095 180 175 5 Level Pay
9,531,809.40 9.982706858 8.292023631 240 235 5 Level Pay
555,894.22 11.095040130 9.355040130 300 294 6 Level Pay
8,468,228.43 9.432351042 7.717577339 360 348 12 Level Pay
385,570,382.00 9.417858891 7.742193336 360 175(1) 5 Balloon
- ------------
(1) The remaining amortization term to maturity is 355 months.
S-52
Percent of the Initial Certificate Principal Balance
at the Respective Percentages of the Prepayment Model
Class A-1
--------------------------------------------
Distribution Date 0% 20% 30% 40% 50%
- ----------------- ---- ---- ---- ---- ----
Initial Percentage ........... 100% 100% 100% 100% 100%
April 25, 2003 ............... 97 63 45 28 11
April 25, 2004 ............... 94 33 8 0 0
April 25, 2005 ............... 90 9 0 0 0
April 25, 2006 ............... 86 0 0 0 0
April 25, 2007 ............... 82 0 0 0 0
April 25, 2008 ............... 78 0 0 0 0
April 25, 2009 ............... 73 0 0 0 0
April 25, 2010 ............... 69 0 0 0 0
April 25, 2011 ............... 65 0 0 0 0
April 25, 2012 ............... 60 0 0 0 0
April 25, 2013 ............... 54 0 0 0 0
April 25, 2014 ............... 48 0 0 0 0
April 25, 2015 ............... 42 0 0 0 0
April 25, 2016 ............... 34 0 0 0 0
Weighted Average Life
(in years)(1) ............. 10.24 1.54 1.00 0.72 0.54
Weighted Average Life
(in years)(1)(2) .......... 10.24 1.54 1.00 0.72 0.54
- ----------
(1) The weighted average lives of the Certificates are determined by:
(a) multiplying the amount of each principal payment by the number
of years from the date of issuance to the related Distribution
Date,
(b) adding the results, and
(c) dividing the sum by the initial respective Certificate
Principal Balance for such class of Certificates.
(2) To the Optional Termination Date.
S-53
Percent of the Initial Certificate Principal Balance
at the Respective Percentages of the Prepayment Model
Class A-2A
------------------------------------
Distribution Date 0% 20% 30% 40% 50%
- ----------------- ---- ---- ---- ---- ----
Initial Percentage ..................... 100% 100% 100% 100% 100%
April 25, 2003 ......................... 98 81 73 64 55
April 25, 2004 ......................... 97 66 54 26 0
April 25, 2005 ......................... 95 55 18 0 0
April 25, 2006 ......................... 93 42 1 0 0
April 25, 2007 ......................... 91 22 0 0 0
April 25, 2008 ......................... 89 9 0 0 0
April 25, 2009 ......................... 86 0 0 0 0
April 25, 2010 ......................... 84 0 0 0 0
April 25, 2011 ......................... 82 0 0 0 0
April 25, 2012 ......................... 80 0 0 0 0
April 25, 2013 ......................... 77 0 0 0 0
April 25, 2014 ......................... 74 0 0 0 0
April 25, 2015 ......................... 71 0 0 0 0
April 25, 2016 ......................... 67 0 0 0 0
Weighted Average Life
(in years)(1) ....................... 12.40 3.28 2.00 1.39 1.04
Weighted Average Life
(in years)(1)(2) .................... 12.40 3.28 2.00 1.39 1.04
- ----------
(1) The weighted average lives of the Certificates are determined by:
(a) multiplying the amount of each principal payment by the number
of years from the date of issuance to the related Distribution
Date,
(b) adding the results, and
(c) dividing the sum by the initial respective Certificate
Principal Balance for such class of Certificates.
(2) To the Optional Termination Date.
S-54
Percent of the Initial Certificate Principal Balance
at the Respective Percentages of the Prepayment Model
Class A-2B
------------------------------------
Distribution Date 0% 20% 30% 40% 50%
- ----------------- ---- ---- ---- ---- ----
Initial Percentage ..................... 100% 100% 100% 100% 100%
April 25, 2003 ......................... 100 100 100 100 100
April 25, 2004 ......................... 100 100 100 51 0
April 25, 2005 ......................... 100 100 37 0 0
April 25, 2006 ......................... 100 83 2 0 0
April 25, 2007 ......................... 100 44 0 0 0
April 25, 2008 ......................... 100 18 0 0 0
April 25, 2009 ......................... 100 0 0 0 0
April 25, 2010 ......................... 100 0 0 0 0
April 25, 2011 ......................... 100 0 0 0 0
April 25, 2012 ......................... 100 0 0 0 0
April 25, 2013 ......................... 100 0 0 0 0
April 25, 2014 ......................... 100 0 0 0 0
April 25, 2015 ......................... 100 0 0 0 0
April 25, 2016 ......................... 100 0 0 0 0
Weighted Average Life
(in years)(1) ....................... 14.57 5.02 3.00 2.06 1.54
Weighted Average Life
(in years)(1)(2) .................... 14.57 5.02 3.00 2.06 1.54
- ----------
(1) The weighted average lives of the Certificates are determined by:
(a) multiplying the amount of each principal payment by the number
of years from the date of issuance to the related Distribution
Date,
(b) adding the results, and
(c) dividing the sum by the initial respective Certificate
Principal Balance for such class of Certificates.
(2) To the Optional Termination Date.
S-55
Percent of the Initial Certificate Principal Balance
at the Respective Percentages of the Prepayment Model
Class A-3
------------------------------------
Distribution Date 0% 20% 30% 40% 50%
- ----------------- ---- ---- ---- ---- ----
Initial Percentage ..................... 100% 100% 100% 100% 100%
April 25, 2003 ......................... 100 100 100 100 100
April 25, 2004 ......................... 100 100 100 100 74
April 25, 2005 ......................... 100 100 100 27 0
April 25, 2006 ......................... 100 100 100 0 0
April 25, 2007 ......................... 100 100 42 0 0
April 25, 2008 ......................... 100 100 12 0 0
April 25, 2009 ......................... 100 99 0 0 0
April 25, 2010 ......................... 100 89 0 0 0
April 25, 2011 ......................... 100 69 0 0 0
April 25, 2012 ......................... 100 48 0 0 0
April 25, 2013 ......................... 100 30 0 0 0
April 25, 2014 ......................... 100 15 0 0 0
April 25, 2015 ......................... 100 2 0 0 0
April 25, 2016 ......................... 100 0 0 0 0
Weighted Average Life
(in years)(1) ....................... 14.57 10.05 5.04 3.01 2.15
Weighted Average Life
(in years)(1)(2) .................... 14.57 8.86 5.00 3.01 2.15
- ----------
(1) The weighted average lives of the Certificates are determined by:
(a) multiplying the amount of each principal payment by the number
of years from the date of issuance to the related Distribution
Date,
(b) adding the results, and
(c) dividing the sum by the initial respective Certificate
Principal Balance for such class of Certificates.
(2) To the Optional Termination Date.
S-56
Percent of the Initial Certificate Principal Balance
at the Respective Percentages of the Prepayment Model
Class A-4
------------------------------------
Distribution Date 0% 20% 30% 40% 50%
- ----------------- ---- ---- ---- ---- ----
Initial Percentage ..................... 100% 100% 100% 100% 100%
April 25, 2003 ......................... 100 100 100 100 100
April 25, 2004 ......................... 100 100 100 100 100
April 25, 2005 ......................... 100 100 100 100 18
April 25, 2006 ......................... 100 97 96 77 15
April 25, 2007 ......................... 99 94 92 18 7
April 25, 2008 ......................... 99 90 87 10 3
April 25, 2009 ......................... 98 86 76 6 2
April 25, 2010 ......................... 94 78 70 3 1
April 25, 2011 ......................... 91 74 61 2 0
April 25, 2012 ......................... 88 73 45 1 0
April 25, 2013 ......................... 85 72 31 1 0
April 25, 2014 ......................... 83 72 21 0 0
April 25, 2015 ......................... 80 72 13 0 0
April 25, 2016 ......................... 78 56 9 0 0
April 25, 2017 ......................... 41 1 0 0 0
April 25, 2018 ......................... 38 1 0 0 0
April 25, 2019 ......................... 33 1 0 0 0
April 25, 2020 ......................... 29 1 0 0 0
April 25, 2021 ......................... 24 0 0 0 0
April 25, 2022 ......................... 20 0 0 0 0
April 25, 2023 ......................... 19 0 0 0 0
April 25, 2024 ......................... 17 0 0 0 0
April 25, 2025 ......................... 15 0 0 0 0
April 25, 2026 ......................... 13 0 0 0 0
April 25, 2027 ......................... 11 0 0 0 0
April 25, 2028 ......................... 8 0 0 0 0
April 25, 2029 ......................... 6 0 0 0 0
April 25, 2030 ......................... 3 0 0 0 0
April 25, 2031 ......................... 0 0 0 0 0
Weighted Average Life
(in years)(1) ....................... 16.25 12.22 9.58 4.70 3.02
Weighted Average Life
(in years)(1)(2) .................... 13.50 8.44 5.89 4.18 2.69
- ----------
(1) The weighted average lives of the Certificates are determined by:
(a) multiplying the amount of each principal payment by the number
of years from the date of issuance to the related Distribution
Date,
(b) adding the results, and
(c) dividing the sum by the initial respective Certificate
Principal Balance for such class of Certificates.
(2) To the Optional Termination Date.
S-57
Percent of the Initial Certificate Principal Balance
at the Respective Percentages of the Prepayment Model
Class A-5
------------------------------------
Distribution Date 0% 20% 30% 40% 50%
- ----------------- ---- ---- ---- ---- ----
Initial Percentage ..................... 100% 100% 100% 100% 100%
April 25, 2003 ......................... 100 100 100 100 100
April 25, 2004 ......................... 100 100 100 100 100
April 25, 2005 ......................... 100 100 100 100 63
April 25, 2006 ......................... 99 90 87 86 51
April 25, 2007 ......................... 98 80 73 62 25
April 25, 2008 ......................... 95 65 54 36 12
April 25, 2009 ......................... 91 51 36 21 6
April 25, 2010 ......................... 80 22 16 12 3
April 25, 2011 ......................... 69 10 5 7 1
April 25, 2012 ......................... 58 4 1 4 1
April 25, 2013 ......................... 48 2 0 2 0
April 25, 2014 ......................... 39 1 0 1 0
April 25, 2015 ......................... 30 0 0 1 0
April 25, 2016 ......................... 22 0 0 0 0
April 25, 2017 ......................... 0 0 0 0 0
April 25, 2018 ......................... 0 0 0 0 0
April 25, 2019 ......................... 0 0 0 0 0
April 25, 2020 ......................... 0 0 0 0 0
April 25, 2021 ......................... 0 0 0 0 0
April 25, 2022 ......................... 0 0 0 0 0
April 25, 2023 ......................... 0 0 0 0 0
April 25, 2024 ......................... 0 0 0 0 0
April 25, 2025 ......................... 0 0 0 0 0
April 25, 2026 ......................... 0 0 0 0 0
April 25, 2027 ......................... 0 0 0 0 0
April 25, 2028 ......................... 0 0 0 0 0
April 25, 2029 ......................... 0 0 0 0 0
April 25, 2030 ......................... 0 0 0 0 0
April 25, 2031 ......................... 0 0 0 0 0
Weighted Average Life
(in years)(1) ....................... 10.82 6.74 6.24 5.86 4.27
Weighted Average Life
(in years)(1)(2) .................... 10.82 6.64 5.43 4.23 3.08
- ----------
(1) The weighted average lives of the Certificates are determined by:
(a) multiplying the amount of each principal payment by the number
of years from the date of issuance to the related Distribution
Date,
(b) adding the results, and
(c) dividing the sum by the initial respective Certificate
Principal Balance for such class of Certificates.
(2) To the Optional Termination Date.
S-58
Percent of the Initial Certificate Principal Balance
at the Respective Percentages of the Prepayment Model
Class A-R
------------------------------------
Distribution Date 0% 20% 30% 40% 50%
- ----------------- ---- ---- ---- ---- ----
Initial Percentage ..................... 100% 100% 100% 100% 100%
April 25, 2002 ......................... 0 0 0 0 0
April 25, 2003 ......................... 0 0 0 0 0
April 25, 2004 ......................... 0 0 0 0 0
April 25, 2005 ......................... 0 0 0 0 0
April 25, 2006 ......................... 0 0 0 0 0
April 25, 2007 ......................... 0 0 0 0 0
April 25, 2008 ......................... 0 0 0 0 0
April 25, 2009 ......................... 0 0 0 0 0
April 25, 2010 ......................... 0 0 0 0 0
April 25, 2011 ......................... 0 0 0 0 0
April 25, 2012 ......................... 0 0 0 0 0
April 25, 2013 ......................... 0 0 0 0 0
April 25, 2014 ......................... 0 0 0 0 0
April 25, 2015 ......................... 0 0 0 0 0
April 25, 2016 ......................... 0 0 0 0 0
April 25, 2017 ......................... 0 0 0 0 0
April 25, 2018 ......................... 0 0 0 0 0
April 25, 2019 ......................... 0 0 0 0 0
April 25, 2020 ......................... 0 0 0 0 0
April 25, 2021 ......................... 0 0 0 0 0
April 25, 2022 ......................... 0 0 0 0 0
April 25, 2023 ......................... 0 0 0 0 0
April 25, 2024 ......................... 0 0 0 0 0
April 25, 2025 ......................... 0 0 0 0 0
April 25, 2026 ......................... 0 0 0 0 0
April 25, 2027 ......................... 0 0 0 0 0
April 25, 2028 ......................... 0 0 0 0 0
April 25, 2029 ......................... 0 0 0 0 0
April 25, 2030 ......................... 0 0 0 0 0
April 25, 2031 ......................... 0 0 0 0 0
April 25, 2032 ......................... 0 0 0 0 0
Weighted Average Life
(in years)(1) ....................... 0.07 0.07 0.07 0.07 0.07
Weighted Average Life
(in years)(1)(2) .................... 0.07 0.07 0.07 0.07 0.07
- ----------
(1) The weighted average lives of the Certificates are determined by:
(a) multiplying the amount of each principal payment by the number
of years from the date of issuance to the related Distribution
Date,
(b) adding the results, and
(c) dividing the sum by the initial respective Certificate
Principal Balance for such class of Certificates.
(2) To the Optional Termination Date.
S-59
Percent of the Initial Certificate Principal Balance
at the Respective Percentages of the Prepayment Model
Class M-1
------------------------------------
Distribution Date 0% 20% 30% 40% 50%
- ----------------- ---- ---- ---- ---- ----
Initial Percentage ..................... 100% 100% 100% 100% 100%
April 25, 2003 ......................... 100 100 100 100 100
April 25, 2004 ......................... 100 100 100 100 100
April 25, 2005 ......................... 100 100 100 100 100
April 25, 2006 ......................... 100 75 44 24 11
April 25, 2007 ......................... 100 59 30 14 6
April 25, 2008 ......................... 100 45 20 8 3
April 25, 2009 ......................... 100 35 14 5 1
April 25, 2010 ......................... 100 27 9 3 1
April 25, 2011 ......................... 100 21 6 2 0
April 25, 2012 ......................... 100 16 4 1 0
April 25, 2013 ......................... 100 12 3 0 0
April 25, 2014 ......................... 100 9 2 0 0
April 25, 2015 ......................... 100 7 1 0 0
April 25, 2016 ......................... 100 5 1 0 0
April 25, 2017 ......................... 4 0 0 0 0
April 25, 2018 ......................... 3 0 0 0 0
April 25, 2019 ......................... 3 0 0 0 0
April 25, 2020 ......................... 2 0 0 0 0
April 25, 2021 ......................... 2 0 0 0 0
April 25, 2022 ......................... 2 0 0 0 0
April 25, 2023 ......................... 2 0 0 0 0
April 25, 2024 ......................... 1 0 0 0 0
April 25, 2025 ......................... 1 0 0 0 0
April 25, 2026 ......................... 1 0 0 0 0
April 25, 2027 ......................... 1 0 0 0 0
April 25, 2028 ......................... 1 0 0 0 0
April 25, 2029 ......................... 0 0 0 0 0
April 25, 2030 ......................... 0 0 0 0 0
April 25, 2031 ......................... 0 0 0 0 0
Weighted Average Life
(in years)(1) ....................... 14.80 6.59 4.71 3.91 3.65
Weighted Average Life
(in years)(1)(2) .................... 14.57 6.04 4.23 3.53 3.23
- ----------
(1) The weighted average lives of the Certificates are determined by:
(a) multiplying the amount of each principal payment by the number
of years from the date of issuance to the related Distribution
Date,
(b) adding the results, and
(c) dividing the sum by the initial respective Certificate
Principal Balance for such class of Certificates.
(2) To the Optional Termination Date.
S-60
Percent of the Initial Certificate Principal Balance
at the Respective Percentages of the Prepayment Model
Class M-2
------------------------------------
Distribution Date 0% 20% 30% 40% 50%
- ----------------- ---- ---- ---- ---- ----
Initial Percentage ..................... 100% 100% 100% 100% 100%
April 25, 2003 ......................... 100 100 100 100 100
April 25, 2004 ......................... 100 100 100 100 100
April 25, 2005 ......................... 100 100 100 100 100
April 25, 2006 ......................... 100 75 44 24 11
April 25, 2007 ......................... 100 59 30 14 6
April 25, 2008 ......................... 100 45 20 8 3
April 25, 2009 ......................... 100 35 14 5 1
April 25, 2010 ......................... 100 27 9 3 1
April 25, 2011 ......................... 100 21 6 2 0
April 25, 2012 ......................... 100 16 4 1 0
April 25, 2013 ......................... 100 12 3 0 0
April 25, 2014 ......................... 100 9 2 0 0
April 25, 2015 ......................... 100 7 1 0 0
April 25, 2016 ......................... 100 5 1 0 0
April 25, 2017 ......................... 4 0 0 0 0
April 25, 2018 ......................... 3 0 0 0 0
April 25, 2019 ......................... 3 0 0 0 0
April 25, 2020 ......................... 2 0 0 0 0
April 25, 2021 ......................... 2 0 0 0 0
April 25, 2022 ......................... 2 0 0 0 0
April 25, 2023 ......................... 2 0 0 0 0
April 25, 2024 ......................... 1 0 0 0 0
April 25, 2025 ......................... 1 0 0 0 0
April 25, 2026 ......................... 1 0 0 0 0
April 25, 2027 ......................... 1 0 0 0 0
April 25, 2028 ......................... 1 0 0 0 0
April 25, 2029 ......................... 0 0 0 0 0
April 25, 2030 ......................... 0 0 0 0 0
April 25, 2031 ......................... 0 0 0 0 0
Weighted Average Life
(in years)(1) ....................... 14.80 6.59 4.69 3.80 3.39
Weighted Average Life
(in years)(1)(2) .................... 14.57 6.04 4.20 3.43 3.11
- ----------
(1) The weighted average lives of the Certificates are determined by:
(a) multiplying the amount of each principal payment by the number
of years from the date of issuance to the related Distribution
Date,
(b) adding the results, and
(c) dividing the sum by the initial respective Certificate
Principal Balance for such class of Certificates.
(2) To the Optional Termination Date.
S-61
Additional Information
The Depositor intends to file certain additional yield tables and other
computational materials with respect to the Offered Certificates with the
Securities and Exchange Commission in a report on Form 8-K. Such tables and
materials were prepared by one or more of the Underwriters at the request of
certain prospective investors, based on assumptions provided by, and satisfying
the special requirements of, such prospective investors. Such tables and
assumptions may be based on assumptions that differ from the 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
Certificates against the purchase price of the Mortgage Loans.
Material Federal Income Tax Consequences
The Pooling and Servicing Agreement provides that the Trust Fund,
exclusive of the assets held in the Carryover Reserve Fund, will comprise a
Lower Tier REMIC and an Upper Tier REMIC (each as defined in the Pooling and
Servicing Agreement). The Lower Tier REMIC will issue uncertificated regular
interests to the Upper Tier REMIC. The Lower Tier REMIC and the Upper Tier REMIC
will each designate a single class of interests as the residual interest in that
REMIC. The Residual Certificate will represent ownership of the residual
interests in each of the REMICs. Elections will be made to treat the Lower Tier
REMIC and the Upper Tier REMIC as REMICs for federal income tax purposes.
Each class of Certificates (other than the Class A-R Certificates) will
represent beneficial ownership of regular interests issued by the Upper Tier
REMIC. In addition, each class of the Certificates (other than the Class A-IO
Certificates) will represent a beneficial interest in the right to receive
payments from the Carryover Reserve Fund, to the extent of their respective
entitlements to Net Rate Carryover.
Upon the issuance of the Certificates, Sidley Austin Brown & Wood LLP
("Tax Counsel"), will deliver its opinion concluding, assuming compliance with
the Pooling and Servicing Agreement, for federal income tax purposes, that the
Lower Tier REMIC and the Upper Tier REMIC will qualify as REMICs within the
meaning of Section 860D of the Internal Revenue Code of 1986, as amended (the
"Code"), and that the Certificates (other than the Class A-R Certificates) will
represent regular interests in a REMIC. Moreover, Tax Counsel will deliver an
opinion concluding that the rights of the holders of the Certificates (other
than the Class A-IO Certificates) to receive payments from the Carryover Reserve
Fund represent, for federal income tax purposes, contractual rights coupled with
regular interests within the meaning of Treasury regulations ss.1.860G-2(i). The
term "Net Rate Carryover Agreement " refers to the rights of the Certificates
(other than the Class A-IO Certificates) to receive payments from the Carryover
Reserve Fund, and the obligation of the Class A-IO Certificateholders to make
payments to the Carryover Reserve Fund with respect to Net Rate Carryover.
Taxation of Regular Interests
The following discussion assumes that the rights and obligations of the
Certificateholders under the Net Rate Carryover Agreement will be treated as
rights and obligations under a notional principal contract rather than as a
partnership for federal income tax purposes. If these rights and obligations
were treated as representing the beneficial interests in an entity taxable as a
partnership for federal income tax purposes, then there could be different tax
timing consequences to all Certificateholders and different withholding tax
consequences on payments of Net Rate Carryover to Certificateholders who are
non-U.S. Persons. Prospective investors in the Certificates should consult their
tax advisors regarding their appropriate tax treatment.
A holder of a Certificate (other than a Class A-IO Certificate) must
allocate the purchase price for such Certificate between two components -- the
REMIC regular interest component and the Net Rate Carryover Agreement component.
The Net Rate Carryover Agreement component should further be viewed as a deemed
obligation of the Class A-IO Certificateholder to the extent payments are used
to pay Net Rate Carryover. For information reporting purposes, the Trustee will
assume that, with respect to any Certificate, the Net Rate Carryover Agreement
component will have an insubstantial value relative to the value of the regular
interest component. The IRS could, however, argue that the Net Rate Carryover
Agreement component has a greater value, and if that argument were to be
sustained, the regular interest component could be viewed as having been issued
with either an additional amount of original issue discount ("OID") (which could
cause the total amount of discount to exceed a statutorily defined de minimis
amount) or with less premium (which would reduce the amount of premium available
to be used as an offset against interest income). See "Federal Income Tax
Consequences -- Taxation of Regular Interest Certificates" in the Prospectus.
S-62
Upon the sale, exchange, or other disposition of a Certificate (other
than a Class A-R Certificate), the holder must allocate the amount realized
between the two components of these Certificates (that is, the regular interest
component and the Net Rate Carryover Agreement component) based on the relative
fair market values of those components at the time of sale. Assuming that these
Certificates are held as "capital assets" within the meaning of section 1221 of
the Code, gain or loss on the disposition of an interest in the Net Rate
Carryover Agreement component should be capital gain or loss, and, gain or loss
on the disposition of the regular interest component should, subject to the
limitation described below, be capital gain or loss. Gain attributable to the
regular interest component of such a Certificate will be treated as ordinary
income, however, to the extent such gain does not exceed the excess, if any, of:
(1) the amount that would have been includible in the holder's
gross income with respect to the regular interest component had income
thereon accrued at a rate equal to 110% of the applicable federal rate
as defined in section 1274(d) of the Code determined as of the date of
purchase of the Certificate
over
(2) the amount actually included in such holder's income.
As indicated above, a portion of the purchase price paid by a holder to
acquire a Certificate (other than a Class A-IO Certificate) will be attributable
to the Net Rate Carryover Agreement component of such Certificate. The portion
of the overall purchase price attributable to the Net Rate Carryover Agreement
component must be amortized over the life of such Certificate, taking into
account the declining balance of the related regular interest component.
Treasury regulations concerning notional principal contracts provide alternative
methods for amortizing the purchase price of an interest rate cap contract.
Under one method -- the level yield constant interest method -- the price paid
for an Net Rate Carryover Agreement is amortized over the life of the cap as
though it were the principal amount of a loan bearing interest at a reasonable
rate. Holders are urged to consult their tax advisors concerning the methods
that can be employed to amortize the portion of the purchase price paid for the
Net Rate Carryover Agreement component of such a Certificate.
Any payments received by a holder of a Certificate from the Carryover
Reserve Fund, and in the case of a Class A-IO Certificateholder, any payment
made to the Carryover Reserve Fund used to pay Net Rate Carryover, will be
treated as periodic payments on an interest rate cap agreement. To the extent
the sum of such periodic payments for any year exceeds that year's amortized
price of the Net Rate Carryover Agreement component, such excess is ordinary
income. If for any year the amount of that year's amortized price exceeds the
sum of the periodic payments, such excess is allowable as an ordinary deduction.
In the case of an individual, such deduction will be subject to the 2-percent
floor imposed on miscellaneous itemized deductions under section 67 of the Code
and may be subject to the overall limitation on itemized deductions imposed
under section 68.
Class A-IO Certificateholders should be viewed as having the right to
receive interest from the Trust Fund in excess of the interest due on the other
Certificates and as being obligated to make a payment under an Net Rate
Carryover Agreement to the extent Net Rate Carryover is paid from payments
received from the Mortgage Loans. Such payments would generally be treated as
miscellaneous itemized deductions for individuals, subject to the limitations of
Sections 67 and Section 68 of the Code mentioned above. In addition, the Class
A-IO Certificateholders should be viewed as receiving a payment to assume such
obligation, increasing the total amount paid for the REMIC component of the
Class A-IO Certificates. Because the Class A-IO Certificates represent an
obligation under an interest rate cap contract as well as a REMIC regular
interest (and such obligation cannot be separated from such Certificates) they
should not be placed in another entity intended to qualify as a REMIC or a
FASIT. The Trustee will treat the amount deemed received to assume this deemed
obligation as nominal, but the IRS could disagree. Class A-IO Certificateholders
should consult with their tax advisors as to the consequences of holding the
Class A-IO Certificates and being treated as an obligor under a notional
principal contract.
S-63
Interest on a regular interest must be included in income by a holder
under the accrual method of accounting, regardless of the holder's regular
method of accounting. In addition, a regular interest could be considered to
have been issued with OID. Although the tax treatment is not entirely certain,
the Class A-IO Certificates will be treated as having been issued with OID for
federal income tax purposes equal to the excess of all expected payments of
interest on the certificates over their issue price. Although unclear, a holder
of a Class A-IO Certificate may be entitled to deduct a loss to the extent that
its remaining basis exceeds the maximum amount of future payments to which the
Certificateholder would be entitled if there were no further prepayments of the
mortgage loans. See "Federal Income Tax Consequences -- Taxation of Regular
Interest Certificates" in the Prospectus. The prepayment assumption that will be
used in determining the accrual of any OID, market discount, or bond premium, if
any, will be a rate equal to 30% CPR as described above. No representation is
made that the mortgage loans will prepay at such a 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.
Status of the Certificates
The regular interest component of the 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, exclusive of the applicable
Carryover Reserve Fund, would be so treated. In addition, the interest derived
from that component will be treated as interest derived from an obligation
secured by real property or an interest in real property for purposes of section
856(c)(3) of the Code in the same proportion that the income of the Trust Fund
would be so treated. The Net Rate Carryover Agreement or partnership interest
component (and in the case of the Class A-R Certificates, for the additional
reason that they are residual interests in a REMIC) of a Certificate will not,
however, qualify as an asset described in Section 7701(a)(19)(C) of the Code or
as a real estate asset under Section 856(c)(5)(B) of the Code. Due to their
entitlement or obligation under the Net Rate Carryover Agreement component, the
Certificates are not appropriate assets for resecuritization in a REMIC. Once
these rights and obligations expire completely, the Certificates (other than the
Class A-R Certificates) will be REMIC-qualified assets.
Taxation of Residual Interests
The holders of the Class A-R Certificates must include the taxable
income of the REMIC in their federal taxable income. The resulting tax liability
of the holders may exceed cash distributions to them during certain periods. All
or a portion of the taxable income from a Class A-R Certificate recognized by a
holder may be treated as "excess inclusion" income, which, with limited
exceptions, cannot be reduced by deductions (including net operating losses) and
in all cases is subject to U.S. federal income tax. The Net Rate Carryover
Agreement component of the Class A-R Certificates has negligible value and is
therefore not discussed further herein.
Purchasers of a Class A-R Certificate are encouraged to consider
carefully the tax consequences of an investment in Class A-R Certificates
discussed in the prospectus and consult their own tax advisors with respect to
those consequences. See "Material Federal Income Tax Consequences -- Taxation of
Holders of Residual Interest Securities" in the prospectus. Specifically,
prospective holders of Class A-R Certificates should consult their tax advisors
regarding whether, at the time of acquisition, a Class A-R Certificate will be
treated as a "noneconomic" residual interest, a "non-significant value" residual
interest or a "tax avoidance potential" residual interest. See "-- Restrictions
on Ownership and Transfer of Residual Certificates," "Material Federal Income
Tax Considerations -- Taxation of Holders of Residual Interest Securities --
Mark to Market Rules," and "-- Excess Inclusions" in the prospectus.
Additionally, for information regarding Prohibited Transactions and Treatment of
Realized Losses, see "Material Federal Income Tax Consequences -- Taxation of
the REMIC -- Prohibited Transactions and Contributions Tax" and "-- Taxation of
Holders of Residual Interest Securities -- Limitation on Losses" in the
prospectus.
S-64
In Revenue Procedure 2001-12, effective February 4, 2000 pending
finalization of the new regulations, the IRS has expanded the "safe harbor" for
transfers of noneconomic residual interests to include certain transfers to
domestic taxable corporations with large amounts of gross and net assets where
agreement is made that all future transfers will be to taxable domestic
corporations in transactions that qualify for one of the "safe harbor"
provisions. Eligibility for this safe harbor requires, among other things, that
the facts and circumstances known to the transferor at the time of transfer not
indicate to a reasonable person that the taxes with respect to the residual
interest will not be paid, with an unreasonably low cost for the transfer
specifically mentioned as negating eligibility.
Prohibited Transactions Tax and Other Taxes
The Code imposes a tax on REMICs equal to 100% of the net income
derived from "prohibited transactions" (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 the Trust Fund will
engage in any prohibited transactions in which it would recognize a material
amount of net income.
In addition, subject to certain exceptions (including an exception for
cash contributed to a REMIC during the 3-month period beginning on the startup
day), 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 (the "startup
day") could result in the imposition of a tax on the trust fund equal to 100% of
the value of the contributed property (the "Contributions Tax"). The Trust Fund
will not accept contributions that would subject it to such tax.
In addition, 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 other than qualifying rents
and other qualifying income for a real estate investment trust. It is not
anticipated that the Trust Fund will recognize net income from foreclosure
property subject to federal income tax.
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 the 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 and 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 either 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 Trust Fund first with amounts otherwise distributable to the
holders of Certificates in the manner provided in the Pooling and Servicing
Agreement. It is not anticipated that any material state or local income or
franchise tax will be imposed on the Trust Fund.
For further information regarding the federal income tax consequences
of investing in the Certificates, see "Material Federal Income Tax Consequences
- -- REMIC Certificates" in the Prospectus.
Other Taxes
The Depositor makes no representations regarding the tax consequences
of purchase, ownership or disposition of the Certificates under the tax laws of
any state. Investors considering an investment in the 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 Certificates.
S-65
ERISA Considerations
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), prohibits "parties in interest" with respect to an employee
benefit plan subject to ERISA from engaging in certain transactions involving
such Plan and its assets unless a statutory, regulatory or administrative
exemption applies to the transaction. Section 4975 of the Code imposes certain
excise taxes on prohibited transactions involving "disqualified persons" and
employee benefit plans or other arrangements (including, but not limited to,
individual retirement accounts) described under that Section (collectively with
employee benefit plans subject to ERISA, "Plans"); ERISA authorizes the
imposition of civil penalties for prohibited transactions involving Plans not
covered under Section 4975 of the Code. Any Plan fiduciary which proposes to
cause a Plan to acquire the Certificates should consult with its counsel with
respect to the potential consequences under ERISA and the Code of the Plan's
acquisition and ownership of such Certificates. See "ERISA Considerations" in
the Prospectus.
Certain employee benefit plans, including governmental plans and
certain church plans, are not subject to ERISA's requirements. Accordingly,
assets of such plans may be invested in the Certificates without regard to the
ERISA considerations described herein and in the Prospectus, subject to the
provisions of other applicable federal and state law. However, any such plan
which is qualified and exempt from taxation under Sections 401(a) and 501(a) of
the Code may be subject to the prohibited transaction rules set forth in Section
503 of the Code.
Except as noted above, investments by Plans are subject to ERISA's
general fiduciary requirements, including the requirement of investment prudence
and diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan. A fiduciary which decides to
invest the assets of a Plan in the Certificates should consider, among other
factors, the extreme sensitivity of the investments to the rate of principal
payments (including prepayments) on the Mortgage Loans.
The U.S. Department of Labor has granted to Countrywide Securities
Corporation, Credit Suisse First Boston Corporation and Deutsche Bank Securities
Inc. substantially identical administrative exemptions (together, the
"Exemption") from certain of the prohibited transaction rules of ERISA and the
related excise tax provisions of Section 4975 of the Code with respect to the
initial purchase, the holding and the subsequent resale by Plans of securities,
including certificates, issued by entities that hold investment pools consisting
of certain receivables, loans and other obligations and the servicing, operation
and management of such entities, provided that the conditions and requirements
of the Exemption are met. The Exemption applies to mortgage loans such as the
Mortgage Loans in the Trust Fund. The Exemption was amended by Prohibited
Transaction Exemption 2000-58, Exemption Application No. D-10829, 65 Fed. Reg.
67765 (November 13, 2000) to extend exemptive relief to certificates rated in
the four highest generic rating categories, including subordinated certificates,
in certain designated transactions when the conditions of the Exemptions are
met. For a general description of the Exemption and the conditions that must be
met for the Exemption to apply, see "ERISA Considerations" in the Prospectus.
It is expected that the Exemption will apply to the acquisition and
holding of the Certificates (other than the Class A-IO and Class A-R
Certificates) by Plans and that all conditions of the Exemption other than those
within the control of the investors will be met. In addition, as of the date
hereof, there is no single Mortgagor that is the obligor on five percent (5%) of
the Mortgage Loans included in the Trust Fund by aggregate unamortized principal
balance of the assets of the Trust Fund.
The rating of a security may change. If a class of certificates no
longer has a rating of at least BBB-- or its equivalent from at least one Rating
Agency, certificates of that class will no longer be eligible for relief under
the Exemption, and consequently may not be sold to or purchased by a Plan
(although a Plan that had purchased the security when it had a permitted rating
would not be required by the Exemption to dispose of it).
Because the Class A-IO and Class A-R Certificates are not being
purchased by an underwriter to whom an exemption similar to the Exemption has
been granted, those classes of Certificates do not currently meet the
requirements of the Exemption or any comparable individual administrative
exemption granted to any underwriter. Consequently, the Class A-IO and Class A-R
Certificates may be transferred only if the Trustee receives:
S-66
o a representation from the transferee of the Certificate, acceptable to
and in form and substance satisfactory to the Trustee, that the
transferee is not a Plan, or a person acting on behalf of a Plan or
using a Plan's assets to effect the transfer; or
o an opinion of counsel satisfactory to the Trustee that the purchase and
holding of the Certificate by a plan, or any person acting on behalf of
a Plan or using a Plan's assets, will not result in the assets of the
Trust Fund being deemed to be "plan assets" and subject to the
prohibited transaction requirements of ERISA and the Code and will not
subject the Trustee to any obligation in addition to those undertaken
in the Pooling and Servicing Agreement.
This representation shall be considered to have been made to the
Trustee by the transferee's acceptance of a Class A-IO Certificate. If the
representation is not true, or any attempt to transfer to a Plan or a person
acting on behalf of a Plan or using the Plan's assets is initiated without the
required opinion of counsel, the attempted transfer or acquisition shall be
void.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the effect of the Plan Assets
Regulation, the applicability of the Exemption, and the potential consequences
in their specific circumstances, prior to making an investment in the
Certificates. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment prudence and diversification, an
investment in the Certificates is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
Method of Distribution
Subject to the terms and conditions set forth in the Underwriting
Agreement among the Depositor, Countrywide Securities Corporation (an affiliate
of the Depositor, the Seller and the Master Servicer), Credit Suisse First
Boston Corporation and Deutsche Bank Securities Inc. (collectively, the
"Underwriters"), the Depositor has agreed to sell the Certificates other than
the Class A-IO and Class A-R Certificates (the "Underwritten Certificates") to
the Underwriters, and the Underwriters have respectively agreed to purchase from
the Depositor the initial Certificate Principal Balance of each class of the
Underwritten Certificates from the Depositor set forth below. It is expected
that the proceeds to the Depositor from the sale of the Underwritten
Certificates will be approximately $628,418,892, plus accrued interest, before
deducting issuance expenses payable by the Depositor, estimated to be
approximately $550,000.
Countrywide
Securities Credit Suisse First Deutsche Bank
Class Corporation Boston Corporation Securities Inc.
- ----- ----------- ------------------- ---------------
A-1 ................... $259,800,000 $ 32,475,000 $ 32,475,000
A-2A .................. 56,000,000 7,000,000 7,000,000
A-2B .................. 56,480,000 7,060,000 7,060,000
A-3 ................... 39,920,000 4,990,000 4,990,000
A-4 ................... 19,120,000 2,390,000 2,390,000
A-5 ................... 44,960,000 5,620,000 5,620,000
M-1 ................... 22,680,000 2,835,000 2,835,000
M-2 ................... 5,040,000 630,000 630,000
------------ ------------ ------------
Total ............ $504,000,000 $ 63,000,000 $ 63,000,000
============ ============ ============
The Depositor has been advised that the Underwriters propose initially
to offer the Underwritten Certificates to certain dealers at the prices set
forth on the cover page less a selling concession not to exceed the percentage
of the Certificate denomination set forth below, and that the Underwriters may
allow and such dealers may reallow a reallowance discount not to exceed the
percentage of the Certificate denomination set forth below:
S-67
Selling Reallowance
Class Concession Discount
- ----- ---------- -----------
A-1................................ 0.06250% 0.02188%
A-2A............................... 0.18750% 0.06563%
A-2B............................... 0.18750% 0.06563%
A-3................................ 0.25000% 0.08750%
A-4................................ 0.31250% 0.10938%
A-5................................ 0.25000% 0.08750%
M-1................................ 0.37500% 0.13125%
M-2................................ 0.50000% 0.17500%
After the initial public offering, the public offering prices, such
concessions and such discounts may be changed.
The Depositor has been advised by the Underwriters that they intend to
make a market in the Underwritten Certificates, but no Underwriter has any
obligation to do so. There can be no assurance that a secondary market for the
Underwritten 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.
Until the distribution of the Underwritten Certificates is completed,
rules of the Securities and Exchange Commission may limit the ability of the
Underwriters and certain selling group members to bid for and purchase the
Underwritten Certificates. As an exception to these rules, the Underwriters are
permitted to engage in certain transactions that stabilize the price of the
Underwritten Certificates. Such transactions consist of bids or purchases for
the purpose of pegging, fixing or maintaining the price of the Underwritten
Certificates.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases.
Neither the Depositor nor any of the Underwriters makes any
representation or prediction as to the direction or magnitude of any effect that
the transactions described above may have on the prices of the Underwritten
Certificates. In addition, neither the Depositor nor any of the Underwriters
makes any representation that the Underwriters will engage in such transactions
or that such transactions, once commenced, will not be discontinued without
notice.
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
"Securities Act").
The Class A-IO and Class A-R Certificates will not be purchased by the
Underwriters but will be transferred to the Seller on the Closing Date as
partial consideration for the sale of the Mortgage Loans to the Depositor. The
Class A-IO and Class A-R Certificates may be offered by the Seller (or an
affiliate) or the Depositor from time to time directly or through underwriters
or agents (either of which may include Countrywide Securities Corporation) in
one or more negotiated transactions, or otherwise, at varying prices to be
determined at the time of sale, in one or more separate transactions at prices
to be negotiated at the time of each sale. Any underwriters or agents that
participate in the distribution of the Class A-IO and Class A-R Certificates may
be deemed to be "underwriters" within the meaning of the Securities Act and any
profit on the sale of the certificates by them and any discounts, commissions,
concessions or other compensation received by any of them may be deemed to be
underwriting discounts and commissions under the Securities Act.
Legal Matters
The validity of the Certificates, including certain federal income tax
consequences with respect thereto, will be passed upon for the Depositor by
Sidley Austin Brown & Wood LLP, New York, New York. Stroock & Stroock & Lavan
LLP, New York, New York, will pass upon certain legal matters on behalf of the
Underwriters.
S-68
Ratings
It is a condition of the issuance of the Certificates that each class
of Certificates be assigned the ratings designated below by Moody's Investors
Service, Inc. ("Moody's") and Standard & Poor's, a division of The McGraw-Hill
Companies, Inc. ("S&P", and together with Moody's, the "Rating Agencies").
Class Rating Rating
----- ------ ------
A-1 Aaa AAA
A-2A Aaa AAA
A-2B Aaa AAA
A-3 Aaa AAA
A-4 Aaa AAA
A-5 Aaa AAA
A-IO Aaa AAA
A-R Aaa AAA
M-1 Aa2 AA
M-2 A2 A
The ratings assigned to the Class A-R Certificates address only the
return of the Certificate Principal Balance of the Class A-R Certificates and
the distribution of interest thereon at the Pass-Through Rate for the Class A-R
Certificates.
The security ratings assigned to the 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 Rating Agencies. The
ratings on the Certificates do not, however, constitute statements regarding the
likelihood or frequency of prepayments on the Mortgage Loans, the payment of the
Net Rate Carryover or the anticipated yields in light of prepayments. Further,
the ratings on the Class A-IO Certificates do not address whether investors will
recoup their initial investment.
The Depositor has not requested a rating of the Certificates by any
rating agency other than Moody's and S&P. However, there can be no assurance as
to whether any other rating agency will rate the 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 Certificates could be lower than the
respective ratings assigned by the Rating Agencies.
S-69
Index of Defined Terms
Accrual Period......................................................S-37
Additional Interest Advance Reimbursement Amount....................S-36
Additional Required Interest Advance................................S-28
Adjusted Net Mortgage Rate..........................................S-38
Advance.............................................................S-27
Applied Realized Loss Amount........................................S-44
balloon loans........................................................S-9
Bankruptcy Rate.....................................................S-26
beneficial owner....................................................S-29
Book-Entry Certificates.............................................S-29
Business Day........................................................S-37
capital assets......................................................S-63
Carryover Reserve Fund..............................................S-44
Cedelbank...........................................................S-31
Certificate Account.................................................S-33
Certificate Owners..................................................S-29
Certificate Principal Balance.......................................S-28
Certificates........................................................S-28
CI..................................................................S-30
Class A Certificates................................................S-28
Class A Principal Distribution Amount...............................S-41
Class M-1 Principal Distribution Amount.............................S-41
Class M-2 Principal Distribution Amount.............................S-41
Clearstream.........................................................S-30
Clearstream Banking.................................................S-31
Clearstream Banking AG..............................................S-31
Clearstream Banking, societe anonyme................................S-30
Clearstream International, societe anonyme..........................S-30
Clearstream Services, societe anonyme...............................S-30
Clearstream, Luxembourg.............................................S-30
Clearstream, Luxembourg S.A.........................................S-30
Code................................................................S-62
Collateral Value....................................................S-16
Combined Loan-to-Value Ratio........................................S-16
Compensating Interest...............................................S-27
Contributions Tax...................................................S-65
Cooperative.........................................................S-31
Co-Trustee..........................................................S-16
Countrywide Credit..................................................S-23
Countrywide Home Loans..............................................S-24
Countrywide Servicing...............................................S-23
CPR.................................................................S-51
CSSF................................................................S-31
Cumulative Loss Trigger Event.......................................S-42
Current Interest....................................................S-38
Cut-off Date........................................................S-15
Cut-off Date Principal Balance......................................S-15
DBC.................................................................S-30
Definitive Certificate..............................................S-29
Delay Delivery Mortgage Loans.......................................S-49
Deleted Mortgage Loan...............................................S-18
Delinquency Trigger Event...........................................S-42
Depositor...........................................................S-16
Deutsche Borse Clearing AG..........................................S-31
disqualified persons................................................S-66
Distribution Account................................................S-36
Distribution Account Deposit Date...................................S-34
Distribution Date...................................................S-37
DTC.................................................................S-29
Due Dates...........................................................S-27
Due Period..........................................................S-36
Enhancement Payment.................................................S-43
ERISA...............................................................S-66
Euroclear...........................................................S-29
Euroclear Operator..................................................S-31
Euroclear Participants..............................................S-31
European Depositaries...............................................S-29
Exemption...........................................................S-66
Expense Fee Rate....................................................S-38
Financial Intermediary..............................................S-29
Foreclosure Rate....................................................S-26
Global Securities....................................................B-1
Indirect Participants...............................................S-29
Insurance Proceeds..................................................S-33
Interest Carry Forward Amount.......................................S-38
Interest Determination Date.........................................S-43
Interest Funds......................................................S-38
Interest Remittance Amount..........................................S-35
Last Scheduled Distribution Date....................................S-51
LIBOR Business Day..................................................S-44
Liquidation Proceeds................................................S-33
Loan Insurance Policy Premium Rate..................................S-39
Loan Insurer........................................................S-20
lock-up..............................................................B-1
Loss Coverage Obligation............................................S-43
Master Servicer.....................................................S-23
Master Servicer Advance Date........................................S-27
Modeling Assumptions................................................S-51
Moody's.............................................................S-69
Mortgage Loans......................................................S-15
Mortgage Notes......................................................S-15
Mortgage Pool.......................................................S-15
Mortgage Rate.......................................................S-15
mortgage related securities..........................................S-5
S-70
Mortgaged Properties................................................S-15
NAS Amount..........................................................S-41
NAS Principal Distribution Amount...................................S-40
net income from foreclosure property................................S-65
Net Mortgage Rate...................................................S-27
net rate cap........................................................S-13
Net Rate Cap........................................................S-39
Net Rate Carryover..................................................S-39
Net Rate Carryover Agreement........................................S-62
Notional Balance....................................................S-28
OID.................................................................S-63
One-Month LIBOR.....................................................S-43
Optional Termination Date...........................................S-46
Participants........................................................S-29
parties in interest.................................................S-66
Pass-Through Rate...................................................S-38
Percentage Interest.................................................S-37
Plans...............................................................S-66
Pooling and Servicing Agreement.....................................S-16
Prepayment Interest Excess..........................................S-27
Prepayment Interest Shortfall.......................................S-27
Prepayment Model....................................................S-51
Prepayment Period...................................................S-27
Primary Carryover Reserve Fund Deposit..............................S-44
Principal Distribution Amount.......................................S-41
Principal Funds.....................................................S-41
Principal Remittance Amount.........................................S-35
Principal Reserve Fund..............................................S-41
prohibited transactions.............................................S-65
Prohibited Transactions Tax.........................................S-65
Purchase Price......................................................S-18
Rating Agencies.....................................................S-69
real estate assets..................................................S-64
Realized Loss.......................................................S-43
Record Date.........................................................S-37
Reference Bank Rate.................................................S-43
Reference Banks.....................................................S-44
regular interests....................................................S-5
Relevant Depositary.................................................S-29
REO Property........................................................S-27
Replacement Mortgage Loan...........................................S-18
Required Percentage.................................................S-42
residual interest....................................................S-5
Rules...............................................................S-29
S&P.................................................................S-69
Scheduled Payments..................................................S-15
Secondary Carryover Reserve Fund Deposit............................S-44
Securities Act......................................................S-68
Seller..............................................................S-23
Seller Shortfall Interest Requirement...............................S-35
Senior Certificates.................................................S-28
Servicing Fee.......................................................S-26
Servicing Fee Rate..................................................S-26
startup day.........................................................S-65
Stated Principal Balance............................................S-15
Stepdown Date.......................................................S-42
subordinate certificates.............................................S-4
subordinate classes..................................................S-7
subordination........................................................S-7
Tax Counsel.........................................................S-62
Terms and Conditions................................................S-31
Trigger Event.......................................................S-42
Trigger Event Realized Loss.........................................S-43
Trust Fund..........................................................S-15
Trustee.............................................................S-16
Trustee Fee.........................................................S-36
Trustee's Mortgage File.............................................S-16
U.S. Person..........................................................S-4
Underwriters........................................................S-67
Underwritten Certificates...........................................S-67
United Guaranty.....................................................S-20
S-71
ANNEX A
THE MORTGAGE POOL
The following information sets forth in tabular format certain
information, as of the Cut-off Date, about the Mortgage Loans to be included in
the Mortgage Pool. Other than with respect to rates of interest, percentages are
approximate and are stated by the Cut-off Date Principal Balance. The sum of the
columns below may not equal the total indicated due to rounding.
Mortgage Rates for the Mortgage Loans in
Mortgage Pool(1)
Aggregate
Number of Principal
Mortgage Balance Percent of Cut-off Date
Range of Mortgage Rates (%) Loans Outstanding Principal Balance
------------------------------- --------- ------------ -----------------------
4.001 - 4.500............... 1 $ 19,894 0.00%
5.501 - 6.000............... 12 568,120 0.09
6.001 - 6.500............... 36 2,171,899 0.34
6.501 - 7.000............... 155 7,183,413 1.14
7.001 - 7.500............... 536 20,263,287 3.22
7.501 - 8.000............... 1,285 43,573,071 6.92
8.001 - 8.500............... 2,977 92,850,353 14.74
8.501 - 9.000............... 4,629 145,048,791 23.02
9.001 - 9.500............... 3,564 112,101,008 17.79
9.501 - 10.000............... 2,740 91,316,666 14.49
10.001 - 10.500............... 1,430 48,414,056 7.68
10.501 - 11.000............... 1,018 35,307,037 5.60
11.001 - 11.500............... 463 15,631,715 2.48
11.501 - 12.000............... 277 9,811,480 1.56
12.001 - 12.500............... 88 3,139,952 0.50
12.501 - 13.000............... 60 2,124,544 0.34
13.001 - 13.500............... 14 431,071 0.07
13.501 - 14.000............... 2 42,640 0.01
------ ------------ ------
Total 19,287 $629,998,996 100.00%
====== ============ ======
- ------------
(1) As of the Cut-off Date, the weighted average Mortgage Rate of the
Mortgage Loans in the Mortgage Pool was approximately 9.204% per annum.
A-1
Combined Loan-to-Value Ratios for the Mortgage Loans in
Mortgage Pool(1)
Aggregate
Number of Principal
Range of Combined Loan-to-Value Mortgage Balance Percent of Cut-off Date
Ratios (%) Loans Outstanding Principal Balance
- ------------------------------------------------------------------- --------- ------------ ------------------------
1.01-10.00....................................................... 3 $ 39,568 0.01%
15.01-20.00....................................................... 7 299,469 0.05
20.01-25.00....................................................... 7 372,152 0.06
25.01-30.00....................................................... 13 651,726 0.10
30.01-35.00....................................................... 18 723,432 0.11
35.01-40.00....................................................... 31 1,190,291 0.19
40.01-45.00....................................................... 36 1,462,277 0.23
45.01-50.00....................................................... 50 2,094,387 0.33
50.01-55.00....................................................... 70 2,887,448 0.46
55.01-60.00....................................................... 97 4,891,507 0.78
60.01-65.00....................................................... 136 5,994,184 0.95
65.01-70.00....................................................... 243 10,952,372 1.74
70.01-75.00....................................................... 347 14,875,225 2.36
75.01-80.00....................................................... 665 29,754,059 4.72
80.01-85.00....................................................... 1,046 28,862,563 4.58
85.01-90.00....................................................... 6,734 187,987,309 29.84
90.01-95.00....................................................... 7,015 233,685,397 37.09
95.01-100.00...................................................... 2,769 103,275,632 16.39
------ ------------ ------
Total............................................................ 19,287 $629,998,996 100.00%
====== ============ ======
- ----------
(1) As of the Cut-off Date, the weighted average Combined Loan-to-Value
Ratio of the Mortgage Loans in the Mortgage Pool was approximately
89.92%.
Mortgage Loan Principal Balance for the Mortgage Loans in
Mortgage Pool(1)
Aggregate
Principal
Range of Mortgage Loan Number of Mortgage Balance Percent of Cut-off Date
Principal Balances ($) Loans Outstanding Principal Balance
--------------------------------------------- ------------------ ------------ ------------------------
0.00 to 10,000.00..................... 515 $ 4,477,512 0.71%
10,000.01 to 20,000.00..................... 4,125 67,274,303 10.68
20,000.01 to 30,000.00..................... 6,044 151,796,289 24.09
30,000.01 to 40,000.00..................... 4,070 140,875,372 22.36
40,000.01 to 50,000.00..................... 2,489 111,184,722 17.65
50,000.01 to 75,000.00..................... 1,402 83,814,594 13.30
75,000.01 to 100,000.00..................... 430 38,050,170 6.04
100,000.01 to 200,000.00..................... 192 26,790,599 4.25
200,000.01 or Greater 20 5,735,435 0.91
------ ------------ ------
Total...................................... 19,287 $629,998,996 100.00%
====== ============ ======
- ----------
(1) As of the Cut-off Date, the average principal balance of the Mortgage
Loans in the Mortgage Pool was $32,664.
A-2
State Distributions of Mortgaged Properties for the Mortgage Loans in
Mortgage Pool
Aggregate
Number of Principal
Mortgage Balance Percent of Cut-off
State Loans Outstanding Date Principal Balance
- ---------------------- --------- ------------ ----------------------
Alabama .............. 239 $ 6,619,612 1.05%
Alaska ............... 19 772,715 0.12
Arizona .............. 565 16,559,594 2.63
Arkansas ............. 1 48,023 0.01
California ........... 5,368 202,113,615 32.08
Colorado ............. 697 23,099,869 3.67
Connecticut .......... 125 4,106,347 0.65
Delaware ............. 58 1,620,186 0.26
District of Columbia . 56 2,032,702 0.32
Florida .............. 524 15,182,658 2.41
Georgia .............. 754 23,291,120 3.70
Hawaii ............... 136 6,520,571 1.04
Idaho ................ 124 2,985,289 0.47
Illinois ............. 688 21,158,846 3.36
Indiana .............. 136 3,539,226 0.56
Iowa ................. 49 1,332,650 0.21
Kansas ............... 10 501,487 0.08
Kentucky ............. 78 1,785,784 0.28
Louisiana ............ 64 2,029,676 0.32
Maine ................ 22 930,298 0.15
Maryland ............. 1,154 38,293,535 6.08
Massachusetts ........ 367 13,199,898 2.10
Michigan ............. 509 15,063,796 2.39
Minnesota ............ 144 4,581,063 0.73
Mississippi .......... 40 1,127,686 0.18
Missouri ............. 186 4,904,276 0.78
Montana .............. 76 1,935,431 0.31
Nebraska ............. 39 1,008,896 0.16
Nevada ............... 253 7,592,140 1.21
New Hampshire ........ 71 2,281,869 0.36
New Jersey ........... 311 10,516,552 1.67
New Mexico ........... 155 3,950,417 0.63
New York ............. 295 10,812,099 1.72
North Carolina ....... 231 6,215,070 0.99
North Dakota ......... 11 228,532 0.04
Ohio ................. 271 6,887,038 1.09
Oklahoma ............. 141 3,706,207 0.59
Oregon ............... 635 16,502,397 2.62
Pennsylvania ......... 498 13,199,007 2.10
Rhode Island ......... 42 1,470,292 0.23
South Carolina ....... 40 1,035,787 0.16
South Dakota ......... 8 298,908 0.05
Tennessee ............ 200 5,206,773 0.83
Texas ................ 1,176 35,136,478 5.58
Utah ................. 433 12,038,408 1.91
Vermont .............. 13 419,506 0.07
Virginia ............. 1,343 48,203,774 7.65
Washington ........... 766 23,231,024 3.69
West Virginia ........ 31 803,901 0.13
Wisconsin ............ 108 2,911,369 0.46
Wyoming .............. 27 1,006,598 0.16
--------- ------------ ----------------------
Total .............. 19,287 $629,998,996 100.00%
========= ============ ======================
A-3
Type of Mortgaged Properties for the Mortgage Loans in
Mortgage Pool
Aggregate
Number of Principal
Mortgage Balance Percent of Cut-off Date
Property Type Loans Outstanding Principal Balance
- --------------------------------------- --------- ----------- ------------------------
Single-Family Detached Dwellings....... 13,216 $432,290,564 68.62%
Planned Unit Developments.............. 4,494 151,336,239 24.02
Condominiums........................... 1,469 42,495,916 6.75
Two Family Dwellings................... 105 3,774,317 0.60
Four Family Dwellings.................. 3 101,960 0.02
------ ------------ ------
Total................................ 19,287 $629,998,996 100.00%
====== ============ ======
Occupancy Types for the Mortgage Loans in
Mortgage Pool(1)
Aggregate
Number of Principal
Mortgage Balance Percent of Cut-off Date
Occupancy Type Loans Outstanding Principal Balance
- --------------------------------------- --------- ----------- ------------------------
Owner Occupied......................... 19,175 $625,726,490 99.32%
Non-owner Occupied..................... 79 3,391,593 0.54
Second Home............................ 33 880,913 0.14
------ ------------ ------
Total................................ 19,287 $629,998,996 100.00%
====== ============ ======
- ----------
(1) Based upon representations of the related mortgagors at the time of
origination.
Remaining Months to Stated Maturity for the Mortgage Loans in
Mortgage Pool(1)
Aggregate
Number of Principal
Mortgage Balance Percent of Cut-off Date
Remaining Amortization Term (months) Loans Outstanding Principal Balance
- --------------------------------------- --------- ----------- ------------------------
1 - 120......................... 767 $ 19,198,006 3.05%
121 - 180......................... 18,102 595,613,975 94.54
181 - 300......................... 324 11,968,944 1.90
301 - 360......................... 94 3,218,070 0.51
------ ------------ ------
Total................................. 19,287 $629,998,996 100.00%
====== ============ ======
- ----------
(1) As of the Cut-off Date, the weighted average remaining amortization
term to maturity for the Mortgage Loans in the Mortgage Pool was
approximately 176 months.
A-4
ANNEX B
Global Clearance, Settlement and Tax
Documentation Procedures
Except in certain limited circumstances, the globally offered CWABS,
Inc. Asset-Backed Certificates, Series 2002-S1 (the "Global Securities") will be
available only in book-entry form. Investors in the Global Securities may hold
such Global Securities through any of DTC, Clearstream, Luxembourg or Euroclear.
The Global Securities will be tradable as home market instruments in both the
European and U.S. domestic markets. Initial settlement and all secondary trades
will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Clearstream, Luxembourg and Euroclear will be conducted in the ordinary
way in accordance with their normal rules and operating procedures and in
accordance with conventional Eurobond practice (i.e., seven calendar day
settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior mortgage pass-through certificate
issues.
Secondary cross-market trading between Clearstream, Luxembourg or
Euroclear and DTC Participants holding Certificates will be effected on a
delivery-against-payment basis through the respective Depositaries of
Clearstream, Luxembourg and Euroclear (in such capacity) and as DTC
Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, Clearstream,
Luxembourg and Euroclear will hold positions on behalf of their participants
through their respective Depositaries, which in turn will hold such positions in
accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to prior mortgage pass-through
certificate issues. Investor securities custody accounts will be credited with
their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Clearstream,
Luxembourg or Euroclear accounts will follow the settlement procedures
applicable to conventional Eurobonds, except that there will be no temporary
global security and no "lock-up" or restricted period. Global Securities will be
credited to the securities custody accounts on the settlement date against
payment in same-day funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and Seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
pass-through certificate issues in same-day funds.
Trading between Clearstream, Luxembourg and/or Euroclear Participants.
Secondary market trading between Clearstream, Luxembourg Participants or
Euroclear Participants will be settled using the procedures applicable to
conventional Eurobonds in same-day funds.
B-1
Trading between DTC Seller and Clearstream, Luxembourg or Euroclear
Purchaser. When Global Securities are to be transferred from the account of a
DTC Participant to the account of a Clearstream, Luxembourg Participant or a
Euroclear Participant, the purchaser will send instructions to Clearstream,
Luxembourg or Euroclear through a Clearstream, Luxembourg Participant or
Euroclear Participant at least one business day prior to settlement.
Clearstream, Luxembourg or Euroclear will instruct the respective Depositary, as
the case may be, to receive the Global Securities against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment date to and excluding the settlement date, on the basis of either
the actual number of days in such accrual period and a year assumed to consist
of 360 days or a 360-day year of twelve 30-day months, as applicable to the
related Class of Global Securities. For transactions settling on the 31st of the
month, payment will include interest accrued to and excluding the first day of
the following month. Payment will then be made by the respective Depositary of
the DTC Participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Clearstream, Luxembourg Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the Clearstream, Luxembourg or
Euroclear cash debt will be valued instead as of the actual settlement date.
Clearstream, Luxembourg Participants and Euroclear Participants will
need to make available to the respective clearing systems the funds necessary to
process same-day funds settlement. The most direct means of doing so is to
preposition funds for settlement, either from cash on hand or existing lines of
credit, as they would for any settlement occurring within Clearstream,
Luxembourg or Euroclear. Under this approach, they may take on credit exposure
to Clearstream, Luxembourg or Euroclear until the Global Securities are credited
to their accounts one day later.
As an alternative, if Clearstream, Luxembourg or Euroclear has extended
a line of credit to them, Clearstream, Luxembourg Participants or Euroclear
Participants can elect not to preposition funds and allow that credit line to be
drawn upon the finance settlement. Under this procedure, Clearstream, Luxembourg
Participants or Euroclear Participants purchasing Global Securities would incur
overdraft charges for one day, assuming they cleared the overdraft when the
Global Securities were credited to their accounts. However, interest on the
Global Securities would accrue from the value date. Therefore, in many cases the
investment income on the Global Securities earned during that one-day period may
substantially reduce or offset the amount of such overdraft charges, although
this result will depend on each Clearstream, Luxembourg Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for sending Global Securities
to the respective European Depositary for the benefit of Clearstream, Luxembourg
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
Trading between Clearstream, Luxembourg or Euroclear Seller and DTC
Purchaser. Due to time zone differences in their favor, Clearstream, Luxembourg
Participants and Euroclear Participants may employ their customary procedures
for transactions in which Global Securities are to be transferred by the
respective clearing system, through the respective Depositary, to a DTC
Participant. The seller will send instructions to Clearstream, Luxembourg or
Euroclear through a Clearstream, Luxembourg Participant or Euroclear Participant
at least one business day prior to settlement. In these cases Clearstream,
Luxembourg or Euroclear will instruct the respective Depositary, as appropriate,
to deliver the Global Securities to the DTC Participant's account against
payment. Payment will include interest accrued on the Global Securities from and
including the last coupon payment to and excluding the settlement date on the
basis of either the actual number of days in such accrual period and a year
assumed to consist of 360 days or a 360-day year of twelve 30-day months, as
applicable to the related Class of Global Securities. For transactions settling
on the 31st of the month, payment will include interest accrued to and excluding
the first day of the following month. The payment will then be reflected in the
account of the Clearstream, Luxembourg Participant or Euroclear Participant the
following day, and receipt of the cash proceeds in the Clearstream, Luxembourg
Participant's or Euroclear Participant's account would be back-valued to the
value date (which would be the preceding day, when settlement occurred in New
York). Should the Clearstream, Luxembourg Participant or Euroclear Participant
have a line of credit with its respective clearing system and elect to be in
debt in anticipation of receipt of the sale proceeds in its account, the
back-valuation will extinguish any overdraft incurred over that one-day period.
If settlement is not completed on the intended value date (i.e., the trade
fails), receipt of the cash proceeds in the Clearstream, Luxembourg
Participant's or Euroclear Participant's account would instead be valued as of
the actual settlement date.
B-2
Finally, day traders that use Clearstream, Luxembourg or Euroclear and
that purchase Global Securities from DTC Participants for delivery to
Clearstream, Luxembourg Participants or Euroclear Participants should note that
these trades would automatically fail on the sale side unless affirmative action
were taken. At least three techniques should be readily available to eliminate
this potential problem:
(a) borrowing through Clearstream, Luxembourg or Euroclear for
one day (until the purchase side of the day trade is reflected in their
Clearstream, Luxembourg or Euroclear accounts) in accordance with the
clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC
Participant no later than one day prior to settlement, which would give
the Global Securities sufficient time to be reflected in their
Clearstream, Luxembourg or Euroclear account in order to settle the
sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of
the trade so that the value date for the purchase from the DTC
Participant is at least one day prior to the value date for the sale to
the Clearstream, Luxembourg Participant or Euroclear Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through
Clearstream, Luxembourg or Euroclear (or through DTC if the holder has an
address outside the U.S.) will be subject to the 30% U.S. withholding tax that
generally applies to payments of interest (including original issue discount) on
registered debt issued by U.S. Persons, unless (i) each clearing system, bank or
other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (ii) such beneficial owner takes one
of the following steps to obtain an exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8BEN). Beneficial owners of
Global Securities that are non-U.S. Persons can obtain a complete exemption from
the withholding tax by filing a signed Form W-8BEN Certificate of Foreign Status
of Beneficial Owners for United States Tax Withholding. Non-U.S. Persons that
are Certificate Owners residing in a country that has a tax treaty with the
United States can obtain an exemption or reduced tax rate (depending on the
treaty terms) by filing Form W-8BEN Certificate of Foreign Status of Beneficial
Owners for United States Tax Withholding. If the information shown on Form
W-8BEN changes, a new Form W-8BEN must be filed within 30 days of such change.
Exemption for non-U.S. Persons with Effectively Connected Income (Form
W-8ECI). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form W-8ECI Certificate of Foreign Person's Claim for
Exemption from Withholding On Income Effectively Connected with the Conduct of a
Trade or Business in the United States.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of a
Global Security, files by submitting the appropriate form to the person through
whom it holds (the clearing agency, in the case of persons holding directly on
the books of the clearing agency). Form W-8BEN and Form W-8ECI are effective
until the third succeeding calendar year from the date the form is signed.
B-3
The term "U.S. Person" means:
(1) a citizen or resident of the United States,
(2) a corporation or 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, any State thereof
or the District of Columbia,
(3) an estate the income of which is includible in gross
income for United States tax purposes, regardless of its source, or
(4) a trust if a court within the United States is able to
exercise primary supervision of the administration of the trust and one
or more United States persons have the authority to control all
substantial decisions of the trust. Investors are advised to consult
their own tax advisors for specific tax advice concerning their holding
and disposing of the Global Securities.
B-4
PROSPECTUS
CWABS, INC.
Depositor
Asset Backed Securities
(Issuable in Series)
- --------------------------------------------------------------------------------
Please carefully consider our discussion of some of the risks of investing in
the securities under "Risk Factors" beginning on page 4.
- --------------------------------------------------------------------------------
The Trusts
Each trust will be established to hold assets in its trust fund transferred
to it by CWABS, Inc. The assets in each trust fund will be specified in the
prospectus supplement for the particular trust and will generally consist
of:
o first lien mortgage loans secured by one- to four-family residential
properties,
o mortgage loans secured by first and/or subordinate liens on small
multifamily residential properties, such as rental apartment buildings
or projects containing five to fifty residential units,
o closed-end and/or revolving home equity loans, secured in whole or in
part by first and/or subordinate liens on one- to four-family
residential properties, or
o home improvement installment sale contracts and installment loan
agreements that are secured by first or subordinate liens on one- to
four-family residential properties.
The Securities
CWABS, Inc. will sell either certificates or notes pursuant to a prospectus
supplement. The securities will be grouped into one or more series, each
having its own distinct designation. Each series will be issued in one or more
classes and each class will evidence beneficial ownership of a specified
portion of future payments on the assets in the trust fund that the series
relates to. A prospectus supplement for a series will specify all of the terms
of the series and of each of the classes in the series.
Offers of Securities
The securities may be offered through several different methods, including
offerings through underwriters.
----------------
The SEC and state securities regulators have not approved or disapproved these
securities or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
December 14, 2001
Table of Contents
Important Notice About Information in this Prospectus and Each Accompanying Prospectus
Supplement................................................................................ 3
Risk Factors ............................................................................... 4
The Trust Fund ............................................................................. 13
General ................................................................................... 13
The Loans ................................................................................. 14
Substitution of Trust Fund Assets ......................................................... 17
Available Information ..................................................................... 17
Incorporation of Certain Documents by Reference ........................................... 17
Reports to Securityholders ................................................................ 18
Use of Proceeds ............................................................................ 18
The Depositor .............................................................................. 18
Loan Program ............................................................................... 18
Underwriting Standards .................................................................... 18
Qualifications of Sellers ................................................................. 19
Representations by Sellers; Repurchases ................................................... 19
Description of the Securities .............................................................. 20
General ................................................................................... 21
Distributions on Securities ............................................................... 22
Advances .................................................................................. 24
Reports to Securityholders ................................................................ 24
Categories of Classes of Securities ....................................................... 25
Indices Applicable to Floating Rate and Inverse Floating Rate Classes ..................... 27
Book-Entry Registration of Securities ..................................................... 30
Credit Enhancement ......................................................................... 32
General ................................................................................... 32
Subordination ............................................................................. 33
Letter of Credit .......................................................................... 33
Insurance Policies, Surety Bonds and Guaranties ........................................... 34
Over-Collateralization .................................................................... 34
Reserve Accounts .......................................................................... 34
Pool Insurance Policies ................................................................... 36
Financial Instruments ..................................................................... 37
Cross Support ............................................................................. 37
Yield and Prepayment Considerations ........................................................ 37
The Agreements ............................................................................. 39
Assignment of the Trust Fund Assets ....................................................... 39
Payments On Loans; Deposits to Security Account ........................................... 40
Pre-Funding Account ....................................................................... 42
Sub-Servicing by Sellers .................................................................. 42
Collection Procedures ..................................................................... 43
Hazard Insurance .......................................................................... 43
Realization Upon Defaulted Loans .......................................................... 45
Servicing and Other Compensation and Payment of Expenses .................................. 46
Evidence as to Compliance ................................................................. 46
Certain Matters Regarding the Master
Servicer and the Depositor............................................................... 46
Events of Default; Rights Upon Event of Default ........................................... 47
Amendment ................................................................................. 49
Termination; Optional Termination ......................................................... 50
The Trustee ............................................................................... 50
Certain Legal Aspects of the Loans ......................................................... 51
General ................................................................................... 51
Foreclosure ............................................................................... 52
Environmental Risks ....................................................................... 53
Rights of Redemption ...................................................................... 54
Anti-Deficiency Legislation and Other Limitations On Lenders .............................. 54
Due-On-Sale Clauses ....................................................................... 55
Enforceability of Prepayment and Late
Payment Fees............................................................................. 56
Applicability of Usury Laws ............................................................... 56
Home Improvement Contracts ................................................................ 56
Installment Contracts ..................................................................... 57
Soldiers' and Sailors' Civil Relief Act ................................................... 58
Junior Mortgages and Rights of Senior Mortgagees .......................................... 58
The Title I Program ....................................................................... 59
Consumer Protection Laws .................................................................. 61
Material Federal Income Tax Consequences ................................................... 62
General ................................................................................... 62
Taxation of Debt Securities ............................................................... 62
Taxation of the REMIC and Its Holders ..................................................... 66
REMIC Expenses; Single Class REMICs ....................................................... 66
Taxation of the REMIC ..................................................................... 67
Taxation of Holders of Residual Interest
Securities............................................................................... 68
Administrative Matters .................................................................... 70
Tax Status as a Grantor Trust ............................................................. 70
Sale or Exchange .......................................................................... 72
Miscellaneous Tax Aspects ................................................................. 73
Tax Treatment of Foreign Investors ........................................................ 73
Tax Characterization of the Trust Fund as a Partnership ................................... 74
Tax Consequences to Holders of the Notes .................................................. 74
Tax Consequences to Holders of the Certificates ........................................... 76
State Tax Considerations ................................................................... 79
ERISA Considerations ....................................................................... 79
Legal Investment ........................................................................... 83
Method of Distribution ..................................................................... 84
Legal Matters .............................................................................. 84
Financial Information ...................................................................... 84
Rating ..................................................................................... 85
Index to Defined Terms ..................................................................... 86
2
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.
The prospectus supplement will contain information about a particular
series that supplements the information contained in this prospectus, and you
should rely on that supplementary information in the prospectus supplement.
You should rely only on the information 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.
----------------
If you require additional information, the mailing address of our
principal executive offices is CWABS, Inc., 4500 Park Granada, Calabasas,
California 91302 and the telephone number is (818) 225-3000. For other means
of acquiring additional information about us or a series of securities, see
"The Trust Fund -- Incorporation of Certain Documents by Reference" beginning
on page 17.
3
Risk Factors
You should carefully consider the following information since it
identifies significant risks associated with an investment in securities.
Limited Source of Payments -- No The applicable prospectus
Recourse To Sellers, Depositor Or supplement may provide that
Servicer securities will be payable
from other trust funds in
addition to their associated
trust fund, but if it does
not, they will be payable
solely from their associated
trust fund. If the trust fund
does not have sufficient
assets to distribute the full
amount due to you as a
securityholder, your yield
will be impaired, and perhaps
even the return of your
principal may be impaired,
without your having recourse
to anyone else. Furthermore,
at the times specified in the
applicable prospectus
supplement, certain assets of
the trust fund may be
released and paid out to
other people, such as the
depositor, a servicer, a
credit enhancement provider,
or any other person entitled
to payments from the trust
fund. Those assets will no
longer be available to make
payments to you. Those
payments are generally made
after other specified
payments that may be set
forth in the applicable
prospectus supplement have
been made.
You will not have any
recourse against the
depositor or any servicer if
you do not receive a required
distribution on the
securities. Nor will you have
recourse against the assets
of the trust fund of any
other series of securities.
The securities will not
represent an interest in the
depositor, any servicer, any
seller to the depositor, or
anyone else except the trust
fund. The only obligation of
the depositor to a trust fund
comes from certain
representations and
warranties made by it about
assets transferred to the
trust fund. If these
representations and
warranties turn out to be
untrue, the depositor may be
required to repurchase some
of the transferred assets.
CWABS, Inc., which is the
depositor, does not have
significant assets and is
unlikely to have significant
assets in the future. So if
the depositor were required
to repurchase a loan because
of a breach of a
representation, its only
sources of funds for the
repurchase would be:
o funds obtained from
enforcing a
corresponding obligation
of a seller or
originator of the loan,
or
o funds from a reserve
fund or similar credit
enhancement established
to pay for loan
repurchases.
The only obligations of the
master servicer to a trust
fund (other than its master
servicing obligations) comes
from certain representations
and warranties made by it in
connection with its loan
servicing activities. If
these representations and
warranties turn out to be
untrue, the master servicer
may be required to repurchase
or substitute for some of the
loans. However, the master
servicer may not have the
financial ability to make the
required repurchase or
substitution.
The only obligations to a
trust fund of a seller of
loans to the depositor comes
from certain representations
and warranties
4
made by it in connection with
its sale of the loans and
certain document delivery
requirements. If these
representations and
warranties turn out to be
untrue, or the seller fails
to deliver required
documents, it may be required
to repurchase or substitute
for some of the loans.
However, the seller may not
have the financial ability to
make the required repurchase
or substitution.
Credit Enhancement May Not Be Credit enhancement is
Sufficient To Protect You From intended to reduce the effect
Losses of loan losses. But credit
enhancements may benefit only
some classes of a series of
securities and the amount of
any credit enhancement will
be limited as described in
the applicable prospectus
supplement. Furthermore, the
amount of a credit
enhancement may decline over
time pursuant to a schedule
or formula or otherwise, and
could be depleted from
payments or for other reasons
before the securities covered
by the credit enhancement are
paid in full. In addition, a
credit enhancement may not
cover all potential sources
of loss. For example, a
credit enhancement may or may
not cover fraud or negligence
by a loan originator or other
parties. Also, the trustee
may be permitted to reduce,
substitute for, or even
eliminate all or a portion of
a credit enhancement so long
as the rating agencies that
have rated the securities at
the request of the depositor
indicate that that would not
cause them to change
adversely their rating of the
securities. Consequently,
securityholders may suffer
losses even though a credit
enhancement exists and its
provider does not default.
Nature Of Mortgages The mortgages and deeds of
Junior Status of Liens Securing trust securing the home
Home Equity Loans Could equity loans will be
Adversely Affect You primarily junior liens
subordinate to the rights of
the mortgagee under the
related senior mortgage(s) or
deed(s) of trust.
Accordingly, the proceeds
from any liquidation,
insurance or condemnation
proceeds will be available to
satisfy the outstanding
balance of the junior lien
only to the extent that the
claims of the related senior
mortgagees have been
satisfied in full, including
any related foreclosure
costs. In addition, if a
junior mortgagee forecloses
on the property securing a
junior mortgage, it
forecloses subject to any
senior mortgage and must take
one of the following steps to
protect its interest in the
property:
o pay the senior mortgage
in full at or prior to
the foreclosure sale, or
o assume the payments on
the senior mortgage in
the event the mortgagor
is in default under the
senior mortgage.
The trust fund may
effectively be prevented from
foreclosing on the related
property since it will have
no funds to satisfy any
senior mortgages or make
payments due to any senior
mortgagees.
Some states have imposed
legal limits on the remedies
of a secured lender in the
event that the proceeds of
any sale under a deed of
trust or other foreclosure
proceedings are insufficient
5
to pay amounts owed to that
secured lender. In some
states, including California,
if a lender simultaneously
originates a loan secured by
a senior lien on a particular
property and a loan secured
by a junior lien on the same
property, that lender as the
holder of the junior lien may
be precluded from obtaining a
deficiency judgment with
respect to the excess of:
o the aggregate amount
owed under both the
senior and junior loans
over
o the proceeds of any sale
under a deed of trust or
other foreclosure
proceedings.
See "Certain Legal Aspects of
the Loans -- Anti-Deficiency
Legislation; Bankruptcy Laws;
Tax Liens."
Declines in Property Values May The value of the properties
Adversely Affect You underlying the loans held in
the trust fund may decline
over time. Among the factors
that could adversely affect
the value of the properties
are:
o an overall decline in
the residential real
estate market in the
areas in which they are
located,
o a decline in their
general condition from
the failure of borrowers
to maintain their
property adequately, and
o natural disasters that
are not covered by
insurance, such as
earthquakes and floods.
In the case of home equity
loans, declining property
values could diminish or
extinguish the value of a
junior mortgage before
reducing the value of a
senior mortgage on the same
property.
If property values decline,
the actual rates of
delinquencies, foreclosures,
and losses on all underlying
loans could be higher than
those currently experienced
in the mortgage lending
industry in general. These
losses, to the extent not
otherwise covered by a credit
enhancement, will be borne by
the holder of one or more
classes of securities.
Delays In Liquidation May Even if the properties
Adversely Affect You underlying the loans held in
the trust fund provide
adequate security for the
loans, substantial delays
could occur before defaulted
loans are liquidated and
their proceeds are forwarded
to investors. Property
foreclosure actions are
regulated by state statutes
and rules and are subject to
many of the delays and
expenses of other lawsuits if
defenses or counterclaims are
made, sometimes requiring
several years to complete.
Furthermore, in some states
if the proceeds of the
foreclosure are insufficient
to repay the loan, the
borrower is not liable for
the deficit. Thus, if a
borrower defaults, these
restrictions may impede the
trust's ability to dispose of
the property and obtain
sufficient proceeds to repay
the loan in full. In
addition, the servicer will
be entitled to deduct from
liquidation proceeds all
expenses reasonably incurred
in attempting to recover on
the defaulted loan, including
legal fees and costs, real
estate taxes, and property
maintenance and preservation
expenses.
6
Disproportionate Effect of
Liquidation Expenses May
Adversely Affect You
Liquidation expenses of
defaulted loans generally do
not vary directly with the
outstanding principal balance
of the loan at the time of
default. Therefore, if a
servicer takes the same steps
for a defaulted loan having a
small remaining principal
balance as it does for a
defaulted loan having a large
remaining principal balance,
the amount realized after
expenses is smaller as a
percentage of the outstanding
principal balance of the
small loan than it is for the
defaulted loan having a large
remaining principal balance.
Consumer Protection Laws May State laws generally regulate
Adversely Affect You interest rates and other
charges, require certain
disclosures, and require
licensing of mortgage loan
originators and servicers. In
addition, most states have
other laws and public
policies for the protection
of consumers that prohibit
unfair and deceptive
practices in the origination,
servicing, and collection of
mortgage loans. Depending on
the particular law and the
specific facts involved,
violations may limit the
ability to collect all or
part of the principal or
interest on the underlying
loans held in the trust fund.
In some cases, the borrower
may even be entitled to a
refund of amounts previously
paid.
The loans held in the trust
fund may also be subject to
certain federal laws,
including:
o the Federal Truth in
Lending Act and its
regulations, which
require disclosures to
the borrowers regarding
the terms of any
mortgage loan;
o the Equal Credit
Opportunity Act and its
regulations, which
prohibit discrimination
in the extension of
credit 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;
and
o the Fair Credit
Reporting Act, which
regulates the use and
reporting of information
related to the
borrower's credit
experience.
Home Equity Loan Consumer
Protection Act. For loans
that were originated or
closed after November 7,
1989, the Home Equity Loan
Consumer Protection Act of
1988, which requires
additional application
disclosures, limits changes
that may be made to the loan
documents without the
borrower's consent and
restricts a lender's ability
to declare a default or to
suspend or reduce a
borrower's credit limit to
certain enumerated events.
The Riegle Act. Certain
mortgage loans may be subject
to the Riegle Community
Development and Regulatory
Improvement Act of 1994,
known as the Riegle Act,
which incorporates the Home
Ownership and Equity
Protection Act of 1994. These
provisions impose additional
disclosure and other
requirements on creditors
with respect to non-purchase
money mortgage loans with
high interest rates or high
up-front fees and charges.
The provisions of the Riegle
Act apply on a mandatory
basis
7
to all mortgage loans
originated on or after
October 1, 1995. These
provisions can impose
specific statutory
liabilities upon creditors
who fail to comply with their
provisions and may affect the
enforceability of the related
loans. In addition, any
assignee of the creditor
would generally be subject to
all claims and defenses that
the consumer could assert
against the creditor,
including the right to
rescind the mortgage loan.
Holder in Due Course
Rules. The home improvement
contracts are also subject to
the so-called holder in due
course rules which comprise
the Preservation of
Consumers' Claims and
Defenses regulations of the
Federal Trade Commission and
other similar federal and
state statutes and
regulations. The holder in
due course rules protect the
homeowner from defective
craftsmanship or incomplete
work by a contractor. These
laws permit the obligor to
withhold payment if the work
does not meet the quality and
durability standards agreed
to by the homeowner and the
contractor. The holder in due
course rules have the effect
of subjecting any assignee of
the seller in a consumer
credit transaction to all
claims and defenses which the
obligor in the credit sale
transaction could assert
against the seller of the
goods.
Some violations of these
federal laws may limit the
ability to collect the
principal or interest on the
loans held in the trust fund,
and in addition could subject
the trust fund to damages and
administrative enforcement.
Losses on loans from the
application of those laws
that are not otherwise
covered by a credit
enhancement will be borne by
the holders of one or more
classes of securities.
Losses on Balloon Payment Some of the mortgage loans
Mortgages Are Borne by You held in the trust fund may
not be fully amortizing over
their terms to maturity and,
thus, will require
substantial principal
payments (that is, balloon
payments) at their stated
maturity. Loans with balloon
payments involve a greater
degree of risk than fully
amortizing loans because
typically the borrower must
be able to refinance the loan
or sell the property to make
the balloon payment at
maturity. The ability of a
borrower to do this will
depend on such factors as
mortgage rates at the time of
sale or refinancing, the
borrower's equity in the
property, the relative
strength of the local housing
market, the financial
condition of the borrower,
and tax laws. Losses on these
loans that are not otherwise
covered by a credit
enhancement will be borne by
the holders of one or more
classes of certificates.
Your Risk Of Loss May Be Higher Multifamily lending may
Than You Expect If Your expose the lender to a
Securities Are Backed By greater risk of loss than
Multifamily Loans single family residential
lending. Owners of
multifamily residential
properties rely on monthly
lease payments from tenants
to
o pay for maintenance and
other operating expenses
of those properties,
o fund capital
improvements, and
8
o service any mortgage
loan and any other debt
that may be secured by
those properties.
Various factors, many of
which are beyond the control
of the owner or operator of a
multifamily property, may
affect the economic viability
of that property.
Changes in payment patterns
by tenants may result from a
variety of social, legal and
economic factors. Economic
factors include the rate of
inflation, unemployment
levels and relative rates
offered for various types of
housing. Shifts in economic
factors may trigger changes
in payment patterns including
increased risks of defaults
by tenants and higher vacancy
rates. Adverse economic
conditions, either local or
national, may limit the
amount of rent that can be
charged and may result in a
reduction in timely lease
payments or a reduction in
occupancy levels. Occupancy
and rent levels may also be
affected by construction of
additional housing units,
competition and local
politics, including rent
stabilization or rent control
laws and policies. In
addition, the level of
mortgage interest rates may
encourage tenants to purchase
single family housing. We are
unable to determine and have
no basis to predict whether,
or to what extent, economic,
legal or social factors will
affect future rental or
payment patterns.
The location and construction
quality of a particular
building may affect the
occupancy level as well as
the rents that may be charged
for individual units. The
characteristics of a
neighborhood may change over
time or in relation to newer
developments. The effects of
poor construction quality
will increase over time in
the form of increased
maintenance and capital
improvements. Even good
construction will deteriorate
over time if adequate
maintenance is not performed
in a timely fashion.
Your Risk Of Loss May Be Higher The trust fund may also
Than You Expect If Your include home equity loans
Securities Are Backed By that were originated with
Partially Unsecured Home Equity loan-to-value ratios or
Loans combined loan-to-value ratios
in excess of the value of the
related mortgaged property.
Under these circumstances,
the trust fund could be
treated as a general
unsecured creditor as to any
unsecured portion of any
related loan. In the event of
a default under a loan that
is unsecured in part, the
trust fund will have recourse
only against the borrower's
assets generally for the
unsecured portion of the
loan, along with all other
general unsecured creditors
of the borrower.
You Could Be Adversely Affected Federal, state, and local
By Violations Of Environmental laws and regulations impose a
Laws 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 held in the
trust fund. Failure to comply
with these laws and
regulations can result in
fines and penalties that
could be assessed against the
trust as owner of the related
property.
9
In some states, a lien on the
property due to contamination
has priority over the lien of
an existing mortgage. Also, 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 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.
Ratings Of The Securities Do Not Any class of securities
Assure Their Payment issued under this prospectus
and the accompanying
prospectus supplement may be
rated by one or more
nationally recognized rating
agencies. A rating is based
on the adequacy of the value
of the trust assets and any
credit enhancement for that
class, and reflects the
rating agency's assessment of
how likely it is that holders
of the class of securities
will receive the payments to
which they are entitled. A
rating does not constitute an
assessment of how likely it
is 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 that the
securities will be redeemed
early. A rating is not a
recommendation to purchase,
hold, or sell securities
because it does not address
the market price of the
securities or the suitability
of the securities for any
particular investor.
A rating may not remain in
effect for any given period
of time and the rating agency
could lower or withdraw the
rating entirely in the
future. For example, the
rating agency could lower or
withdraw its rating due to:
o a decrease in the
adequacy of the value of
the trust assets or any
related credit
enhancement,
o an adverse change in the
financial or other
condition of a credit
enhancement provider, or
o a change in the rating
of the credit
enhancement provider's
long-term debt.
The amount, type, and nature
of credit enhancement
established for a class of
securities will be determined
on the basis of criteria
established by each rating
agency rating classes of the
securities. These criteria
are sometimes based upon an
actuarial analysis of the
behavior of similar loans in
a larger group. That analysis
is often the basis upon which
each rating agency determines
the amount of credit
enhancement required for a
class. The historical data
supporting any actuarial
analysis may not accurately
reflect future experience,
and the data derived from a
large pool of similar loans
may not accurately predict
the delinquency, foreclosure,
or loss experience of any
particular pool of mortgage
loans. Mortgaged properties
may not retain their values.
If residential real estate
markets experience an overall
decline in property values
such that the outstanding
principal balances of the
loans held in a particular
trust fund and any secondary
financing on the related
mortgaged properties become
equal to or greater
10
than the value of the
mortgaged properties, the
rates of delinquencies,
foreclosures, and losses
could be higher than those
now generally experienced in
the mortgage lending
industry. In addition,
adverse economic conditions
may affect timely payment by
mortgagors on their loans
whether or not the conditions
affect real property values
and, accordingly, the rates
of delinquencies,
foreclosures, and losses in
any trust fund. Losses from
this that are not covered by
a credit enhancement will be
borne, at least in part, by
the holders of one or more
classes of securities.
Book-Entry Registration Securities issued in book-
Limit on Liquidity 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 Transactions in book-entry
or Pledge securities can be effected
only through The Depository
Trust Company, its
participating organizations,
its indirect participants,
and certain banks. Therefore,
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
The Depository Trust Company
for it to credit the accounts
of its participants. In turn,
these participants will then
credit the distributions to
your account either directly
or indirectly through
indirect participants.
Bankruptcy Or Insolvency May The seller and the depositor
Affect The Timing And Amount Of will treat the transfer of
Distributions On The Securities the loans held in the trust
fund by the seller to the
depositor as a sale for
accounting purposes. The
depositor and the trust fund
will treat the transfer of
the loans from the depositor
to the trust fund as a sale
for accounting purposes. If
these characterizations are
correct, then if the seller
were to become bankrupt, the
loans would not be part of
the seller's bankruptcy
estate and would not be
available to the seller's
creditors. On the other hand,
if the seller becomes
bankrupt, its bankruptcy
trustee or one of its
creditors may attempt to
recharacterize the sale of
the loans as a borrowing by
the seller, secured by a
pledge of the loans.
Presenting this position to a
bankruptcy court could
prevent timely payments on
the securities and even
reduce the payments on the
securities. Similarly, if the
characterizations of the
transfers as sales are
correct, then if the
depositor were to become
bankrupt, the loans would not
be part of the depositor's
bankruptcy estate and would
not be available to the
depositor's creditors. On the
other hand, if the depositor
becomes bankrupt, its
bankruptcy trustee or one of
its creditors may attempt to
recharacterize the sale of
the loans as a borrowing by
the depositor, secured by a
pledge of the loans.
Presenting this position to a
bankruptcy court could
prevent timely payments on
the securities and even
reduce the payments on the
securities.
If the master servicer
becomes bankrupt, the
bankruptcy trustee may have
the power to prevent the
appointment of a successor
11
master servicer. The period
during which cash collections
may be commingled with the
master servicer's own funds
before each distribution date
for securities will be
specified in the applicable
prospectus supplement. If the
master servicer becomes
bankrupt and cash collections
have been commingled with the
master servicer's own funds
for at least ten days, the
trust fund will likely not
have a perfected interest in
those collections. In this
case the trust might be an
unsecured creditor of the
master servicer as to the
commingled funds and could
recover only its share as a
general creditor, which might
be nothing. Collections
commingled less than ten days
but still in an account of
the master servicer might
also be included in the
bankruptcy estate of the
master servicer even though
the trust may have a
perfected security interest
in them. Their inclusion in
the bankruptcy estate of the
master servicer may result in
delays in payment and failure
to pay amounts due on the
securities.
Federal and state statutory
provisions affording
protection or relief to
distressed borrowers may
affect the ability of the
secured mortgage lender to
realize upon its security in
other situations as well. For
example, in a proceeding
under the federal Bankruptcy
Code, a lender may not
foreclose on a mortgaged
property without the
permission of the bankruptcy
court. And in certain
instances a bankruptcy court
may allow a borrower to
reduce the monthly payments,
change the rate of interest,
and alter the mortgage loan
repayment schedule for under
collateralized mortgage
loans. The effect of these
types of proceedings can be
to cause delays in receiving
payments on the loans
underlying securities and
even to reduce the aggregate
amount of payments on the
loans underlying securities.
The Principal Amount Of The market value of the
Securities May Exceed The Market assets relating to a series
Value Of The Trust Fund Assets of securities at any time may
be less than the principal
amount of the securities of
that series then outstanding,
plus accrued interest. After
an event of default and a
sale of the assets relating
to a series of securities,
the trustee, the master
servicer, the credit
enhancer, if any, and any
other service provider
specified in the related
prospectus supplement
generally will be entitled to
receive the proceeds of that
sale to the extent of unpaid
fees and other amounts owing
to them under the related
transaction document prior to
distributions to
securityholders. Upon any
such sale, the proceeds may
be insufficient to pay in
full the principal of and
interest on the securities of
the related series.
Certain capitalized terms are
used in this prospectus to
assist you in understanding
the terms of the securities.
The capitalized terms used in
this prospectus are defined
on the pages indicated under
the caption "Index to Defined
Terms" beginning on page 87.
12
The Trust Fund
General
The securities of each series will represent interests in the assets of the
related trust fund, and the notes of each series will be secured by the pledge
of the assets of the related trust fund. The trust fund for each series will
be held by the trustee for the benefit of the related securityholders. Each
trust fund will consist of the trust fund assets (the "Trust Fund Assets")
consisting of a pool comprised of loans as specified in the related prospectus
supplement, together with payments relating to those loans as specified in the
related prospectus supplement.* The pool will be created on the first day of
the month of the issuance of the related series of securities or such other
date specified in the related prospectus supplement. The securities will be
entitled to payment from the assets of the related trust fund or funds or
other assets pledged for the benefit of the securityholders, as specified in
the related prospectus supplement and will not be entitled to payments in
respect of the assets of any other trust fund established by the depositor.
The Trust Fund Assets will be acquired by the depositor, either directly or
through affiliates, from originators or sellers which may be affiliates of the
depositor (the "Sellers"), and conveyed without recourse by the depositor to
the related trust fund. Loans acquired by the depositor will have been
originated in accordance with the underwriting criteria specified below under
"Loan Program -- Underwriting Standards" or as otherwise described in the
related prospectus supplement. See "Loan Program -- Underwriting Standards."
The depositor will cause the Trust Fund Assets to be assigned to the trustee
named in the related prospectus supplement for the benefit of the holders of
the securities of the related series. The master servicer named in the related
prospectus supplement will service the Trust Fund Assets, either directly or
through other servicing institutions called sub-servicers, pursuant to a
Pooling and Servicing Agreement among the depositor, the master servicer and
the trustee with respect to a series consisting of certificates, or a master
servicing agreement (each, a "Master Servicing Agreement") between the trustee
and the master servicer with respect to a series consisting of certificates
and notes, and will receive a fee for such services. See "Loan Program" and
"The Agreements." With respect to loans serviced by the master servicer
through a sub-servicer, the master servicer will remain liable for its
servicing obligations under the related Agreement as if the master servicer
alone were servicing such loans.
As used herein, "Agreement" means, with respect to a series consisting of
certificates, the Pooling and Servicing Agreement, and with respect to a
series consisting of certificates and notes, the Trust Agreement, the
Indenture and the Master Servicing Agreement, as the context requires.
If so specified in the related prospectus supplement, a trust fund relating
to a series of securities may be a business trust formed under the laws of the
state specified in the related prospectus supplement pursuant to a trust
agreement (each, a "Trust Agreement") between the depositor and the trustee of
such trust fund.
With respect to each trust fund, prior to the initial offering of the
related series of securities, the trust fund will have no assets or
liabilities. No trust fund is expected to engage in any activities other than
acquiring, managing and holding of the related Trust Fund Assets and other
assets contemplated herein specified and in the related prospectus supplement
and the proceeds thereof, issuing securities and making payments and
distributions thereon and certain related activities. No trust fund is
expected to have any source of capital other than its assets and any related
credit enhancement.
The applicable prospectus supplement may provide for additional obligations
of the depositor, but if it does not, the only obligations of the depositor
with respect to a series of securities will be to obtain certain
representations and warranties from the sellers and to assign to the trustee
for such series of securities the depositor's rights with respect to such
representations and warranties. See "The Agreements -- Assignment of the Trust
Fund Assets." The obligations of the master servicer with respect to the loans
will consist principally of its contractual servicing obligations under the
related Agreement (including its obligation to enforce the obligations of the
sub-servicers or sellers, or both, as more fully described herein under "Loan
Program -- Representations by Sellers; Repurchases" and "The Agreements --
Sub-Servicing By Sellers" and "-- Assignment of the Trust Fund Assets") and
its obligation, if any, to make certain cash advances in the event of
delinquencies in payments on or with respect to the loans in the amounts
described herein under "Description of the Securities -- Advances." The
obligations of the master servicer to make advances may be subject to
limitations, to the extent provided herein and in the related prospectus
supplement.
* Whenever the terms pool, certificates, notes and securities are used in
this prospectus, those terms will be considered to apply, unless the
context indicates otherwise, to one specific pool and the securities of
one series including the certificates representing undivided interests
in, and/or notes secured by the assets of, a single trust fund consisting
primarily of the loans in that pool. Similarly, the term "Pass-Through
Rate" will refer to the pass-through rate borne by the certificates and
the term interest rate will refer to the interest rate borne by the notes
of one specific series, as applicable, and the term trust fund will refer
to one specific trust fund.
13
The following is a brief description of the assets expected to be included
in the trust funds. If specific information respecting the Trust Fund Assets
is not known at the time the related series of securities initially is
offered, more general information of the nature described below will be
provided in the related prospectus supplement, and specific information will
be set forth in a report on Form 8-K to be filed with the Securities and
Exchange Commission within fifteen days after the initial issuance of such
securities (the "Detailed Description"). A copy of the Agreement with respect
to each series of securities will be attached to the Form 8-K and will be
available for inspection at the corporate trust office of the trustee
specified in the related prospectus supplement. A schedule of the loans
relating to such series will be attached to the Agreement delivered to the
trustee upon delivery of the securities.
The Loans
General. Loans will consist of single family loans, multifamily loans, home
equity loans or home improvement contracts. For purposes hereof, "home equity
loans" includes "closed-end loans" and "revolving credit line loans." If so
specified, the loans may include cooperative apartment loans ("cooperative
loans") secured by security interests in shares issued by private, non-profit,
cooperative housing corporations ("cooperatives") and in the related
proprietary leases or occupancy agreements granting exclusive rights to occupy
specific dwelling units in such cooperatives' buildings. As more fully
described in the related prospectus supplement, the loans may be
"conventional" loans or loans that are insured or guaranteed by a governmental
agency such as the Federal Housing Administration (the "FHA") or the
Department of Veterans' Affairs (the "VA").
The applicable prospectus supplement may specify the day on which monthly
payments on the loans in a pool will be due, but if it does not, all of the
mortgage loans in a pool will have monthly payments due on the first day of
each 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 or combination thereof or other features described in the
related prospectus supplement:
o Interest may be payable at a fixed rate, a rate adjustable from time to
time in relation to an index (which 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 the limitations. 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 interest rate borne by such loan (the "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, may be calculated on the basis of an assumed
amortization schedule that is significantly longer than the original term
to maturity or on an interest rate that is different from the Loan Rate
or may not be amortized during all or a portion of the original term.
Payment of all or a substantial portion of the principal may be due on
maturity, called balloon payments. 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, may increase over a specified period of time or may change from
period to period. The terms of a loan may include limits on periodic
increases or decreases in the amount of monthly payments and may include
maximum or minimum amounts of monthly payments.
o The loans generally may be prepaid at any time. Prepayments of principal
may be subject to 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 certain periods, which are called lockout periods.
Certain 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 that
permit the mortgagee to demand payment of the entire loan in connection
with the sale or certain transfers of the related mortgaged property.
Other loans may be assumable by persons meeting the then applicable
underwriting standards of the seller.
A trust fund may contain buydown loans that include provisions whereby a
third party partially subsidizes the monthly payments of the obligors on the
loans during the early years of the loans, the difference to be made up from a
buydown fund contributed by the third party at the time of origination of the
loan. A buydown fund will be
14
in an amount equal either to the discounted value or full aggregate amount of
future payment subsidies. Thereafter, buydown funds are applied to the
applicable loan upon receipt by the master servicer of the mortgagor's portion
of the monthly payment on the loan. The master servicer administers the
buydown fund to ensure that the monthly allocation from the buydown fund
combined with the monthly payment received from the mortgagor equals the
scheduled monthly payment on the applicable loan. The underlying assumption of
buydown plans is that the income of the mortgagor will increase during the
buydown period as a result of normal increases in compensation and inflation,
so that the mortgagor will be able to meet the full mortgage payments at the
end of the buydown period. To the extent that this assumption as to 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 mortgagor initially, on annual increases in the interest rate and on
the length of the buydown period.
The real property which secures repayment of the loans is referred to as the
mortgaged properties. The 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, such liens generally will be subordinated to
one or more senior liens on the related mortgaged properties as described in
the related prospectus supplement. In addition to being secured by mortgages
on real estate the home improvement contracts may also be secured by purchase
money security interests in the home improvements financed thereby. If so
specified in the related prospectus supplement, the home equity loans may
include loans (primarily for home improvement or debt consolidation purposes)
that are in amounts in excess of the value of the related mortgaged properties
at the time of origination. The mortgaged properties and the home improvements
are collectively referred to herein as the "Properties." 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 certain Loan-to-Value Ratios and/or certain principal balances
may be covered wholly or partially by primary mortgage guaranty insurance
policies (each, a "Primary Mortgage Insurance Policy"). The existence, extent
and duration of any such coverage will be described in the applicable
prospectus supplement.
The aggregate principal balance of loans secured by Properties that are
owner-occupied will be disclosed in the related prospectus supplement. The
applicable prospectus supplement may provide for the basis for representations
relating to Single Family Properties, but if it does not, the sole basis for a
representation that a given percentage of the loans is secured by Single
Family Properties that are owner-occupied will be either (i) the making of a
representation by the borrower at origination of the loan either that the
underlying 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 Property as a
primary residence or (ii) a finding that the address of the underlying
Property is the borrower's mailing address.
Single Family Loans. The mortgaged properties relating to single family
loans will consist of detached or semi-detached one- to four-family dwelling
units, townhouses, rowhouses, individual condominium units, individual units
in planned unit developments, manufactured housing that is permanently affixed
and treated as real property under local law, and certain other dwelling units
("Single Family Properties"). Single Family Properties may include vacation
and second homes, investment properties and leasehold interests. In the case
of leasehold interests, the applicable prospectus supplement may provide for
the leasehold term, but if it does not, the term of the leasehold will exceed
the scheduled maturity of the loan by at least five years.
Multifamily Loans. Mortgaged properties which secure multifamily loans may
include small multifamily residential properties such as rental apartment
buildings or projects containing five to fifty residential units, including
mid-rise and garden apartments. Certain of the multifamily loans may be
secured by apartment buildings owned by cooperatives. In such cases, the
cooperative owns all the apartment units in the building and all common areas.
The cooperative is owned by tenant-stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive
proprietary leases or occupancy agreements which confer exclusive rights to
occupy specific apartments or units. Generally, a tenant-stockholder of a
cooperative must make a monthly payment to the cooperative representing such
tenant-stockholder's pro rata share of the cooperative's payments for its
mortgage loan, real property taxes, maintenance expenses and other capital or
ordinary expenses. Those payments are in addition to any payments of principal
and interest the tenant-stockholder must make on any loans to the tenant-
stockholder secured by its shares in the cooperative. The cooperative will be
directly responsible for building management and, in most cases, payment of
real estate taxes and hazard and liability insurance. A cooperative's ability
to meet debt service obligations on a multifamily loan, as well as all other
operating expenses, will be dependent in large part on the receipt of
maintenance payments from the tenant-stockholders, as well as any rental
income from units the cooperative might control. Unanticipated expenditures
may in some cases have to be paid by special assessments on the tenant-
stockholders. No more than 5% of the aggregate Trust Fund Assets for any
series, as constituted at the time of the applicable cut-off date (measured by
principal balance), will be comprised of multifamily loans.
15
Home Equity Loans. The mortgaged properties relating to home equity loans
will consist of Single Family Properties. 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 outstanding
principal balance of such loan. Principal amounts on a revolving credit line
loan may be drawn down (up to a maximum amount as set forth in the related
prospectus supplement) or repaid under each revolving credit line loan 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. The full amount of a closed-end loan is advanced at the inception of
the loan and generally is repayable in equal (or substantially equal)
installments of an amount to fully amortize such loan at its stated maturity.
Except to the extent provided in the related prospectus supplement, the
original terms to stated maturity of closed-end loans will not exceed 360
months. Under certain circumstances, under either a revolving credit line loan
or a closed-end loan, a borrower may choose an interest only payment option
and is obligated to pay only the amount of interest which accrues on the loan
during the billing cycle. An interest only payment option may be available for
a specified period before the borrower must begin paying at least the minimum
monthly payment of a specified percentage of the average outstanding balance
of the loan.
Home Improvement Contracts. The Trust Fund Assets for a series of
securities may consist, in whole or in part, of home improvement contracts
originated by a home improvement contractor, a thrift or a commercial mortgage
banker in the ordinary course of business. The home improvements securing the
home improvement contracts may 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. The home improvement
contracts will be secured by mortgages on Single Family Properties which are
generally subordinate to other mortgages on the same Property. In general, 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.
The initial Loan-to-Value Ratio of a home improvement contract is computed in
the manner described in the related prospectus supplement.
Additional Information. Each prospectus supplement will contain
information, as of the date of the prospectus supplement and to the extent
then specifically known to the depositor, with respect to the loans contained
in the related pool, including
o the aggregate outstanding principal balance and the average outstanding
principal balance of the loans as of the first day of the month of
issuance of the related series of certificates or another date specified
in the related prospectus supplement called a cut-off date,
o the type of property securing the loans (e.g., single-family residences,
individual units in condominium apartment buildings or in buildings owned
by cooperatives, small multifamily properties, other real property or
home improvements),
o the original terms to maturity of the loans,
o the largest principal balance and the smallest principal balance of any
of the loans,
o the earliest origination date and latest maturity date of any of the
loans,
o the Loan-to-Value Ratios or Combined Loan-to-Value Ratios, as applicable,
of the loans,
o the Loan Rates or annual percentage rates ("APR") or range of Loan Rates
or APR's borne by the loans,
o the maximum and minimum per annum Loan Rates and
o the geographical distribution of the loans. If specific information
respecting the loans is not known to the depositor at the time the
related securities are initially offered, more general information of the
nature described above will be provided in the detailed description of
Trust Assets.
The "Loan-to-Value Ratio" of a loan at any given time is the fraction,
expressed as a percentage, the numerator of which is the original principal
balance of the related loan and the denominator of which is the Collateral
Value of the related Property. The "Combined Loan-to-Value Ratio" of a loan at
any given time is the ratio, expressed as a percentage, of (i) the sum of (a)
the original principal balance of the loan (or, in the case of a revolving
credit line loan, the maximum amount thereof available) and (b) the
outstanding principal balance at the date of origination of the loan of any
senior mortgage loan(s) or, in the case of any open-ended senior mortgage
loan, the maximum available line of credit with respect to such mortgage loan,
regardless of any lesser amount actually outstanding at the date of
origination of the loan, to (ii) the Collateral Value of the related Property.
The "Collateral Value" of the Property, other than with respect to certain
loans the proceeds of which were used to refinance an existing mortgage loan
(each, a "Refinance Loan"), is the lesser of (a) the appraised value
determined
16
in an appraisal obtained by the originator at origination of such loan and (b)
the sales price for such Property. In the case of Refinance Loans, the
"Collateral Value" of the related Property is generally the appraised value
thereof determined in an appraisal obtained at the time of refinancing.
No assurance can be given that values of the Properties have remained or
will remain at their levels on the dates of origination of the related loans.
If the residential real estate market should experience an overall decline in
property values such that the outstanding principal balances of the loans, and
any secondary financing on the Properties, in a particular pool become equal
to or greater than the value of the Properties, the actual rates of
delinquencies, foreclosures and losses could be higher than those now
generally experienced in the mortgage lending industry. In addition, adverse
economic conditions and other factors (which may or may not affect real
property values) may affect the timely payment by borrowers of scheduled
payments of principal and interest on the loans and, accordingly, the actual
rates of delinquencies, foreclosures and losses with respect to any pool. To
the extent that the losses are not covered by subordination provisions or
alternative arrangements, the losses will be borne, at least in part, by the
holders of the securities of the related series.
Substitution of Trust Fund Assets
Substitution of Trust Fund Assets will be permitted in the event of breaches
of representations and warranties with respect to any original Trust Fund
Asset or in the event the documentation with respect to any Trust Fund Asset
is determined by the trustee to be incomplete. The period during which such
substitution will be permitted generally will be indicated 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, covering the securities. This prospectus,
which forms a part of the Registration Statement, and the prospectus
supplement relating to each series of certificates contain summaries of the
material terms of the documents referred to in this prospectus and in the
prospectus supplement, but do not contain all of the information 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 Room at 450 Fifth Street, N.W., Washington, D.C.
20549, and at its Regional Offices located as follows: Chicago Regional
Office, 500 West Madison Street, Chicago, Illinois 60661; and New York
Regional Office, Seven World Trade Center, New York, New York 10048. You may
obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. The SEC maintains an Internet Web site that
contains reports, information statements and other information regarding the
registrants that file electronically with the SEC, including the depositor.
The address of that Internet Web site is http://www.sec.gov.
This prospectus and any applicable prospectus supplement do not constitute
an offer to sell or a solicitation of an offer to buy any securities other
than the securities offered by this prospectus and the prospectus supplement
nor an offer of the securities to any person in any state or other
jurisdiction in which the offer would be unlawful.
Incorporation of Certain Documents by Reference
All documents filed for the trust fund referred to in the accompanying
prospectus supplement after the date of this prospectus and before the end of
the related offering with the SEC pursuant to Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended, are incorporated by
reference in this prospectus and are a part of this prospectus from the date
of their filing. Any statement contained in a document incorporated by
reference in this prospectus is modified or superseded for all purposes of
this prospectus to the extent that a statement contained in this prospectus
(or in the accompanying prospectus supplement) or in any other subsequently
filed document that also is incorporated by reference differs from that
statement. Any statement so modified or superseded shall not, except as so
modified or superseded, constitute a part of this prospectus. Neither the
depositor nor the master servicer intends to file with the Securities and
Exchange Commission periodic reports with respect to the trust fund following
completion of the reporting period required by Rule 15d-1 or Regulation 15D
under the Securities Exchange Act of 1934.
The trustee on behalf of any trust fund will provide without charge to each
person to whom this prospectus is delivered, on the person's written or oral
request, a copy of any or all of the documents referred to above that have
been or may be incorporated by reference in this prospectus (not including
exhibits to the information that is incorporated by reference unless the
exhibits are specifically incorporated by reference into the information that
this prospectus incorporates). Requests should be directed to the corporate
trust office of the trustee specified in the accompanying prospectus
supplement.
17
Reports to Securityholders
Periodic and annual reports concerning the trust fund will be forwarded to
securityholders. However, such reports will neither be examined nor reported
on by an independent public accountant. See "Description of the Securities --
Reports to Securityholders."
Use of Proceeds
The net proceeds to be received from the sale of the securities will be
applied by the depositor to the purchase of Trust Fund Assets or will be used
by the depositor for general corporate purposes. The depositor expects to sell
securities in series from time to time, but the timing and amount of offerings
of securities will depend on a number of factors, including the volume of
Trust Fund Assets acquired by the depositor, prevailing interest rates,
availability of funds and general market conditions.
The Depositor
CWABS, Inc., a Delaware corporation, the depositor, was incorporated in
August 1996 for the limited purpose of acquiring, owning and transferring
Trust Fund Assets and selling interests therein or bonds secured thereby. The
depositor is a limited purpose finance subsidiary of Countrywide Credit
Industries, Inc., a Delaware corporation. The depositor maintains its
principal office at 4500 Park Granada, Calabasas, California 91302. Its
telephone number is (818) 225-3000.
Neither the depositor nor any of the depositor's affiliates will insure or
guarantee distributions on the securities of any series.
Loan Program
The loans will have been purchased by the depositor, either directly or
through affiliates, from sellers. The applicable prospectus supplement may
provide for the underwriting criteria used in originating the loans, but if it
does not, the loans so acquired by the depositor will have been originated in
accordance with the underwriting criteria specified below under "Underwriting
Standards."
Underwriting Standards
The applicable prospectus supplement may provide for the seller's
representations and warranties relating to the loans, but if it does not, each
seller will represent and warrant that all loans originated and/or sold by it
to the depositor or one of its affiliates will have been underwritten in
accordance with standards consistent with those utilized by mortgage lenders
generally during the period of origination for similar types of loans. As to
any loan insured by the FHA or partially guaranteed by the VA, the seller will
represent that it has complied with underwriting policies of the FHA or the
VA, as the case may be.
Underwriting standards are applied by or on behalf of a lender to evaluate
the borrower's credit standing and repayment ability, and the value and
adequacy of the related Property as collateral. In general, a prospective
borrower applying for a loan is required to fill out a detailed application
designed to provide to the underwriting officer pertinent credit information,
including the principal balance and payment history with respect to any senior
mortgage, if any. The applicable prospectus supplement may specify whether
that credit information will be verified by the seller, but if it does not,
the credit information supplied by the borrower will be verified by the
related seller. As part of the description of the borrower's financial
condition, the borrower generally is required to provide a current list of
assets and liabilities and a statement of income and expenses, as well as an
authorization to apply for a credit report which summarizes the borrower's
credit history with local merchants and lenders and any record of bankruptcy.
In most cases, an employment verification is obtained from an independent
source (typically the borrower's employer) which verification reports, among
other things, the length of employment with that organization and the
borrower's current salary. If a prospective borrower is self-employed, the
borrower may be required to submit copies of signed tax returns. The borrower
may also be required to authorize verification of deposits at financial
institutions where the borrower has demand or savings accounts.
In determining the adequacy of the property to be used as collateral, an
appraisal will generally be made of each property considered for financing.
The appraiser is generally required to inspect the property, issue a report on
its condition and, if applicable, verify construction, if new, has been
completed. The appraisal is generally based on the market value of comparable
homes, the estimated rental income (if considered applicable by the appraiser)
and the cost of replacing the home. The value of the property being financed,
as indicated by the appraisal, must be such that it currently supports, and is
anticipated to support in the future, the outstanding loan balance.
18
The maximum loan amount will vary depending upon a borrower's credit grade
and loan program but will not generally exceed $1,000,000. Variations in
maximum loan amount limits will be permitted based on compensating factors.
Compensating factors may generally include, to the extent specified in the
related prospectus supplement, low loan-to-value ratio, low debt-to-income
ratio, stable employment, favorable credit history and the nature of the
underlying first mortgage loan, if applicable.
Each seller's underwriting standards will generally permit loans with loan-
to-value ratios at origination of up to 100% depending on the loan program,
type and use of the property, creditworthiness of the borrower and debt-to-
income ratio. If so specified in the related prospectus supplement, a seller's
underwriting criteria may permit loans with loan-to-value ratios at
origination in excess of 100%, such as for debt consolidation or home
improvement purposes. Loan-to-value ratios may not be evaluated in the case of
Title I loans.
After obtaining all applicable employment, credit and property information,
the related seller will use a debt-to-income ratio to assist in determining
whether the prospective borrower has sufficient monthly income available to
support the payments of principal and interest on the mortgage loan in
addition to other monthly credit obligations. The "debt-to-income ratio" is
the ratio of the borrower's total monthly payments to the borrower's gross
monthly income. The maximum monthly debt-to-income ratio will vary depending
upon a borrower's credit grade and loan program but will not generally exceed
55%. Variations in the monthly debt-to-income ratio limit will be permitted
based on compensating factors to the extent specified in the related
prospectus supplement.
In the case of a loan secured by a leasehold interest in real property, the
title to which is held by a third party lessor, the applicable prospectus
supplement may provide for the related representations and warranties of the
seller, but if it does not, the related seller will represent and warrant,
among other things, that the remaining term of the lease and any sublease is
at least five years longer than the remaining term on the loan.
Certain of the types of loans that may be included in a trust fund are
recently developed and may involve additional uncertainties not present in
traditional types of loans. For example, certain of such loans may provide for
escalating or variable payments by the borrower. These types of loans are
underwritten on the basis of a judgment that the borrowers have the ability to
make the monthly payments required initially. In some instances, a borrower's
income may not be sufficient to permit continued loan payments as such
payments increase. These types of loans may also be underwritten primarily
upon the basis of Loan-to-Value Ratios or other favorable credit factors.
Qualifications of Sellers
Each seller will be required to satisfy the following qualifications. Each
seller must be an institution experienced in originating and servicing loans
of the type contained in the related pool in accordance with accepted
practices and prudent guidelines, and must maintain satisfactory facilities to
originate and service those loans. Each seller must be a seller/servicer
approved by either Fannie Mae or Freddie Mac. Each seller must be a mortgagee
approved by the FHA or an institution the deposit accounts of which are
insured by the FDIC.
Representations by Sellers; Repurchases
Each seller will have made representations and warranties in respect of the
loans sold by such seller and evidenced by all, or a part, of a series of
securities. Such representations and warranties may include, among other
things:
o that title insurance (or in the case of Properties located in areas where
such policies are generally not available, an attorney's certificate of
title) and any required hazard insurance policy were effective at
origination of each loan, other than cooperative loans and certain home
equity loans, and that each policy (or certificate of title as
applicable) remained in effect on the date of purchase of the loan from
the seller by or on behalf of the depositor;
o that the seller had good title to each such loan and such loan was
subject to no offsets, defenses, counterclaims or rights of rescission
except to the extent that any buydown agreement may forgive certain
indebtedness of a borrower;
o that each loan constituted a valid lien on, or a perfected security
interest with respect to, the Property (subject only to permissible liens
disclosed, if applicable, title insurance exceptions, if applicable, and
certain other exceptions described in the Agreement) and that the
Property was free from damage and was in acceptable condition;
o that there were no delinquent tax or assessment liens against the
Property;
19
o that no required payment on a loan was delinquent more than the number of
days specified in the related prospectus supplement; and
o that each loan was made in compliance with, and is enforceable under, all
applicable local, state and federal laws and regulations in all material
respects.
If so specified in the related prospectus supplement, the representations and
warranties of a seller in respect of a loan will be made not as of the cut-off
date but as of the date on which such seller sold the loan to the depositor or
one of its affiliates. Under such circumstances, a substantial period of time
may have elapsed between the sale date and the date of initial issuance of the
series of securities evidencing an interest in such loan. Since the
representations and warranties of a seller do not address events that may
occur following the sale of a loan by such seller, its repurchase obligation
described below will not arise if the relevant event that would otherwise have
given rise to such an obligation with respect to a loan occurs after the date
of sale of such loan by such seller to the depositor or its affiliates.
However, the depositor will not include any loan in the trust fund for any
series of securities if anything has come to the depositor's attention that
would cause it to believe that the representations and warranties of a seller
will not be accurate and complete in all material respects in respect of such
loan as of the date of initial issuance of the related series of securities.
If the master servicer is also a seller of loans with respect to a particular
series of securities, such representations will be in addition to the
representations and warranties made by the master servicer in its capacity as
a master servicer.
The master servicer or the trustee, if the master servicer is the seller,
will promptly notify the relevant seller of any breach of any representation
or warranty made by it in respect of a loan which materially and adversely
affects the interests of the securityholders in such loan. If such seller
cannot cure such breach within 90 days following notice from the master
servicer or the trustee, as the case may be, the applicable prospectus
supplement may provide for the seller's obligations under those circumstances,
but if it does not, then such seller will be obligated either
o to repurchase such loan from the trust fund at a price (the "Purchase
Price") equal to 100% of the unpaid principal balance thereof as of the
date of the repurchase plus accrued interest thereon to the first day of
the month following the month of repurchase at the Loan Rate (less any
Advances or amount payable as related servicing compensation if the
seller is the master servicer) or
o substitute for such loan a replacement loan that satisfies the criteria
specified in the related prospectus supplement.
If a REMIC election is to be made with respect to a trust fund, the applicable
prospectus supplement may provide for the obligations of the master servicer
or residual certificateholder, but if it does not, the master servicer or a
holder of the related residual certificate generally will be obligated to pay
any prohibited transaction tax which may arise in connection with any such
repurchase or substitution and the trustee must have received a satisfactory
opinion of counsel that such repurchase or 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. The master servicer may be entitled to
reimbursement for any such payment from the assets of the related trust fund
or from any holder of the related residual certificate. See "Description of
the Securities -- General." Except in those cases in which the master servicer
is the seller, the master servicer will be required under the applicable
Agreement to enforce this obligation for the benefit of the trustee and the
holders of the securities, following the practices it would employ in its good
faith business judgment were it the owner of such loan. This repurchase or
substitution obligation will constitute the sole remedy available to holders
of securities or the trustee for a breach of representation by a seller.
Neither the depositor nor the master servicer (unless the master servicer is
the seller) will be obligated to purchase or substitute a loan if a seller
defaults on its obligation to do so, and no assurance can be given that
sellers will carry out their respective repurchase or substitution obligations
with respect to loans. However, to the extent that a breach of a
representation and warranty of a seller may also constitute a breach of a
representation made by the master servicer, the master servicer may have a
repurchase or substitution obligation as described below under "The Agreements
- -- Assignment of Trust Fund Assets."
Description of the Securities
Each series of certificates will be issued pursuant to separate agreements
(each, a "Pooling and Servicing Agreement" or a "Trust Agreement") among the
depositor, the master servicer and the trustee. A form of Pooling and
Servicing Agreement and Trust 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 pursuant to an indenture (the "Indenture") between the
related trust fund and the entity named in the related prospectus supplement
as trustee with respect to such series, and the related loans will be serviced
by the master servicer pursuant to a Master Servicing Agreement. A
20
form of Indenture and Master Servicing Agreement has been filed as an exhibit
to the Registration Statement of which this prospectus forms a part. A series
of securities may consist of both notes and certificates. Each Agreement,
dated as of the related cut-off date, will be among the depositor, the master
servicer and the trustee for the benefit of the holders of the securities of
such series. The provisions of each Agreement will vary depending upon the
nature of the securities to be issued thereunder and the nature of the related
trust fund. The following are descriptions of the material provisions which
may appear in each Agreement. The descriptions are subject to, and are
qualified in their entirety by reference to, all of the provisions of the
Agreement for each series of securities and the applicable prospectus
supplement. The depositor will provide a copy of the Agreement (without
exhibits) relating to any series without charge upon written request of a
holder of record of a security of such series addressed to CWABS, Inc., 4500
Park Granada, Calabasas, California 91302, Attention: Secretary.
General
The securities of each series will be issued in book-entry or fully
registered form, in the authorized denominations specified in the related
prospectus supplement, will, in the case of certificates, evidence specified
beneficial ownership interests in, and in the case of notes, be secured by,
the assets of the related trust fund created pursuant to each Agreement and
will not be entitled to payments in respect of the assets included in any
other trust fund established by the depositor. The applicable prospectus
supplement may provide for guarantees or insurance obtained from a
governmental entity or other person, but if it does not, the Trust Fund Assets
will not be guaranteed or insured by any governmental entity or other person.
Each trust fund will consist of, to the extent provided in the related
Agreement,
o the Trust Fund Assets, as from time to time are subject to the related
Agreement (exclusive of any amounts specified in the related prospectus
supplement ("Retained Interest")), including all payments of interest and
principal received with respect to the loans after the cut-off date (to
the extent not applied in computing the principal balance of such loans
as of the cut-off date (the "Cut-off Date Principal Balance"));
o the assets required to be deposited in the related Security Account from
time to time;
o property which secured a loan and which is acquired on behalf of the
securityholders by foreclosure or deed in lieu of foreclosure and
o any insurance policies or other forms of credit enhancement required to
be maintained pursuant to the related Agreement.
If so specified in the related prospectus supplement, a trust fund may also
include one or more of the following: reinvestment income on payments received
on the Trust Fund Assets, a reserve fund, a mortgage pool insurance policy, a
special hazard insurance policy, a bankruptcy bond, one or more letters of
credit, a surety bond, guaranties or similar instruments.
Each series of securities will be issued in one or more classes. Each class
of certificates of a series will evidence beneficial ownership of a specified
percentage (which may be 0%) or portion of future interest payments and a
specified percentage (which may be 0%) or portion of future principal payments
on, and each class of notes of a series will be secured by, the related Trust
Fund Assets. A series of securities may include one or more classes that are
senior in right to payment to one or more other classes of securities of such
series. Certain series or classes of securities may be covered by insurance
policies, surety bonds or other forms of credit enhancement, in each case as
described under "Credit Enhancement" herein and in the related prospectus
supplement. One or more classes of securities of a series may be entitled to
receive distributions of principal, interest or any combination thereof.
Distributions on one or more classes of a series of securities may be made
prior to one or more other classes, after the occurrence of specified events,
in accordance with a schedule or formula or on the basis of collections from
designated portions of the related Trust Fund Assets, in each case as
specified in the related prospectus supplement. The timing and amounts of such
distributions may vary among classes or over time as specified in the related
prospectus supplement.
Distributions of principal and interest (or, where applicable, of principal
only or interest only) on the related securities will be made by the trustee
on each distribution date (i.e., monthly, quarterly, semi-annually or at such
other intervals and on the dates as are specified in the related prospectus
supplement) in proportion to the percentages specified in the related
prospectus supplement. Distributions will be made to the persons in whose
names the securities are registered at the close of business on the dates
specified in the related prospectus supplement (each, a "Record Date").
Distributions will be made in the manner specified in the related prospectus
supplement to the persons entitled thereto at the address appearing in the
register maintained for holders of securities (the "Security Register");
provided, however, that the final distribution in retirement of the securities
will
21
be made only upon presentation and surrender of the securities at the office
or agency of the trustee or other person specified in the notice to
securityholders of such final distribution.
The securities will be freely transferable and exchangeable at the Corporate
Trust Office of the trustee as set forth in the related prospectus supplement.
No service charge will be made for any registration of exchange or transfer of
securities of any series, but the trustee may require payment of a sum
sufficient to cover any related tax or other governmental charge.
Under current law the purchase and holding of a class of securities entitled
only to a specified percentage of payments of either interest or principal or
a notional amount of either interest or principal on the related loans or a
class of securities entitled to receive payments of interest and principal on
the loans only after payments to other classes or after the occurrence of
certain specified events by or on behalf of any employee benefit plan or other
retirement arrangement (including individual retirement accounts and
annuities, Keogh plans and collective investment funds in which such plans,
accounts or arrangements are invested) subject to provisions of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") or the Internal
Revenue Code of 1986, as amended (the "Code"), may result in prohibited
transactions, within the meaning of ERISA and the Code. See "ERISA
Considerations." The applicable prospectus supplement may provide for the
conditions for transferring a security of that type of class, but if it does
not, the transfer of securities of such a class will not be registered unless
the transferee (i) represents that it is not, and is not purchasing on behalf
of, any such plan, account or arrangement or (ii) provides an opinion of
counsel satisfactory to the trustee and the depositor that the purchase of
securities of such a class by or on behalf of such plan, account or
arrangement is permissible under applicable law and will not subject the
trustee, the master servicer or the depositor to any obligation or liability
in addition to those undertaken in the Agreements.
As to each series, an election may be made to treat the related trust fund
or designated portions thereof as a "real estate mortgage investment conduit"
or REMIC as defined in the Code. The related prospectus supplement will
specify whether a REMIC election is to be made. Alternatively, the Agreement
for a series may provide that a REMIC election may be made at the discretion
of the depositor or the master servicer and may only be made if certain
conditions are satisfied. As to any such series, the terms and provisions
applicable to the making of a REMIC election will be set forth in the related
prospectus supplement. If such an election is made with respect to a series,
one of the classes will be designated as evidencing the sole class of
"residual interests" in the related REMIC, as defined in the Code. All other
classes of securities in such a series will constitute "regular interests" in
the related REMIC, as defined in the Code. As to each series with respect to
which a REMIC election is to be made, the master servicer or a holder of the
related residual certificate will be obligated to take all actions required in
order to comply with applicable laws and regulations and will be obligated to
pay any prohibited transaction taxes. The master servicer, unless otherwise
provided in the related prospectus supplement, will be entitled to
reimbursement for any such payment from the assets of the trust fund or from
any holder of the related residual certificate.
Distributions on Securities
General. In general, the method of determining the amount of distributions
on a particular series of securities will depend on the type of credit
support, if any, that is used with respect to such series. See "Credit
Enhancement." Set forth below are descriptions of various methods that may be
used to determine the amount of distributions on the securities of a
particular series. The prospectus supplement for each series of securities
will describe the method to be used in determining the amount of distributions
on the securities of such series.
Distributions allocable to principal and interest on the securities will be
made by the trustee out of, and only to the extent of, funds in the related
Security Account, including any funds transferred from any reserve fund. As
between securities of different classes and as between distributions of
principal (and, if applicable, between distributions of Principal Prepayments,
as defined below, and scheduled payments of principal) and interest,
distributions made on any distribution date will be applied as specified in
the related prospectus supplement. The prospectus supplement will also
describe the method for allocating distributions among securities of a
particular class.
Available Funds. All distributions on the securities of each series on each
distribution date will be made from the Available Funds described below, in
accordance with the terms described in the related prospectus supplement and
specified in the Agreement. "Available Funds" for each distribution date will
generally equal the amount on deposit in the related Security Account on such
distribution date (net of related fees and expenses payable by the related
trust fund) other than amounts to be held therein for distribution on future
distribution dates.
Distributions of Interest. Interest will accrue on the aggregate principal
balance of the securities (or, in the case of securities entitled only to
distributions allocable to interest, the aggregate notional amount) of each
class of
22
securities (the "Class Security Balance") entitled to interest from the date,
at the Pass-Through Rate or interest rate, as applicable (which in either case
may be a fixed rate or rate adjustable as specified in such prospectus
supplement), and for the periods specified in such prospectus supplement. To
the extent funds are available therefor, interest accrued during each such
specified period on each class of securities entitled to interest (other than
a class of securities that provides for interest that accrues, but is not
currently payable) will be distributable on the distribution dates specified
in the related prospectus supplement until the aggregate Class Security
Balance of the securities of such class has been distributed in full or, in
the case of securities entitled only to distributions allocable to interest,
until the aggregate notional amount of such securities is reduced to zero or
for the period of time designated in the related prospectus supplement. The
original Class Security Balance of each security will equal the aggregate
distributions allocable to principal to which such security is entitled.
Distributions allocable to interest on each security that is not entitled to
distributions allocable to principal will be calculated based on the notional
amount of such security. The notional amount of a security will not evidence
an interest in or entitlement to distributions allocable to principal but will
be used solely for convenience in expressing the calculation of interest and
for certain other purposes.
Interest payable on the securities of a series on a distribution date will
include all interest accrued during the period specified in the related
prospectus supplement. In the event interest accrues over a period ending two
or more days prior to a distribution date, the effective yield to
securityholders will be reduced from the yield that would otherwise be
obtainable if interest payable on the security were to accrue through the day
immediately preceding such distribution date, and the effective yield (at par)
to securityholders will be less than the indicated coupon rate.
With respect to any class of accrual securities, if specified in the related
prospectus supplement, any interest that has accrued but is not paid on a
given distribution date will be added to the aggregate Class Security Balance
of such class of securities on that distribution date. Distributions of
interest on any class of accrual securities will commence only after the
occurrence of the events specified in such prospectus supplement. Prior to
such time, the beneficial ownership interest in the trust fund or the
principal balance, as applicable, of such class of accrued securities, as
reflected in the aggregate Class Security Balance of such class of accrual
securities, will increase on each distribution date by the amount of interest
that accrued on such class of accrual securities during the preceding interest
accrual period but that was not required to be distributed to such class on
such distribution date. Any such class of accrual securities will thereafter
accrue interest on its outstanding Class Security Balance as so adjusted.
Distributions of Principal. The related prospectus supplement will specify
the method by which the amount of principal to be distributed on the
securities on each distribution date will be calculated and the manner in
which such amount will be allocated among the classes of securities entitled
to distributions of principal. The aggregate Class Security Balance of any
class of securities entitled to distributions of principal generally will be
the aggregate original Class Security Balance of such class of securities
specified in such prospectus supplement, reduced by all distributions reported
to the holders of such securities as allocable to principal and,
o in the case of accrual securities, in general, increased by all interest
accrued but not then distributable on such accrual securities; and
o in the case of adjustable rate securities, subject to the effect of
negative amortization, if applicable.
If so provided in the related prospectus supplement, one or more classes of
securities will be entitled to receive all or a disproportionate percentage of
the payments of principal which are received from borrowers in advance of
their scheduled due dates and are not accompanied by amounts representing
scheduled interest due after the month of such payments ("Principal
Prepayments") in the percentages and under the circumstances or for the
periods specified in such prospectus supplement. Any such allocation of
Principal Prepayments to such class or classes of securities will have the
effect of accelerating the amortization of such securities while increasing
the interests evidenced by one or more other classes of securities in the
trust fund. Increasing the interests of the other classes of securities
relative to that of certain securities is intended to preserve the
availability of the subordination provided by such other securities. See
"Credit Enhancement -- Subordination."
Unscheduled Distributions. If specified in the related prospectus
supplement, the securities will be subject to receipt of distributions before
the next scheduled distribution date under the circumstances and in the manner
described below and in the prospectus supplement. If applicable, the trustee
will be required to make unscheduled distributions on the day and in the
amount specified in the related prospectus supplement if, due to substantial
payments of principal (including Principal Prepayments) on the Trust Fund
Assets, the trustee or the master servicer determines that the funds available
or anticipated to be available from the Security Account and, if applicable,
any reserve fund, may be insufficient to make required distributions on the
securities on that distribution date. The
23
applicable prospectus supplement may provide for limits on the amount of an
unscheduled distribution, but if it does not, the amount of any unscheduled
distribution that is allocable to principal will not exceed the amount that
would otherwise have been required to be distributed as principal on the
securities on the next distribution date. The applicable prospectus supplement
may specify whether the unscheduled distribution will include interest, but if
it does not, the unscheduled distributions will include interest at the
applicable Pass-Through Rate (if any) or interest rate (if any) on the amount
of the unscheduled distribution allocable to principal for the period and to
the date specified in the prospectus supplement.
Advances
To the extent provided in the related prospectus supplement, the master
servicer will be required to advance on or before each distribution date (from
its own funds, funds advanced by sub-servicers or funds held in the Security
Account for future distributions to the holders of securities of the related
series), an amount equal to the aggregate of payments of interest and/or
principal that were delinquent on the related Determination Date (as such term
is defined in the related prospectus supplement) and were not advanced by any
sub-servicer, subject to the master servicer's determination that such
advances may be recoverable out of late payments by borrowers, Liquidation
Proceeds, Insurance Proceeds or otherwise. In the case of cooperative loans,
the master servicer also may be required to advance any unpaid maintenance
fees and other charges under the related proprietary leases as specified in
the related prospectus supplement.
In making advances, the master servicer will endeavor to maintain a regular
flow of scheduled interest and principal payments to holders of the
securities, rather than to guarantee or insure against losses. If advances are
made by the master servicer from cash being held for future distribution to
securityholders, the master servicer will replace such funds on or before any
future distribution date to the extent that funds in the applicable Security
Account on such distribution date would be less than the amount required to be
available for distributions to securityholders on such date. Any master
servicer funds advanced will be reimbursable to the master servicer out of
recoveries on the specific loans with respect to which such advances were made
(e.g., late payments made by the related borrower, any related Insurance
Proceeds, Liquidation Proceeds or proceeds of any loan purchased by the
depositor, a sub-servicer or a seller pursuant to the related Agreement).
Advances by the master servicer (and any advances by a sub-servicer) also will
be reimbursable to the master servicer (or sub-servicer) from cash otherwise
distributable to securityholders (including the holders of Senior securities)
to the extent that the master servicer determines that any such advances
previously made are not ultimately recoverable as described above. To the
extent provided in the related prospectus supplement, the master servicer also
will be obligated to make advances, to the extent recoverable out of Insurance
Proceeds, Liquidation Proceeds or otherwise, in respect of certain taxes and
insurance premiums not paid by borrowers on a timely basis. Funds so advanced
are reimbursable to the master servicer to the extent permitted by the related
Agreement. The obligations of the master servicer to make advances may be
supported by a cash advance reserve fund, a surety bond or other arrangement
of the type described herein under "Credit Enhancement," in each case as
described in the related prospectus supplement.
In the event the master servicer or a sub-servicer fails to make a required
advance, the applicable prospectus supplement may specify whether another
party will have advancing obligations, but if it does not, the trustee will be
obligated to make such advance in its capacity as successor servicer. If the
trustee makes such an advance, it will be entitled to be reimbursed for such
advance to the same extent and degree as the master servicer or a sub-servicer
is entitled to be reimbursed for advances. See "Description of the Securities
- -- Distributions on Securities."
Reports to Securityholders
Prior to or concurrently with each distribution on a distribution date the
master servicer or the trustee will furnish to each securityholder of record
of the related series a statement setting forth, to the extent applicable to
such series of securities, among other things:
o the amount of such distribution allocable to principal, separately
identifying the aggregate amount of any Principal Prepayments and if so
specified in the related prospectus supplement, any applicable prepayment
penalties included therein;
o the amount of such distribution allocable to interest;
o the amount of any advance;
o the aggregate amount (a) otherwise allocable to the Subordinated
Securityholders on such distribution date, and (b) withdrawn from the
reserve fund, if any, that is included in the amounts distributed to the
Senior Securityholders;
24
o the outstanding principal balance or notional amount of each class of the
related series after giving effect to the distribution of principal on
such distribution date;
o the percentage of principal payments on the loans (excluding
prepayments), if any, which each such class will be entitled to receive
on the following distribution date;
o the percentage of Principal Prepayments on the loans, if any, which each
such class will be entitled to receive on the following distribution
date;
o the related amount of the servicing compensation retained or withdrawn
from the Security Account by the master servicer, and the amount of
additional servicing compensation received by the master servicer
attributable to penalties, fees, excess Liquidation Proceeds and other
similar charges and items;
o the number and aggregate principal balances of loans (A) delinquent
(exclusive of loans in foreclosure) 1 to 30 days, 31 to 60 days, 61 to 90
days and 91 or more days and (B) in foreclosure and delinquent 1 to 30
days, 31 to 60 days, 61 to 90 days and 91 or more days, as of the close
of business on the last day of the calendar month preceding such
distribution date;
o the book value of any real estate acquired through foreclosure or grant
of a deed in lieu of foreclosure;
o the Pass-Through Rate or interest rate, as applicable, if adjusted from
the date of the last statement, of any such class expected to be
applicable to the next distribution to such class;
o if applicable, the amount remaining in any reserve fund at the close of
business on the distribution date;
o the Pass-Through Rate or interest rate, as applicable, as of the day
prior to the immediately preceding distribution date; and
o any amounts remaining under letters of credit, pool policies or other
forms of credit enhancement.
Where applicable, any amount set forth above may be expressed as a dollar
amount per single security of the relevant class having the percentage
interest specified in the related prospectus supplement. The report to
securityholders for any series of securities may include additional or other
information of a similar nature to that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the master servicer or the trustee will mail to each
securityholder of record at any time during such calendar year a report (a) as
to the aggregate of amounts reported pursuant to (i) and (ii) above for such
calendar year or, in the event such person was a securityholder of record
during a portion of such calendar year, for the applicable portion of such
year and (b) such other customary information as may be deemed necessary or
desirable for securityholders to prepare their tax returns.
Categories of Classes of Securities
The securities of any series may be comprised of one or more classes. Such
classes, in general, fall into different categories. The following chart
identifies and generally defines certain of the more typical categories. The
prospectus supplement for a series of securities may identify the classes
which comprise such series by reference to the following categories.
Categories of Classes Definition
Principal Types
Accretion Directed. . . . . . . . . . . . A class that receives principal
payments from the accreted interest
from specified Accrual classes. An
accretion directed class also may
receive principal payments from
principal paid on the underlying
Trust Fund Assets for the related
series.
Component Securities. . . . . . . . . . . A class consisting of "components."
The components of a class of
component securities may have
different principal and/or interest
payment characteristics but together
constitute a single class. Each
component of a class of component
securities may be identified as
falling into one or more of the
categories in this chart.
Notional Amount Securities. . . . . . . . A class having no principal balance
and bearing interest on the related
notional amount. The notional amount
is used for purposes of the
determination of interest
distributions.
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Planned Principal Class or PACs . . . . . A class that is designed to receive
principal payments using a
predetermined principal balance
schedule derived by assuming two
constant prepayment rates for the
underlying Trust Fund Assets. These
two rates are the endpoints for the
"structuring range" for the planned
principal class. The planned
principal classes in any series of
certificates may be subdivided into
different categories (e.g., primary
planned principal classes, secondary
planned principal classes and so
forth) having different effective
structuring ranges and different
principal payment priorities. The
structuring range for the secondary
planned principal class of a series
of certificates will be narrower
than that for the primary planned
principal class of the series.
Scheduled Principal Class . . . . . . . . A class that is designed to receive
principal payments using a
predetermined principal balance
schedule but is not designated as a
Planned Principal Class or Targeted
Principal Class. In many cases, the
schedule is derived by assuming two
constant prepayment rates for the
underlying Trust Fund Assets. These
two rates are the endpoints for the
"structuring range" for the
scheduled principal class.
Sequential Pay. . . . . . . . . . . . . . Classes that receive principal
payments in a prescribed sequence,
that do not have predetermined
principal balance schedules and that
under all circumstances receive
payments of principal continuously
from the first distribution date on
which they receive principal until
they are retired. A single class
that receives principal payments
before or after all other classes in
the same series of securities may be
identified as a sequential pay
class.
Strip.. . . . . . . . . . . . . . . . . . A class that receives a constant
proportion, or "strip," of the
principal payments on the underlying
Trust Fund Assets.
Support Class (also sometimes
referred to as "companion
classes") . . . . . . . . . . . . . . . A class that receives principal
payments on any distribution date
only if scheduled payments have been
made on specified planned principal
classes, targeted principal classes
and/or Scheduled Principal Classes.
Targeted Principal Class or TACs. . . . . A class that is designed to receive
principal payments using a
predetermined principal balance
schedule derived by assuming a
single constant prepayment rate for
the underlying Trust Fund Assets.
Interest Types
Fixed Rate. . . . . . . . . . . . . . . . A class with an interest rate that
is fixed throughout the life of the
class.
Floating Rate . . . . . . . . . . . . . . A class with an interest rate that
resets periodically based upon a
designated index and that varies
directly with changes in such index.
Inverse Floating Rate . . . . . . . . . . A class with an interest rate that
resets periodically based upon a
designated index and that varies
inversely with changes in such
index.
Variable Rate . . . . . . . . . . . . . . A class with an interest rate that
resets periodically and is
calculated by reference to the rate
or rates of interest applicable to
specified assets or instruments
(e.g., the Loan Rates borne by the
underlying loans).
Interest Only . . . . . . . . . . . . . . A class that receives some or all of
the interest payments made on the
underlying Trust Fund Assets and
little or no principal. Interest
Only classes have either a nominal
principal balance or a notional
amount. A nominal principal balance
represents actual principal that
will be paid on the class. It is
referred to as nominal since it is
extremely small compared to other
classes. A notional amount is the
amount used as a reference to
calculate the amount of interest due
on an Interest Only class that is
not entitled to any distributions in
respect of principal.
26
Principal Only. . . . . . . . . . . . . . A class that does not bear interest
and is entitled to receive only
distributions in respect of
principal.
Partial Accrual . . . . . . . . . . . . . A class that accretes a portion of
the amount of accrued interest
thereon, which amount will be added
to the principal balance of such
class on each applicable
distribution date, with the
remainder of such accrued interest
to be distributed currently as
interest on such class. Such
accretion may continue until a
specified event has occurred or
until such Partial Accrual class is
retired.
Accrual . . . . . . . . . . . . . . . . . A class that accretes the amount of
accrued interest otherwise
distributable on such class, which
amount will be added as principal to
the principal balance of such class
on each applicable distribution
date. Such accretion may continue
until some specified event has
occurred or until such Accrual class
is retired.
Indices Applicable to Floating Rate and Inverse Floating Rate Classes
Libor
The applicable prospectus supplement may specify some other basis for
determining LIBOR, but if it does not, on the LIBOR determination date (as
defined in the related prospectus supplement) for each class of certificates
of a series for which the applicable interest rate is determined by reference
to an index denominated as LIBOR, the person designated in the related pooling
and servicing agreement as the calculation agent will determine LIBOR in
accordance with one of the two methods described below (which method will be
specified in the related prospectus supplement):
LIBO Method
If using this method to calculate LIBOR, the calculation agent will
determine LIBOR by reference to the quotations, as set forth on the Reuters
Screen LIBO Page, offered by the principal London office of each of the
designated reference banks meeting the criteria set forth in this prospectus
for making one-month United States dollar deposits in leading banks in the
London Interbank market, as of 11:00 a.m. (London time) on the LIBOR
determination date. In lieu of relying on the quotations for those reference
banks that appear at the time on the Reuters Screen LIBO Page, the calculation
agent will request each of the reference banks to provide the offered
quotations at the time.
Under this method LIBOR will be established by the calculation agent on each
LIBOR determination date as follows:
(a) If on any LIBOR determination date two or more reference banks
provide offered quotations, LIBOR for the next interest accrual period
shall be the arithmetic mean of the offered quotations (rounded upwards
if necessary to the nearest whole multiple of 1/32%.
(b) If on any LIBOR determination date only one or none of the
reference banks provides offered quotations, LIBOR for the next interest
accrual period shall be whichever is the higher of
o LIBOR as determined on the previous LIBOR determination date or
o the reserve interest rate.
The reserve interest rate shall be the rate per annum which the
calculation agent determines to be either
o the arithmetic mean (rounded upwards if necessary to the nearest whole
multiple of 1/32%) of the one-month United States dollar lending rates
that New York City banks selected by the calculation agent are quoting,
on the relevant LIBOR determination date, to the principal London
offices of at least two of the reference banks to which the quotations
are, in the opinion of the calculation agent being so made, or
o if the calculation agent cannot determine the arithmetic mean, the
lowest one-month United States dollar lending rate which New York City
banks selected by the calculation agent are quoting on the LIBOR
determination date to leading European banks.
(c) If on any LIBOR determination date for a class specified in the
related prospectus supplement, the calculation agent is required but is
unable to determine the reserve interest rate in the manner provided in
paragraph (b) above, LIBOR for the next interest accrual period shall be
LIBOR as
27
determined on the preceding LIBOR determination date, or, in the case of
the first LIBOR determination date, LIBOR shall be considered to be the
per annum rate specified as such in the related prospectus supplement.
Each reference bank shall be a leading bank engaged in transactions in
Eurodollar deposits in the international Eurocurrency market; shall not
control, be controlled by, or be under common control with the calculation
agent; and shall have an established place of business in London. If a
reference bank should be unwilling or unable to act as such or if appointment
of a reference bank is terminated, another leading bank meeting the criteria
specified above will be appointed.
BBA Method
If using this method of determining LIBOR, the calculation agent will
determine LIBOR on the basis of the British Bankers' Association "Interest
Settlement Rate" for one-month deposits in United States dollars as found on
Telerate page 3750 as of 11:00 a.m. London time on each LIBOR determination
date. Interest Settlement Rates currently are based on rates quoted by eight
British Bankers' Association designated banks as being, in the view of the
banks, the offered rate at which deposits are being quoted to prime banks in
the London interbank market. The Interest Settlement Rates are calculated by
eliminating the two highest rates and the two lowest rates, averaging the four
remaining rates, carrying the result (expressed as a percentage) out to six
decimal places, and rounding to five decimal places.
If on any LIBOR determination date, the calculation agent is unable to
calculate LIBOR in accordance with the method set forth in the immediately
preceding paragraph, LIBOR for the next interest accrual period shall be
calculated in accordance with the LIBOR method described under "LIBO Method."
The establishment of LIBOR on each LIBOR determination date by the
calculation agent and its calculation of the rate of interest for the
applicable classes for the related interest accrual period shall (in the
absence of manifest error) be final and binding.
COFI
The Eleventh District Cost of Funds Index is designed to represent the
monthly weighted average cost of funds for savings institutions in Arizona,
California and Nevada that are member institutions of the Eleventh Federal
Home Loan Bank District (the "Eleventh District"). The Eleventh District Cost
of Funds Index for a particular month reflects the interest costs paid on all
types of funds held by Eleventh District member institutions and is calculated
by dividing the cost of funds by the average of the total amount of those
funds outstanding at the end of that month and of the prior month and
annualizing and adjusting the result to reflect the actual number of days in
the particular month. If necessary, before these calculations are made, the
component figures are adjusted by the Federal Home Loan Bank of San Francisco
("FHLBSF") to neutralize the effect of events such as member institutions
leaving the Eleventh District or acquiring institutions outside the Eleventh
District. The Eleventh District Cost of Funds Index is weighted to reflect the
relative amount of each type of funds held at the end of the relevant month.
The major components of funds of Eleventh District member institutions are:
savings deposits, time deposits, FHLBSF advances, repurchase agreements and
all other borrowings. Because the component funds represent a variety of
maturities whose costs may react in different ways to changing conditions, the
Eleventh District Cost of Funds Index does not necessarily reflect current
market rates.
A number of factors affect the performance of the Eleventh District Cost of
Funds Index, which may cause it to move in a manner different from indices
tied to specific interest rates, such as United States Treasury bills or
LIBOR. Because the liabilities upon which the Eleventh District Cost of Funds
Index is based were issued at various times under various market conditions
and with various maturities, the Eleventh District Cost of Funds Index may not
necessarily reflect the prevailing market interest rates on new liabilities of
similar maturities. Moreover, as stated above, the Eleventh District Cost of
Funds Index is designed to represent the average cost of funds for Eleventh
District savings institutions for the month prior to the month in which it is
due to be published. Additionally, the Eleventh District Cost of Funds Index
may not necessarily move in the same direction as market interest rates at all
times, since as longer term deposits or borrowings mature and are renewed at
prevailing market interest rates, the Eleventh District Cost of Funds Index is
influenced by the differential between the prior and the new rates on those
deposits or borrowings. In addition, movements of the Eleventh District Cost
of Funds Index, as compared to other indices tied to specific interest rates,
may be affected by changes instituted by the FHLBSF in the method used to
calculate the Eleventh District Cost of Funds Index.
The FHLBSF publishes the Eleventh District Cost of Funds Index in its
monthly Information Bulletin. Any individual may request regular receipt by
mail of Information Bulletins by writing the Federal Home Loan Bank of
28
San Francisco, P.O. Box 7948, 600 California Street, San Francisco, California
94120, or by calling (415) 616-1000. The Eleventh District Cost of Funds Index
may also be obtained by calling the FHLBSF at (415) 616-2600.
The FHLBSF has stated in its Information Bulletin that the Eleventh District
Cost of Funds Index for a month "will be announced on or near the last working
day" of the following month and also has stated that it "cannot guarantee the
announcement" of such index on an exact date. So long as such index for a
month is announced on or before the tenth day of the second following month,
the interest rate for each class of securities of a series as to which the
applicable interest rate is determined by reference to an index denominated as
COFI (each, a class of "COFI securities") for the Interest Accrual Period
commencing in such second following month will be based on the Eleventh
District Cost of Funds Index for the second preceding month. If publication is
delayed beyond such tenth day, such interest rate will be based on the
Eleventh District Cost of Funds Index for the third preceding month.
The applicable prospectus supplement may specify some other basis for
determining COFI, but if it does not, then if on the tenth day of the month in
which any interest accrual period commences for a class of COFI certificates
the most recently published Eleventh District Cost of Funds Index relates to a
month before the third preceding month, the index for the current interest
accrual period and for each succeeding interest accrual period will, except as
described in the next to last sentence of this paragraph, be based on the
National Monthly Median Cost of Funds Ratio to SAIF-Insured Institutions (the
"National Cost of Funds Index") published by the Office of Thrift Supervision
(the "OTS") for the third preceding month (or the fourth preceding month if
the National Cost of Funds Index for the third preceding month has not been
published on the tenth day of an interest accrual period). Information on the
National Cost of Funds Index may be obtained by writing the OTS at 1700 G
Street, N.W., Washington, D.C. 20552 or calling (202) 906-6677, and the
current National Cost of Funds Index may be obtained by calling (202) 906-
6988. If on the tenth day of the month in which an interest accrual period
commences the most recently published National Cost of Funds Index relates to
a month before the fourth preceding month, the applicable index for the
interest accrual period and each succeeding interest accrual period will be
based on LIBOR, as determined by the calculation agent in accordance with the
Agreement relating to the series of certificates. A change of index from the
Eleventh District Cost of Funds Index to an alternative index will result in a
change in the index level and could increase its volatility, particularly if
LIBOR is the alternative index.
The establishment of COFI by the calculation agent and its calculation of
the rates of interest for the applicable classes for the related interest
accrual period shall (in the absence of manifest error) be final and binding.
Treasury Index
The applicable prospectus supplement may specify some other basis for
determining and defining the Treasury index, but if it does not, on the
Treasury index determination date for each class of securities of a series for
which the applicable interest rate is determined by reference to an index
denominated as a Treasury index, the calculation agent will ascertain the
Treasury index for Treasury securities of the maturity and for the period (or,
if applicable, date) specified in the related prospectus supplement. The
Treasury index for any period means the average of the yield for each business
day during the specified period (and for any date means the yield for the
date), expressed as a per annum percentage rate, on U.S. Treasury securities
adjusted to the "constant maturity" specified in the prospectus supplement or
if no "constant maturity" is so specified, U.S. Treasury securities trading on
the secondary market having the maturity specified in the prospectus
supplement, in each case as published by the Federal Reserve Board in its
Statistical Release No. H.15 (519). Statistical Release No. H.15 (519) is
published on Monday or Tuesday of each week and may be obtained by writing or
calling the Publications Department at the Board of Governors of the Federal
Reserve System, 21st and C Streets, Washington, D.C. 20551, (202) 452-3244. If
the calculation agent has not yet received Statistical Release No. H.15 (519)
for a week, then it will use the Statistical Release from the preceding week.
Yields on U.S. Treasury securities at "constant maturity" are derived 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 Treasury securities in the over-the-counter market. These
market yields are calculated from composites of quotations reported by five
leading U.S. Government securities dealers to the Federal Reserve Bank of New
York. This method provides a yield for a given maturity even if no security
with that exact maturity is outstanding. In the event that the Treasury Index
is no longer published, a new index based upon comparable data and methodology
will be designated in accordance with the Agreement relating to the particular
series of securities. The Calculation Agent's determination of the Treasury
Index, and its calculation of the rates of interest for the applicable classes
for the related Interest Accrual Period shall (in the absence of manifest
error) be final and binding.
29
Prime Rate
The applicable prospectus supplement may specify the party responsible for
determining the Prime Rate, but if it does not, on the Prime Rate
Determination Date (as such term is defined in the related prospectus
supplement) for each class of securities of a series as to which the
applicable interest rate is determined by reference to an index denominated as
the Prime Rate, the calculation agent will ascertain the Prime Rate for the
related interest accrual period. The applicable prospectus supplement may
provide for the means of determining the Prime Rate, but if it does not, the
Prime Rate for an interest accrual period will be the "Prime Rate" as
published in the "Money Rates" section of The Wall Street Journal (or if not
so published, the "Prime Rate" as published in a newspaper of general
circulation selected by the calculation agent in its sole discretion) on the
related Prime Rate Determination Date. If a prime rate range is given, then
the average of such range will be used. In the event that the Prime Rate is no
longer published, a new index based upon comparable data and methodology will
be designated in accordance with the Agreement relating to the particular
series of securities. The calculation agent's determination of the Prime Rate
and its calculation of the rates of interest for the related interest accrual
period shall (in the absence of manifest error) be final and binding.
Book-Entry Registration of Securities
As described in the related prospectus supplement, if not issued in fully
registered form, each class of securities will be registered as book-entry
certificates. Persons acquiring beneficial ownership interests in the
securities ("Security Owners") will hold their securities through The
Depository Trust Company ("DTC") in the United States, or Clearstream,
Luxembourg or Euroclear (in Europe) if they are participants of such systems,
or indirectly through organizations which are participants in such systems.
The Book-Entry securities will be issued in one or more certificates which
equal the aggregate principal balance of the securities and will initially be
registered in the name of Cede & Co., the nominee of DTC. Clearstream,
Luxembourg and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in Clearstream,
Luxembourg's and Euroclear's names on the books of their respective
depositaries which in turn will hold such positions in customers' securities
accounts in the depositaries' names on the books of DTC. Citibank, N.A., will
act as depositary for Clearstream, Luxembourg and The Chase Manhattan Bank
will act as depositary for Euroclear (in such capacities, individually the
"Relevant Depositary" and collectively the "European Depositaries"). Except as
described below, no person acquiring a Book-Entry security (each, a
"beneficial owner") will be entitled to receive a physical certificate
representing such security (a "Definitive Security"). Unless and until
Definitive Securities are issued, it is anticipated that the only
"securityholders" of the securities will be Cede & Co., as nominee of DTC.
Security Owners are only permitted to exercise their rights indirectly through
Participants and DTC.
The beneficial owner's ownership of a Book-Entry security will be recorded
on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
beneficial owner's account for 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 participating firm that acts as agent for the
Financial Intermediary, whose interest will in turn be recorded on the records
of DTC, if the beneficial owner's Financial Intermediary is not a DTC
participant, and on the records of Clearstream, Luxembourg or Euroclear, as
appropriate).
Security Owners will receive all distributions of principal of, and interest
on, the securities from the trustee through DTC and DTC participants. While
the securities are outstanding (except under the circumstances described
below), under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
among Participants on whose behalf it acts with respect to the securities and
is required to receive and transmit distributions of principal of, and
interest on, the securities. Participants and indirect participants with whom
Security 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 Security Owners. Accordingly,
although Security Owners will not possess certificates, the Rules provide a
mechanism by which Security Owners will receive distributions and will be able
to transfer their interest.
Security Owners will not receive or be entitled to receive certificates
representing their respective interests in the securities, except under the
limited circumstances described below. Unless and until Definitive Securities
are issued, Security Owners who are not Participants may transfer ownership of
securities only through Participants and indirect participants by instructing
such Participants and indirect participants to transfer securities, by book-
entry transfer, through DTC for the account of the purchasers of such
securities, which account is maintained with their respective Participants.
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 indirect participants will make debits or credits, as the
case may be, on their records on behalf of the selling and purchasing Security
Owners.
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Because of time zone differences, credits of securities received in
Clearstream, Luxembourg or Euroclear as a result of a transaction with a
Participant will be made during subsequent securities settlement processing
and dated the business day following the DTC settlement date. Such credits or
any transactions in such securities settled during such processing will be
reported to the relevant Euroclear or Clearstream, Luxembourg Participants on
such business day. Cash received in Clearstream, Luxembourg or Euroclear as a
result of sales of securities by or through a Clearstream, Luxembourg
Participant (as defined herein) or Euroclear Participant (as defined herein)
to a DTC Participant will be received with value on the DTC settlement date
but will be available in the relevant Clearstream, Luxembourg or Euroclear
cash account only as of the business day following settlement in DTC.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Clearstream, Luxembourg Participants and Euroclear
Participants will occur in accordance with their respective rules and
operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream,
Luxembourg Participants or Euroclear Participants, on the other, will be
effected in DTC in accordance with DTC rules on behalf of the relevant
European international clearing system by the Relevant Depositary; however,
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, Luxembourg Participants and
Euroclear Participants may not deliver instructions directly to the European
Depositaries.
Clearstream, Luxembourg is incorporated under the laws of Luxembourg as a
professional depository. Clearstream, Luxembourg holds securities for its
participating organizations ("Clearstream, Luxembourg Participants") and
facilitates the clearance and settlement of securities transactions between
Clearstream, Luxembourg Participants through electronic book-entry changes in
accounts of Clearstream, Luxembourg Participants, thereby eliminating the need
for physical movement of certificates. Transactions may be settled in
Clearstream, Luxembourg in any of 28 currencies, including United States
dollars. Clearstream, Luxembourg provides to its Clearstream, Luxembourg
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Clearstream, Luxembourg interfaces with domestic
markets in several countries. As a professional depository, Clearstream,
Luxembourg is subject to regulation by the Luxembourg Monetary Institute.
Clearstream, Luxembourg 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, Luxembourg is also available to others, such
as banks, brokers, dealers and trust companies that clear through or maintain
a custodial relationship with a Clearstream, Luxembourg Participant, either
directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities
and cash. Transactions may be settled in any of 32 currencies, including
United States dollars. Euroclear includes various other services, including
securities lending and borrowing and interfaces with domestic markets in
several countries generally similar to the arrangements for cross-market
transfers with DTC described above. Euroclear is operated by the Brussels,
Belgium office of Morgan Guaranty Trust Company of New York ("Morgan" and in
such capacity, the "Euroclear Operator"), under contract with Euroclear
Clearance Systems S.C., a Belgian cooperative corporation (the "Belgian
Cooperative"). All operations are conducted by Morgan, and all Euroclear
securities clearance accounts and Euroclear cash accounts are accounts with
the Euroclear Operator, not the Belgian Cooperative. The Belgian cooperative
establishes policy for Euroclear on behalf of Euroclear Participants.
Euroclear Participants include banks (including central banks), securities
brokers and dealers and other professional financial intermediaries. Indirect
access to Euroclear is also available to other firms that clear through or
maintain a custodial relationship with a Euroclear Participant, either
directly or indirectly.
Morgan is the Belgian branch of a New York banking corporation which is a
member bank of the Federal Reserve System. As such, it is regulated and
examined by the Board of Governors of the Federal Reserve System and the New
York State Banking Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with Morgan are governed by
the Terms and Conditions Governing Use of Euroclear and the related Operating
Procedures of the Euroclear System and applicable Belgian
31
law (collectively, the "Terms and Conditions"). The Terms and Conditions
govern transfers of securities and cash within Euroclear, withdrawals of
securities and cash from Euroclear, and receipts of payments with respect to
securities in Euroclear. All securities in Euroclear are held on a fungible
basis without attribution of specific certificates to specific securities
clearance accounts. The Euroclear Operator acts under the Terms and Conditions
only on behalf of Euroclear Participants, and has no record of or relationship
with persons holding through Euroclear Participants.
Under a book-entry format, beneficial owners of the Book-Entry securities
may experience some delay in their receipt of payments, since such payments
will be forwarded by the trustee to Cede & Co., as nominee of DTC.
Distributions with respect to securities held through Clearstream, Luxembourg
or Euroclear will be credited to the cash accounts of Clearstream, Luxembourg
Participants or Euroclear Participants in accordance with the relevant
system's rules and procedures, to the extent received by the Relevant
Depositary. Such distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. See "Federal Income Tax
Consequences -- Tax Treatment of Foreign Investors" and "-- Tax Consequences
to Holders of the Notes -- Backup Withholding" herein. Because DTC can only
act on behalf of Financial Intermediaries, the ability of a beneficial owner
to pledge Book-Entry securities to persons or entities that do not participate
in the Depository system 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 will be provided to Cede & Co., as
nominee of DTC, and may be made available by Cede & Co. to beneficial owners
upon request, in accordance with the rules, regulations and procedures
creating and affecting the Depository, and to the Financial Intermediaries to
whose DTC accounts the Book-Entry securities of such beneficial owners are
credited.
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 applicable Agreement only at the direction of
one or more Financial Intermediaries to whose DTC accounts the Book-Entry
securities are credited, to the extent that such actions are taken on behalf
of Financial Intermediaries whose holdings include such Book-Entry securities.
Clearstream, Luxembourg or the Euroclear Operator, as the case may be, will
take any other action permitted to be taken by a securityholder under the
Agreement on behalf of a Clearstream, Luxembourg Participant or Euroclear
Participant only in accordance with its relevant rules and procedures and
subject to the ability of the Relevant Depositary to effect 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.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Securities. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Securities and instructions for re-
registration, the trustee will issue Definitive securities, and thereafter the
trustee will recognize the holders of such Definitive securities as
securityholders under the applicable Agreement.
Although DTC, Clearstream, Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of securities among
participants of DTC, Clearstream, Luxembourg and Euroclear, they are under no
obligation to perform or continue to perform such procedures and such
procedures may be discontinued at any time.
None of the master servicer, the depositor or the trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry securities held by
Cede & Co., as nominee of DTC, or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests.
Credit Enhancement
General
Credit enhancement may be provided with respect to one or more classes of a
series of securities or with respect to the related Trust Fund Assets. Credit
enhancement may be in the form of a limited financial guaranty policy issued
by an entity named in the related prospectus supplement, the subordination of
one or more classes of the securities of such series, the establishment of one
or more reserve funds, the use of a cross-collateralization feature, use of a
mortgage pool insurance policy, FHA Insurance, VA Guarantee, bankruptcy bond,
special hazard
32
insurance policy, surety bond, letter of credit, guaranteed investment
contract, overcollateralization, or another method of credit enhancement
contemplated herein and described in the related prospectus supplement, or any
combination of the foregoing. The applicable prospectus supplement may provide
for credit enhancement which covers all the classes of securities, but if it
does not, credit enhancement will not provide protection against all risks of
loss and will not guarantee repayment of the entire principal balance of the
securities and interest thereon. If losses occur which exceed the amount
covered by credit enhancement or which are not covered by the credit
enhancement, securityholders will bear their allocable share of any
deficiencies.
Subordination
If so specified in the related prospectus supplement, protection afforded to
holders of one or more classes of securities of a series by means of the
subordination feature may be accomplished by the preferential right of holders
of one or more other classes of such series (the "Senior Securities") to
distributions in respect of scheduled principal, Principal Prepayments,
interest or any combination thereof that otherwise would have been payable to
holders of subordinated securities under the circumstances and to the extent
specified in the related prospectus supplement. Protection may also be
afforded to the holders of Senior Securities of a series by: (i) reducing the
ownership interest (if applicable) of the related subordinated securities;
(ii) a combination of the immediately preceding sentence and clause (i) above;
or (iii) as otherwise described in the related prospectus supplement. If so
specified in the related prospectus supplement, delays in receipt of scheduled
payments on the loans and losses on defaulted loans may be borne first by the
various classes of subordinated securities and thereafter by the various
classes of Senior Securities, in each case under the circumstances and subject
to the limitations specified in such prospectus supplement. The aggregate
distributions in respect of delinquent payments on the loans over the lives of
the securities or at any time, the aggregate losses in respect of defaulted
loans which must be borne by the Subordinated Securities by virtue of
subordination and the amount of the distributions otherwise distributable to
the Subordinated Securityholders that will be distributable to Senior
Securityholders on any distribution date may be limited as specified in the
related prospectus supplement. If aggregate distributions in respect of
delinquent payments on the loans or aggregate losses in respect of such loans
were to exceed an amount specified in the related prospectus supplement,
holders of Senior Securities would experience losses on the securities.
In addition to or in lieu of the foregoing, if so specified in the related
prospectus supplement, all or any portion of distributions otherwise payable
to holders of Subordinated Securities on any distribution date may instead be
deposited into one or more reserve funds established with the trustee or
distributed to holders of Senior Securities. Such deposits may be made on each
distribution date, for specified periods or until the balance in the reserve
fund has reached a specified amount and, following payments from the reserve
fund to holders of Senior Securities or otherwise, thereafter to the extent
necessary to restore the balance in the reserve fund to required levels, in
each case as specified in the related prospectus supplement. Amounts on
deposit in the reserve fund may be released to the holders of certain classes
of securities at the times and under the circumstances specified in such
prospectus supplement.
If specified in the related prospectus supplement, various classes of Senior
Securities and Subordinated Securities may themselves be subordinate in their
right to receive certain distributions to other classes of Senior and
Subordinated Securities, respectively, through a cross-collateralization
mechanism or otherwise.
As between classes of Senior Securities and as between classes of
Subordinated Securities, distributions may be allocated among such classes (i)
in the order of their scheduled final distribution dates, (ii) in accordance
with a schedule or formula, (iii) in relation to the occurrence of events, or
(iv) otherwise, in each case as specified in the related prospectus
supplement. As between classes of Subordinated Securities, payments to holders
of Senior Securities on account of delinquencies or losses and payments to any
reserve fund will be allocated as specified in the related prospectus
supplement.
Letter of Credit
The letter of credit, if any, with respect to a series of securities will be
issued by the bank or financial institution specified in the related
prospectus supplement (the "L/C Bank"). Under the letter of credit, the L/C
Bank will be obligated to honor drawings thereunder in an aggregate fixed
dollar amount, net of unreimbursed payments thereunder, equal to the
percentage specified in the related prospectus supplement of the aggregate
principal balance of the loans on the related cut-off date or of one or more
Classes of securities (the "L/C Percentage"). If so specified in the related
prospectus supplement, the letter of credit may permit drawings in the event
of losses not covered by insurance policies or other credit support, such as
losses arising from damage not covered by standard hazard insurance policies,
losses resulting from the bankruptcy of a borrower and the application of
certain provisions of the federal Bankruptcy Code, or losses resulting from
denial of insurance coverage due to misrepresentations in connection with the
origination of a loan. The amount available under the
33
letter of credit will, in all cases, be reduced to the extent of the
unreimbursed payments thereunder. The obligations of the L/C Bank under the
letter of credit for each series of securities will expire at the earlier of
the date specified in the related prospectus supplement or the termination of
the trust fund. See "The Agreements -- Termination: Optional Termination." A
copy of the letter of credit for a series, if any, will be filed with the
Securities and Exchange Commission (the "SEC") as an exhibit to a Current
Report on Form 8-K to be filed within 15 days of issuance of the securities of
the related series.
Insurance Policies, Surety Bonds and Guaranties
If so provided in the prospectus supplement for a series of securities,
deficiencies in amounts otherwise payable on such securities or certain
classes thereof will be covered by insurance policies and/or surety bonds
provided by one or more insurance companies or sureties. Such 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 (i) maintaining timely payments or
providing additional protection against losses on the assets included in such
trust fund, (ii) paying administrative expenses or (iii) establishing a
minimum reinvestment rate on the payments made in respect of such assets or
principal payment rate on such assets. Such 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
such prospectus supplement. A copy of any such 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 within 15 days of 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 may be applied as an additional
distribution in respect of principal to reduce the principal balance of a
certain class or classes of securities and, thus, accelerate the rate of
payment of principal on such class or classes of securities. Reducing the
principal balance of the securities without a corresponding reduction in the
principal balance of the underlying Trust Fund Assets will result in over-
collateralization.
Reserve Accounts
If specified in the related prospectus supplement, credit support with
respect to a series of securities will be provided by the establishment and
maintenance with the trustee for such series of securities, in trust, of one
or more reserve funds for such series. The related prospectus supplement will
specify whether or not any such reserve funds will be included in the trust
fund for such series.
The reserve fund for a series will be funded (i) by the deposit therein of
cash, United States Treasury securities, instruments evidencing ownership of
principal or interest payments thereon, letters of credit, demand notes,
certificates of deposit or a combination thereof in the aggregate amount
specified in the related prospectus supplement, (ii) by the deposit therein
from time to time of certain amounts, as specified in the related prospectus
supplement to which the Subordinate Securityholders, if any, would otherwise
be entitled or (iii) in such other manner as may be specified in the related
prospectus supplement.
Any amounts on deposit in the reserve fund and the proceeds of any other
instrument upon maturity will be held in cash or will be invested in
"Permitted Investments" which may include
(i) obligations of the United States or any agency thereof, provided
such obligations are backed by the full faith and credit of the United
States;
(ii) general obligations of or obligations guaranteed by any state of
the United States or the District of Columbia receiving the highest long-
term debt rating of each Rating Agency rating the related series of
securities, or such lower rating as will not result in the downgrading or
withdrawal of the ratings then assigned to such securities by each such
Rating Agency;
(iii) commercial paper issued by Countrywide Home Loans, Inc. or any
of its affiliates; provided that such commercial paper is rated no lower
than the rating specified in the related prospectus supplement;
(iv) commercial or finance company paper which is then receiving the
highest commercial or finance company paper rating of each such Rating
Agency, or such lower rating as will not result in the downgrading or
withdrawal of the ratings then assigned to such securities by each such
Rating Agency;
34
(v) certificates of deposit, demand or time deposits, or bankers'
acceptances issued by any depository institution or trust company
incorporated under the laws of the United States or of any state thereof
and subject to supervision and examination by federal and/or state
banking authorities, provided that the commercial paper and/or long term
unsecured debt obligations of such depository institution or trust
company (or in the case of the principal depository institution in a
holding company system, the commercial paper or long-term unsecured debt
obligations of such holding company, but only if Moody's Investors
Service, Inc. ("Moody's") is not a Rating Agency) are then rated one of
the two highest long-term and the highest short-term ratings of each such
Rating Agency for such securities, or such lower ratings as will not
result in the downgrading or withdrawal of the rating then assigned to
such securities by any such Rating Agency;
(vi) demand or time deposits or certificates of deposit issued by any
bank or trust company or savings institution to the extent that such
deposits are fully insured by the FDIC;
(vii) guaranteed reinvestment agreements issued by any bank, insurance
company or other corporation containing, at the time of the issuance of
such agreements, such terms and conditions as will not result in the
downgrading or withdrawal of the rating then assigned to such securities
by any such Rating Agency;
(viii) repurchase obligations with respect to any security described
in clauses (i) and (ii) above, in either case entered into with a
depository institution or trust company (acting as principal) described
in clause (v) above;
(ix) securities (other than stripped bonds, stripped coupons or
instruments sold at a purchase price in excess of 115% of the face amount
thereof) bearing interest or sold at a discount issued by any corporation
incorporated under the laws of the United States or any state thereof
which, at the time of such investment, have one of the two highest
ratings of each Rating Agency (except if the Rating Agency is Moody's,
such rating shall be the highest commercial paper rating of Moody's for
any such securities), or such lower rating as will not result in the
downgrading or withdrawal of the rating then assigned to such securities
by any such Rating Agency, as evidenced by a signed writing delivered by
each such Rating Agency;
(x) interests in any money market fund which at the date of
acquisition of the interests in such fund and throughout the time such
interests are held in such fund has the highest applicable rating by each
such Rating Agency or such lower rating as will not result in the
downgrading or withdrawal of the ratings then assigned to such securities
by each such Rating Agency;
(xi) short term investment funds sponsored by any trust company or
national banking association incorporated under the laws of the United
States or any state thereof which on the date of acquisition has been
rated by each such Rating Agency in their respective highest applicable
rating category or such lower rating as will not result in the
downgrading or withdrawal of the ratings then assigned to such securities
by each such Rating Agency; and
(xii) such other investments having a specified stated maturity and
bearing interest or sold at a discount acceptable to each Rating Agency
as will not result in the downgrading or withdrawal of the rating then
assigned to such securities by any such Rating Agency, as evidenced by a
signed writing delivered by each such Rating Agency; provided that no
such instrument shall be a Permitted Investment if such instrument
evidences the right to receive interest only payments with respect to the
obligations underlying such instrument; and provided, further, that no
investment specified in clause (x) or clause (xi) above shall be a
Permitted Investment for any pre-funding account or any related
Capitalized Interest Account.
If a letter of credit is deposited with the trustee, that letter of credit
will be irrevocable and will name the trustee, in its capacity as trustee for
the holders of the securities, as beneficiary and will be issued by an entity
acceptable to each Rating Agency that rates the securities of the related
series. Additional information with respect to such instruments deposited in
the reserve funds will be set forth in the related prospectus supplement.
Any amounts so deposited and payments on instruments so deposited will be
available for withdrawal from the reserve fund for distribution to the holders
of securities of the related series for the purposes, in the manner and at the
times specified in the related prospectus supplement.
35
Pool Insurance Policies
If specified in the related prospectus supplement, a separate pool insurance
policy ("Pool Insurance Policy") will be obtained for the pool and issued by
the insurer (the "Pool Insurer") named in such prospectus supplement. Each
Pool Insurance Policy will, subject to the limitations described below, cover
loss by reason of default in payment on loans in the pool in an amount equal
to a percentage specified in such prospectus supplement of the aggregate
principal balance of such loans on the cut-off date which are not covered as
to their entire outstanding principal balances by Primary Mortgage Insurance
Policies. As more fully described below, the master servicer will present
claims thereunder to the Pool Insurer on behalf of itself, the trustee and the
holders of the securities of the related series. The Pool Insurance Policies,
however, are not blanket policies against loss, since claims thereunder may
only be made respecting particular defaulted loans and only upon satisfaction
of certain conditions precedent described below. The applicable prospectus
supplement may provide for the extent of coverage provided by the related Pool
Insurance Policy, but if it does not, the Pool Insurance Policies will not
cover losses due to a failure to pay or denial of a claim under a Primary
Mortgage Insurance Policy.
The applicable prospectus supplement may provide for the conditions for the
presentation of claims under a Pool Insurance Policy, but if it does not, the
Pool Insurance Policy will provide that no claims may be validly presented
unless (i) any required Primary Mortgage Insurance Policy is in effect for the
defaulted loan and a claim thereunder has been submitted and settled; (ii)
hazard insurance on the related Property has been kept in force and real
estate taxes and other protection and preservation expenses have been paid;
(iii) if there has been physical loss or damage to the Property, it has been
restored to its physical condition (reasonable wear and tear excepted) at the
time of issuance of the policy; and (iv) the insured has acquired good and
merchantable title to the Property free and clear of liens except certain
permitted encumbrances. Upon satisfaction of these conditions, the Pool
Insurer will have the option either (a) to purchase the property securing the
defaulted loan at a price equal to the principal balance thereof plus accrued
and unpaid interest at the Loan Rate to the date of such purchase and certain
expenses incurred by the master servicer on behalf of the trustee and
securityholders, or (b) to pay the amount by which the sum of the principal
balance of the defaulted loan plus accrued and unpaid interest at the Loan
Rate to the date of payment of the claim and the aforementioned expenses
exceeds the proceeds received from an approved sale of the Property, in either
case net of certain amounts paid or assumed to have been paid under the
related Primary Mortgage Insurance Policy. If any Property securing a
defaulted loan is damaged and proceeds, if any, from the related hazard
insurance policy or the applicable special hazard insurance policy are
insufficient to restore the damaged Property to a condition sufficient to
permit recovery under the Pool Insurance Policy, the master servicer will not
be required to expend its own funds to restore the damaged Property unless it
determines that (i) such restoration will increase the proceeds to
securityholders on liquidation of the loan after reimbursement of the master
servicer for its expenses and (ii) such expenses will be recoverable by it
through proceeds of the sale of the Property or proceeds of the related Pool
Insurance Policy or any related Primary Mortgage Insurance Policy.
The applicable prospectus supplement may provide for a Pool Insurance Policy
covering losses resulting from defaults, but if it does not, the Pool
Insurance Policy will not insure (and many Primary Mortgage Insurance Policies
do not insure) against loss sustained by reason of a default arising from,
among other things,
o fraud or negligence in the origination or servicing of a loan, including
misrepresentation by the borrower, the originator or persons involved in
the origination thereof, or
o failure to construct a Property in accordance with plans and
specifications.
A failure of coverage attributable to one of the foregoing events might result
in a breach of the related seller's representations described above, and, in
such events might give rise to an obligation on the part of such seller to
repurchase the defaulted loan if the breach cannot be cured by such seller. No
Pool Insurance Policy will cover (and many Primary Mortgage Insurance Policies
do not cover) a claim in respect of a defaulted loan occurring when the
servicer of such loan, at the time of default or thereafter, was not approved
by the applicable insurer.
The applicable prospectus supplement may provide for a Pool Insurance Policy
featuring a fixed amount of coverage over the life of the policy, but if it
does not, the original amount of coverage under each Pool Insurance Policy
will be reduced over the life of the related securities by the aggregate
dollar amount of claims paid less the aggregate of the net amounts realized by
the Pool Insurer upon disposition of all foreclosed properties. The applicable
prospectus supplement may provide for the exclusion of specified expenses from
the coverage of the Pool Insurance Policy, but if it does not, the amount of
claims paid will include certain expenses incurred by the master servicer as
well as accrued interest on delinquent loans to the date of payment of the
claim. Accordingly, if aggregate net claims paid under any Pool Insurance
Policy reach the original policy limit, coverage under that Pool Insurance
Policy will be exhausted and any further losses will be borne by the related
securityholders.
36
Financial Instruments
If specified in the related prospectus supplement, the trust fund may
include one or more swap arrangements or other financial instruments that are
intended to meet the following goals:
o to convert the payments on some or all of the mortgage loans 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 in the event that any index rises above or falls
below specified levels; or
o to provide protection against interest rate changes, certain types of
losses, including reduced market value, or the 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.
Cross Support
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 support feature that requires that
distributions be made on securities evidencing a beneficial ownership interest
in other asset groups within the same trust fund. The related prospectus
supplement for a series that includes a cross support feature will describe
the manner and conditions for applying the cross support feature.
If specified in the related prospectus supplement, the coverage provided by
one or more forms of credit support may apply concurrently to two or more
related trust funds. If applicable, the related prospectus supplement will
identify the trust funds to which the credit support relates and the manner of
determining the amount of the coverage provided by it and of the application
of the coverage to the identified trust funds.
Yield and Prepayment Considerations
The yields to maturity and weighted average lives of the securities will be
affected primarily by the amount and timing of principal payments received on
or in respect of the Trust Fund Assets included in the related trust fund. The
original terms to maturity of the loans in a given pool will vary depending
upon the type of loans included therein. Each prospectus supplement will
contain information with respect to the type and maturities of the loans in
the related pool. The related prospectus supplement will specify the
circumstances, if any, under which the related loans will be subject to
prepayment penalties. The prepayment experience on the loans in a pool will
affect the weighted average life of the related series of securities.
The rate of prepayment on the loans cannot be predicted. Home equity loans
and home improvement contracts 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 prepayment of such loans.
Generally, home equity loans and home improvement contracts are not viewed by
borrowers as permanent financing. Accordingly, such loans may experience a
higher rate of prepayment than traditional 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 lower than, or similar to,
those of traditional fully-amortizing first mortgage loans. 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, 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 mortgage loans or home improvement contracts include the
amounts of, and interest rates on, the underlying senior mortgage loans, and
the use of first mortgage loans as long-term financing for home purchase and
subordinate 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, such loans may experience
a higher rate of prepayment than traditional fixed-rate mortgage loans. In
addition, 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 loans. The enforcement of a "due-on-
sale" provision (as described below) will have the same effect as a prepayment
of the related loan. See "Certain Legal Aspects of the Loans -- Due-on-Sale
Clauses". The yield to an investor who purchases securities in the secondary
market at a price other than par will vary from the anticipated yield if the
rate of prepayment on the loans is actually different than the rate
anticipated by such investor at the time such securities were purchased.
37
Collections on revolving credit line loans may vary because, among other
things, borrowers may (i) make payments during any month as low as the minimum
monthly payment for such 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 and the fees and charges for such month or (ii) make
payments as high as the entire outstanding principal balance plus accrued
interest and the fees and charges thereon. It is possible that borrowers may
fail to make the required periodic payments. In addition, collections on the
loans may vary due to seasonal purchasing and the payment habits of borrowers.
Generally, all conventional loans will contain due-on-sale provisions
permitting the mortgagee to accelerate the maturity of the loan upon sale or
certain transfers by the borrower of the related Property. Loans insured by
the FHA, and single family loans partially guaranteed by the VA, are assumable
with the consent of the FHA and the VA, respectively. Thus, the rate of
prepayments on such loans may be lower than that of conventional loans bearing
comparable interest rates. The master servicer generally will enforce any due-
on-sale or due-on-encumbrance clause, to the extent it has knowledge of the
conveyance or further encumbrance or the proposed conveyance or proposed
further encumbrance of the Property and reasonably believes that it is
entitled to do so under applicable law; provided, however, that the master
servicer will not take any enforcement action that would impair or threaten to
impair any recovery under any related insurance policy. See "The Agreements --
Collection Procedures" and "Certain Legal Aspects of the Loans" for a
description of certain provisions of each Agreement and certain legal
developments that may affect the prepayment experience on the loans.
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. In general, if prevailing rates fall
significantly below the Loan Rates borne by the loans, such loans are more
likely to be subject to higher prepayment rates than if prevailing interest
rates remain at or above such Loan Rates. Conversely, if prevailing interest
rates rise appreciably above the Loan Rates borne by the loans, such loans are
more likely to experience a lower prepayment rate than if prevailing rates
remain at or below such Loan Rates. However, there can be no assurance that
such will be the case.
When a full prepayment is made on a loan, the borrower is charged interest
on the principal amount of the loan so prepaid only for the number of days in
the month actually elapsed up to the date of the prepayment, rather than for a
full month. The effect of prepayments in full will be to reduce the amount of
interest passed through or paid in the following month to holders of
securities because interest on the principal amount of any loan so prepaid
will generally be paid only to the date of prepayment. Partial prepayments in
a given month may be applied to the outstanding principal balances of the
loans so prepaid on the first day of the month of receipt or the month
following receipt. In the latter case, partial prepayments will not reduce the
amount of interest passed through or paid in such month. The applicable
prospectus supplement may specify when prepayments are passed through to
securityholders, but if it does not, neither full nor partial prepayments will
be passed through or paid until the month following receipt.
Even assuming that the Properties provide adequate security for the loans,
substantial delays could be encountered in connection with the liquidation of
defaulted loans and corresponding delays in the receipt of related proceeds by
securityholders could occur. An action to foreclose on a Property securing a
loan is regulated by state statutes and rules and is subject to many of the
delays and expenses of other lawsuits if defenses or counterclaims are
interposed, sometimes requiring several years to complete. Furthermore, in
some states an action to obtain a deficiency judgment is not permitted
following a nonjudicial sale of a property. In the event of a default by a
borrower, these restrictions among other things, may impede the ability of the
master servicer to foreclose on or sell the Property or to obtain liquidation
proceeds sufficient to repay all amounts due on the related loan. In addition,
the master servicer will be entitled to deduct from related liquidation
proceeds all expenses reasonably incurred in attempting to recover amounts due
on defaulted loans and not yet repaid, including payments to senior
lienholders, legal fees and costs of legal action, real estate taxes and
maintenance and preservation expenses.
Liquidation expenses with respect to defaulted mortgage loans generally do
not vary directly with the outstanding principal balance of the loan at the
time of default. Therefore, assuming that a servicer took the same steps in
realizing upon a defaulted mortgage loan having a small remaining principal
balance as it would in the case of a defaulted mortgage loan having a large
remaining principal balance, the amount realized after expenses of liquidation
would be smaller as a percentage of the remaining principal balance of the
small mortgage loan than would be the case with the other defaulted mortgage
loan having a large remaining principal balance.
Applicable state laws generally regulate interest rates and other charges,
require certain disclosures, and require licensing of certain originators and
servicers of loans. In addition, most have other laws, public policy and
general principles of equity relating to the protection of consumers, unfair
and deceptive practices and practices which may apply to the origination,
servicing and collection of the loans. Depending on the provisions of the
applicable law and the specific facts and circumstances involved, violations
of these laws, policies and principles
38
may limit the ability of the master servicer to collect all or part of the
principal of or interest on the loans, may entitle the borrower to a refund of
amounts previously paid and, in addition, could subject the master servicer to
damages and administrative sanctions.
If the rate at which interest is passed through or paid to the holders of
securities of a series is calculated on a loan-by-loan basis, disproportionate
principal prepayments among loans with different Loan Rates will affect the
yield on such securities. In most cases, the effective yield to
securityholders will be lower than the yield otherwise produced by the
applicable Pass-Through Rate or interest rate and purchase price, because
while interest will generally accrue on each loan from the first day of the
month, the distribution of such interest will not be made earlier than the
month following the month of accrual.
Under certain circumstances, the master servicer, the holders of the
residual interests in a REMIC or any person specified in the related
prospectus supplement may have the option to purchase the assets of a trust
fund thereby effecting earlier retirement of the related series of securities.
See "The Agreements -- Termination; Optional Termination".
The relative contribution of the various factors affecting prepayment may
vary from time to time. There can be no assurance as to the rate of payment of
principal of the Trust Fund Assets at any time or over the lives of the
securities.
The prospectus supplement relating to a series of securities will discuss in
greater detail the effect of the rate and timing of principal payments
(including prepayments), delinquencies and losses on the yield, weighted
average lives and maturities of such securities.
The Agreements
Set forth below is a description of the material provisions of each
Agreement which are not described elsewhere in this prospectus. The
description is subject to, and qualified in its entirety by reference to, the
provisions of each Agreement. Where particular provisions or terms used in the
Agreements are referred to, such provisions or terms are as specified in the
Agreements.
Assignment of the Trust Fund Assets
Assignment of the Loans. At the time of issuance of the securities of a
series, the depositor will cause the loans comprising the related trust fund
to be assigned to the trustee, without recourse, together with all principal
and interest received by or on behalf of the depositor on or with respect to
such loans after the cut-off date, other than principal and interest due on or
before the cut-off date and other than any Retained Interest specified in the
related prospectus supplement. The trustee will, concurrently with such
assignment, deliver such securities to the depositor in exchange for the
loans. Each loan will be identified in a schedule appearing as an exhibit to
the related Agreement. Such schedule will include information as to the
outstanding principal balance of each loan after application of payments due
on or before the cut-off date, as well as information regarding the Loan Rate
or APR, the maturity of the loan, the Loan-to-Value Ratios or Combined Loan-
to-Value Ratios, as applicable, at origination and certain other information.
In addition, the depositor will also deliver or cause to be delivered to the
trustee (or to the custodian) for each single family loan, multifamily loan or
home equity loan,
o the mortgage note or contract endorsed without recourse in blank or to
the order of the trustee,
o the mortgage, deed of trust or similar instrument (a "Mortgage") with
evidence of recording indicated thereon (except for any Mortgage not
returned from the public recording office, in which case the depositor
will deliver or cause to be delivered a copy of such Mortgage together
with a certificate that the original of such Mortgage was delivered to
such recording office),
o an assignment of the Mortgage to the trustee, which assignment will be in
recordable form in the case of a Mortgage assignment, and
o any other security documents, including those relating to any senior
interests in the Property, as may be specified in the related prospectus
supplement or the related Agreement.
The applicable prospectus supplement may provide other arrangements for
assuring the priority of assignments, but if it does not, the depositor will
promptly cause the assignments of the related loans to be recorded in the
appropriate public office for real property records, except in states in
which, in the opinion of counsel acceptable to
39
the trustee, such recording is not required to protect the trustee's interest
in such loans against the claim of any subsequent transferee or any successor
to or creditor of the depositor or the originator of such loans.
With respect to any loans that are cooperative loans, the depositor will
cause to be delivered to the trustee the related original cooperative note
endorsed without recourse in blank or to the order of the trustee, the
original security agreement, the proprietary lease or occupancy agreement, the
recognition agreement, an executed financing agreement and the relevant stock
certificate, related blank stock powers and any other document specified in
the related prospectus supplement. The depositor will cause to be filed in the
appropriate office an assignment and a financing statement evidencing the
trustee's security interest in each cooperative loan.
The applicable prospectus supplement may provide for the depositor's
delivery obligations in connection with home improvement contracts, but if it
does not, the depositor will as to each home improvement contract, deliver or
cause to be delivered to the trustee the original home improvement contract
and copies of documents and instruments related to each home improvement
contract and the security interest in the Property securing such home
improvement contract. In general, it is expected that the home improvement
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 home
improvement contracts without notice of such assignment, the interest of
securityholders in the home improvement contracts could be defeated. See
"Certain Legal Aspects of the Loans -- The Home Improvement Contracts."
The trustee (or the custodian) will review such loan documents within the
time period specified in the related prospectus supplement after receipt
thereof, and the trustee will hold such documents in trust for the benefit of
the related securityholders. Generally, if the document is found to be missing
or defective in any material respect, the trustee (or the custodian) will
notify the master servicer and the depositor, and the master servicer will
notify the related seller. If the seller cannot cure the omission or defect
within the time period specified in the related prospectus supplement after
receipt of such notice, the seller will be obligated to either purchase the
related loan from the trust fund at the Purchase Price or if so specified in
the related prospectus supplement, remove such loan from the trust fund and
substitute in its place one or more other loans that meet certain requirements
set forth therein. There can be no assurance that a seller will fulfill this
purchase or substitution obligation. Although the master servicer may be
obligated to enforce such obligation to the extent described above under "Loan
Program -- Representations by Sellers; Repurchases," neither the master
servicer nor the depositor will be obligated to purchase or replace such loan
if the seller defaults on its obligation, unless such breach also constitutes
a breach of the representations or warranties of the master servicer or the
depositor, as the case may be. The applicable prospectus supplement may
provide other remedies, but if it does not, this obligation to cure, purchase
or substitute constitutes the sole remedy available to the securityholders or
the trustee for omission of, or a material defect in, a constituent document.
The trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review
the documents relating to the loans as agent of the trustee.
The master servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the Agreement. Upon a breach of any such representation of
the master servicer which materially and adversely affects the interests of
the securityholders in a loan, the master servicer will be obligated either to
cure the breach in all material respects or to purchase (at the Purchase
Price) or if so specified in the related prospectus supplement, replace the
loan. The applicable prospectus supplement may provide other remedies, but if
it does not, this obligation to cure, purchase or substitute constitutes the
sole remedy available to the securityholders or the trustee for such a breach
of representation by the master servicer.
Notwithstanding the foregoing provisions, with respect to a trust fund for
which a REMIC election is to be made, no purchase or substitution of a loan
will be made if such purchase or substitution would result in a prohibited
transaction tax under the Code.
Payments On Loans; Deposits to Security Account
The master servicer will establish and maintain or cause to be established
and maintained with respect to the related trust fund a separate account or
accounts for the collection of payments on the related Trust Fund Assets in
the trust fund (the "Security Account"). The applicable prospectus supplement
may provide for other requirements for the Security Account, but if it does
not, the Security Account must be either (i) maintained with a depository
institution the debt obligations of which (or in the case of a depository
institution that is the principal subsidiary of a holding company, the
obligations of which) are rated in one of the two highest rating categories by
the Rating Agency or Rating Agencies that rated one or more classes of the
related series of securities, (ii) an account or accounts the deposits in
which are fully insured by either the Bank Insurance Fund (the "BIF") of the
FDIC or the Savings Association Insurance Fund (as successor to the Federal
Savings and Loan Insurance Corporation
40
("SAIF")), (iii) an account or accounts the deposits in which are insured by
the BIF or SAIF (to the limits established by the FDIC), and the uninsured
deposits in which are otherwise secured such that, as evidenced by an opinion
of counsel, the securityholders have a claim with respect to the funds in the
security account or a perfected first priority security interest against any
collateral securing such funds that is superior to the claims of any other
depositors or general creditors of the depository institution with which the
Security Account is maintained, or (iv) an account or accounts otherwise
acceptable to each Rating Agency. The collateral eligible to secure amounts in
the Security Account is limited to Permitted Investments. A Security Account
may be maintained as an interest bearing account or the funds held therein may
be invested pending each succeeding distribution date in Permitted
Investments. To the extent provided in the related prospectus supplement, the
master servicer or its designee will be entitled to receive any such interest
or other income earned on funds in the Security Account as additional
compensation and will be obligated to deposit in the Security Account the
amount of any loss immediately as realized. The Security Account may be
maintained with the master servicer or with a depository institution that is
an affiliate of the master servicer, provided it meets the standards set forth
above.
The master servicer will deposit or cause to be deposited in the Security
Account for each trust fund, to the extent applicable and unless otherwise
specified in the Agreement, the following payments and collections received or
advances made by or on behalf of it subsequent to the cut-off date (other than
payments due on or before the cut-off date and exclusive of any amounts
representing Retained Interest):
o all payments on account of principal, including Principal Prepayments
and, if specified in the related prospectus supplement, any applicable
prepayment penalties, on the loans;
o all payments on account of interest on the loans, net of applicable
servicing compensation;
o all proceeds (net of unreimbursed payments of property taxes, insurance
premiums and similar items ("Insured Expenses") incurred, and
unreimbursed advances made, by the master servicer, if any) of the hazard
insurance policies and any Primary Mortgage 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 (collectively, "Insurance Proceeds") and all
other cash amounts (net of unreimbursed expenses incurred in connection
with liquidation or foreclosure ("Liquidation Expenses") and unreimbursed
advances made, by the master servicer, if any) received and retained in
connection with the liquidation of defaulted loans, by foreclosure or
otherwise ("Liquidation Proceeds"), together with any net proceeds
received on a monthly basis with respect to any properties acquired on
behalf of the securityholders by foreclosure or deed in lieu of
foreclosure;
o all proceeds of any loan or property in respect thereof purchased by the
master servicer, the depositor or any seller as described under "Loan
Program -- Representations by Sellers; Repurchases" or "-- Assignment of
Trust Fund Assets" above and all proceeds of any loan repurchased as
described under "-- Termination; Optional Termination" below;
o all payments required to be deposited in the Security Account with
respect to any deductible clause in any blanket insurance policy
described under "-- Hazard Insurance" below;
o any amount required to be deposited by the master servicer in connection
with losses realized on investments for the benefit of the master
servicer of funds held in the Security Account and, to the extent
specified in the related prospectus supplement, any payments required to
be made by the master servicer in connection with prepayment interest
shortfalls; and
o all other amounts required to be deposited in the Security Account
pursuant to the Agreement.
The master servicer (or the depositor, as applicable) may from time to time
direct the institution that maintains the Security Account to withdraw funds
from the Security Account for the following purposes:
o to pay to the master servicer the servicing fees described in the related
prospectus supplement, the master servicing fees (subject to reduction)
and, as additional servicing compensation, earnings on or investment
income with respect to funds in the amounts in the Security Account
credited thereto;
o to reimburse the master servicer for advances, such right of
reimbursement with respect to any loan being limited to amounts received
that represent late recoveries of payments of principal and/or interest
on such loan (or Insurance Proceeds or Liquidation Proceeds with respect
thereto) with respect to which such advance was made;
o to reimburse the master servicer for any advances previously made which
the master servicer has determined to be nonrecoverable;
41
o to reimburse the master servicer from Insurance Proceeds for expenses
incurred by the master servicer and covered by the related insurance
policies;
o to reimburse the master servicer for unpaid master servicing fees and
unreimbursed out-of-pocket costs and expenses incurred by the master
servicer in the performance of its servicing obligations, such right of
reimbursement being limited to amounts received representing late
recoveries of the payments for which such advances were made;
o to pay to the master servicer, with respect to each loan or property
acquired in respect thereof that has been purchased by the master
servicer pursuant to the Agreement, all amounts received thereon and not
taken into account in determining the principal balance of such
repurchased loan;
o to reimburse the master servicer or the depositor for expenses incurred
and reimbursable pursuant to the Agreement;
o to withdraw any amount deposited in the Security Account and not required
to be deposited therein; and
o to clear and terminate the Security Account upon termination of the
Agreement.
In addition, the Agreement will generally provide that, on or prior to the
business day immediately preceding each distribution date, the master servicer
shall withdraw from the Security Account the amount of Available Funds, to the
extent on deposit, for deposit in an account maintained by the trustee for the
related series of securities.
Pre-Funding Account
If so provided in the related prospectus supplement, the master servicer
will establish and maintain an account (the "Pre-Funding Account"), in the
name of the related trustee on behalf of the related securityholders, into
which the depositor will deposit cash in an amount specified in the prospectus
supplement (the "Pre-Funded Amount") on the related Closing Date. The Pre-
Funding Account will be maintained with the trustee for the related series of
securities and is designed solely to hold funds to be applied by such trustee
during the period from the closing date to a date not more than a year after
such closing date (the "Funding Period") to pay to the depositor the purchase
price for loans purchased during such Funding Period (the "Subsequent Loans").
Monies on deposit in the Pre-Funding Account will not be available to cover
losses on or in respect of the related loans. The Pre-Funded Amount will not
exceed 50% of the initial aggregate principal amount of the certificates and
notes of the related series. The Pre-Funded Amount will be used by the related
trustee to purchase Subsequent Loans from the depositor from time to time
during the Funding Period. The Funding Period, if any, for a trust fund will
begin on the related Closing Date and will end on the date specified in the
related prospectus supplement, which in no event will be later than the date
that is one year after the related Closing Date. Monies on deposit in the Pre-
Funding Account may be invested in Permitted Investments under the
circumstances and in the manner described in the related Agreement. Earnings
on investment of funds in the Pre-Funding Account will be deposited into the
related Security Account or such other trust account as is specified in the
related prospectus supplement and losses will be charged against the funds on
deposit in the Pre-Funding Account. Any amounts remaining in the Pre-Funding
Account at the end of the Funding Period will be distributed to the related
securityholders in the manner and priority specified in the related prospectus
supplement, as a prepayment of principal of the related securities.
In addition, if so provided in the related prospectus supplement, on the
related Closing Date the depositor will deposit in an account (the
"Capitalized Interest Account") cash in such amount as is necessary to cover
shortfalls in interest on the related series of securities that may arise as a
result of utilization of the Pre-Funding Account as described above. The
Capitalized Interest Account shall be maintained with the trustee for the
related series of securities and is designed solely to cover the above-
mentioned interest shortfalls. Monies on deposit in the Capitalized Interest
Account will not be available to cover losses on or in respect of the related
loans. To the extent that the entire amount on deposit in the Capitalized
Interest Account has not been applied to cover shortfalls in interest on the
related series of securities by the end of the Funding Period, any amounts
remaining in the Capitalized Interest Account will be paid to the depositor.
Sub-Servicing by Sellers
Each seller of a loan or any other servicing entity may act as the sub-
servicer for such loan pursuant to a sub-servicing agreement, which will not
contain any terms inconsistent with the related Agreement. While each sub-
servicing agreement will be a contract solely between the master servicer and
the sub-servicer, the Agreement pursuant to which a series of securities is
issued will provide that, if for any reason the master servicer for such
series of securities is no longer the master servicer of the related loans,
the trustee or any successor master servicer must recognize the sub-servicer's
rights and obligations under such sub-servicing agreement. Notwithstanding any
42
such subservicing arrangement, unless otherwise provided in the related
prospectus supplement, the master servicer will remain liable for its
servicing duties and obligations under the Master Servicing Agreement as if
the master servicer alone were servicing the loans.
Collection Procedures
The master servicer, directly or through one or more sub-servicers, will
make reasonable efforts to collect all payments called for under the loans and
will, consistent with each Agreement and any Pool Insurance Policy, Primary
Mortgage Insurance Policy, FHA Insurance, VA Guaranty, bankruptcy bond or
alternative arrangements, follow such collection procedures as are customary
with respect to loans that are comparable to the loans. Consistent with the
above, the master servicer may, in its discretion, waive any assumption fee,
late payment or other charge in connection with a loan and to the extent not
inconsistent with the coverage of such loan by a Pool Insurance Policy,
Primary Mortgage Insurance Policy, FHA Insurance, VA Guaranty, bankruptcy bond
or alternative arrangements, if applicable, arrange with a borrower a schedule
for the liquidation of delinquencies running for no more than 125 days after
the applicable due date for each payment. To the extent the master servicer is
obligated to make or cause to be made advances, such obligation will remain
during any period of such an arrangement.
In any case in which property securing a loan has been, or is about to be,
conveyed by the mortgagor or obligor, the master servicer will, to the extent
it has knowledge of such conveyance or proposed conveyance, exercise or cause
to be exercised its rights to accelerate the maturity of such loan under any
due-on-sale clause applicable thereto, but only if the exercise of such rights
is permitted by applicable law and will not impair or threaten to impair any
recovery under any Primary Mortgage Insurance Policy. If these conditions are
not met or if the master servicer reasonably believes it is unable under
applicable law to enforce such due-on-sale clause or if such loan is a
mortgage loan insured by the FHA or partially guaranteed by the VA, the master
servicer will enter into or cause to be entered into an assumption and
modification agreement with the person to whom such property has been or is
about to be conveyed, pursuant to which such person becomes liable for
repayment of the loan and, to the extent permitted by applicable law, the
mortgagor remains liable thereon. Any fee collected by or on behalf of the
master servicer for entering into an assumption agreement will be retained by
or on behalf of the master servicer as additional servicing compensation. See
"Certain Legal Aspects of the Loans -- Due-on-Sale Clauses". In connection
with any such assumption, the terms of the related loan may not be changed.
With respect to cooperative loans, any prospective purchaser will generally
have to obtain the approval of the board of directors of the relevant
cooperative before purchasing the shares and acquiring rights under the
related proprietary lease or occupancy agreement. See "Certain Legal Aspects
of the Loans". This approval is usually based on the purchaser's income and
net worth and numerous other factors. Although the cooperative's approval is
unlikely to be unreasonably withheld or delayed, the necessity of acquiring
such approval could limit the number of potential purchasers for those shares
and otherwise limit the trust fund's ability to sell and realize the value of
those shares.
In general a "tenant-stockholder" (as defined in Code Section 216(b)(2) of a
corporation that qualifies as a "cooperative housing corporation" within the
meaning of Code Section 216(b)(1) is allowed a deduction for amounts paid or
accrued within his taxable year to the corporation representing his
proportionate share of certain interest expenses and certain real estate taxes
allowable as a deduction under Code Section 216(a) to the corporation under
Code Sections 163 and 164. In order for a corporation to qualify under Code
Section 216(b)(1) for its taxable year in which such items are allowable as a
deduction to the corporation, such Section requires, among other things, that
at least 80% of the gross income of the corporation be derived from its
tenant-stockholders (as defined in Code Section 216(b)(2)). By virtue of this
requirement, the status of a corporation for purposes of Code Section
216(b)(1) must be determined on a year-to-year basis. Consequently, there can
be no assurance that cooperatives relating to the cooperative loans will
qualify under such Section for any particular year. In the event that such a
cooperative fails to qualify for one or more years, the value of the
collateral securing any related cooperative loans could be significantly
impaired because no deduction would be allowable to tenant-stockholders under
Code Section 216(a) with respect to those years. In view of the significance
of the tax benefits accorded tenant-stockholders of a corporation that
qualifies under Code Section 216(b)(1), the likelihood that such a failure
would be permitted to continue over a period of years appears remote.
Hazard Insurance
In general, the master servicer will require the mortgagor or obligor on
each loan to maintain a hazard insurance policy providing for no less than the
coverage of the standard form of fire insurance policy with extended coverage
customary for the type of Property in the state in which such Property is
located. Such coverage will be in an amount that is at least equal to the
lesser of
43
o the maximum insurable value of the improvements securing such loan or
o the greater of
(1) the outstanding principal balance of the loan and
(2) an amount such that the proceeds of such policy shall be sufficient
to prevent the mortgagor and/or the mortgagee from becoming a co-insurer.
All amounts collected by the master servicer under any hazard policy (except
for amounts to be applied to the restoration or repair of the Property or
released to the mortgagor or obligor in accordance with the master servicer's
normal servicing procedures) will be deposited in the related Security
Account. In the event that the master servicer maintains a blanket policy
insuring against hazard losses on all the loans comprising part of a trust
fund, it will conclusively be deemed to have satisfied its obligation relating
to the maintenance of hazard insurance. Such blanket policy may contain a
deductible clause, in which case the master servicer will be required to
deposit from its own funds into the related Security Account the amounts which
would have been deposited therein but for such clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements securing a loan 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 loans may have been underwritten
by different insurers under different state laws in accordance with different
applicable forms and therefore may not contain identical terms and conditions,
the basic terms thereof are dictated by respective state laws, and most such
policies typically do not cover any physical damage resulting from the
following: war, revolution, 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 hurricanes. The
foregoing list is merely indicative of certain kinds of uninsured risks and is
not intended to be all inclusive. If the Property securing a loan is located
in a federally designated special flood area at the time of origination, the
master servicer will require the mortgagor or obligor to obtain and maintain
flood insurance.
The hazard insurance policies covering properties securing the loans
typically contain a clause which in effect requires the insured at all time to
carry insurance of a specified percentage of a specified percentage (generally
80% to 90%) of the full replacement value of the insured property in order to
recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, then the insurer's liability in the event of
partial loss will not exceed the larger of
o the actual cash value (generally defined as replacement cost at the time
and place of loss, less physical depreciation) of the improvements
damaged or destroyed or
o 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 the master servicer may cause to be
maintained on the improvements securing the loans declines as the principal
balances owing thereon decrease, and since improved real estate generally has
appreciated in value over time in the past, the effect of this requirement in
the event of partial loss may be that hazard insurance proceeds will be
insufficient to restore fully the damaged property. If specified in the
related prospectus supplement, a special hazard insurance policy will be
obtained to insure against certain of the uninsured risks described above. See
"Credit Enhancement".
The master servicer will not require that a standard hazard or flood
insurance policy be maintained on the cooperative dwelling relating to any
cooperative loan. Generally, the cooperative itself is responsible for
maintenance of hazard insurance for the property owned by the cooperative and
the tenant-stockholders of that cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a cooperative and the related
borrower on a cooperative loan do not maintain such insurance or do not
maintain adequate coverage or any insurance proceeds are not applied to the
restoration of damaged property, any damage to such borrower's cooperative
dwelling or such cooperative's building could significantly reduce the value
of the collateral securing such cooperative loan to the extent not covered by
other credit support.
If the Property securing a defaulted loan is damaged and proceeds, if any,
from the related hazard insurance policy are insufficient to restore the
damaged Property, the master servicer is not required to expend its own funds
to restore the damaged Property unless it determines (i) that such restoration
will increase the proceeds to securityholders on liquidation of the loan after
reimbursement of the master servicer for its expenses and (ii) that such
expenses will be recoverable by it from related Insurance Proceeds or
Liquidation Proceeds.
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If recovery on a defaulted loan under any related Insurance Policy is not
available for the reasons set forth in the preceding paragraph, or if the
defaulted loan is not covered by an Insurance Policy, the master servicer will
be obligated to follow or cause to be followed such normal practices and
procedures as it deems necessary or advisable to realize upon the defaulted
loan. If the proceeds of any liquidation of the Property securing the
defaulted loan are less than the principal balance of such loan plus interest
accrued thereon that is payable to securityholders, the trust fund will
realize a loss in the amount of such difference plus the aggregate of expenses
incurred by the master servicer in connection with such proceedings and which
are reimbursable under the Agreement. In the unlikely event that any such
proceedings result in a total recovery which is, after reimbursement to the
master servicer of its expenses, in excess of the principal balance of such
loan plus interest accrued thereon that is payable to securityholders, the
master servicer will be entitled to withdraw or retain from the Security
Account amounts representing its normal servicing compensation with respect to
such loan and amounts representing the balance of such excess, exclusive of
any amount required by law to be forwarded to the related borrower, as
additional servicing compensation.
If the master servicer or its designee recovers Insurance Proceeds which,
when added to any related Liquidation Proceeds and after deduction of certain
expenses reimbursable to the master servicer, exceed the principal balance of
such loan plus interest accrued thereon that is payable to securityholders,
the master servicer will be entitled to withdraw or retain from the Security
Account amounts representing its normal servicing compensation with respect to
such loan. In the event that the master servicer has expended its own funds to
restore the damaged Property and such funds have not been reimbursed under the
related hazard insurance policy, it will be entitled to withdraw from the
Security Account out of related Liquidation Proceeds or Insurance Proceeds an
amount equal to such expenses incurred by it, in which event the trust fund
may realize a loss up to the amount so charged. Since Insurance Proceeds
cannot exceed deficiency claims and certain expenses incurred by the master
servicer, no such payment or recovery will result in a recovery to the trust
fund which exceeds the principal balance of the defaulted loan together with
accrued interest thereon. See "Credit Enhancement".
The proceeds from any liquidation of a loan will be applied in the following
order of priority: first, to reimburse the master servicer for any
unreimbursed expenses incurred by it to restore the related Property and any
unreimbursed servicing compensation payable to the master servicer with
respect to such loan; second, to reimburse the master servicer for any
unreimbursed advances with respect to such loan; third, to accrued and unpaid
interest (to the extent no advance has been made for such amount) on such
loan; and fourth, as a recovery of principal of such loan.
Realization Upon Defaulted Loans
Primary Mortgage Insurance Policies. If so specified in the related
prospectus supplement, the master servicer will maintain or cause to be
maintained, as the case may be, in full force and effect, a Primary Mortgage
Insurance Policy with regard to each loan for which such coverage is required.
Primary Mortgage Insurance Policies reimburse certain losses sustained by
reason of defaults in payments by borrowers. The master servicer will not
cancel or refuse to renew any such Primary Mortgage Insurance Policy in effect
at the time of the initial issuance of a series of securities that is required
to be kept in force under the applicable Agreement unless the replacement
Primary Mortgage Insurance Policy for such cancelled or nonrenewed policy is
maintained with an insurer whose claims-paying ability is sufficient to
maintain the current rating of the classes of securities of such series that
have been rated.
FHA Insurance; VA Guaranties. Loans designated in the related prospectus
supplement as insured by the FHA will be insured by the FHA as authorized
under the United States Housing Act of 1937, as amended. In addition to the
Title I Program of the FHA, see "Certain Legal Aspects of the Loans -- Title I
Program", certain loans will be insured under various FHA programs including
the standard FHA 203 (b) program to finance the acquisition of one- to four-
family housing units and the FHA 245 graduated payment mortgage program. These
programs generally limit the principal amount and interest rates of the
mortgage loans insured. Loans insured by 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 may have an interest rate or original
principal amount exceeding the applicable FHA limits at the time of
origination of such loan.
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 (a "VA Guaranty"). The Serviceman's Readjustment Act
of 1944, as amended, permits a veteran (or in certain instances the spouse of
a veteran) to obtain a mortgage loan guaranty by the VA covering mortgage
financing of the purchase of a one- to four-family dwelling unit at interest
rates permitted by the VA. The program has no mortgage loan limits, requires
no down payment from the purchaser and permits the guaranty of mortgage loans
of up to 30 years' duration. However, no loan guaranteed by the VA will have
an original principal amount greater than five times the partial VA guaranty
for
45
such loan. 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.
Servicing and Other Compensation and Payment of Expenses
The principal servicing compensation to be paid to the master servicer in
respect of its master servicing activities for each series of securities will
be equal to the percentage per annum described in the related prospectus
supplement (which may vary under certain circumstances) of the outstanding
principal balance of each loan, and such compensation will be retained by it
from collections of interest on such loan in the related trust fund (the
"Master Servicing Fee"). As compensation for its servicing duties, a sub-
servicer or, if there is no sub-servicer, the master servicer will be entitled
to a monthly servicing fee as described in the related prospectus supplement.
In addition, generally, the master servicer or sub-servicer will retain all
prepayment charges, assumption fees and late payment charges, to the extent
collected from borrowers, and any benefit that may accrue as a result of the
investment of funds in the applicable Security Account.
The master servicer will pay or cause to be paid certain ongoing expenses
associated with each trust fund and incurred by it in connection with its
responsibilities under the related Agreement, including, without limitation,
payment of any fee or other amount payable in respect of any credit
enhancement arrangements, payment of the fees and disbursements of the
trustee, any custodian appointed by the trustee, the certificate registrar and
any paying agent, and payment of expenses incurred in enforcing the
obligations of sub-servicers and sellers. The master servicer will be entitled
to reimbursement of expenses incurred in enforcing the obligations of sub-
servicers and sellers under certain limited circumstances.
Evidence as to Compliance
Each 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
FHLMC, 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 related Agreement) was
conducted in compliance with such agreements except for any significant
exceptions or errors in records that, in the opinion of the firm, the Audit
Program for Mortgages serviced for FHLMC, or the Uniform Single Attestation
Program for Mortgage Bankers, it is required to report. In rendering its
statement such firm may rely, as to matters relating to the direct servicing
of loans by sub-servicers, 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
FHLMC (rendered within one year of such statement) of firms of independent
public accountants with respect to the related sub-servicer.
Each Agreement will also provide for delivery to the trustee, on or before a
specified date in each year, of an annual statement signed by two officers of
the master servicer to the effect that the master servicer has fulfilled its
obligations under the Agreement throughout the preceding year.
Copies of the annual accountants' statement and the statement of officers of
the master servicer may be obtained by securityholders of the related series
without charge upon written request to the master servicer at the address set
forth in the related prospectus supplement.
Certain Matters Regarding the Master Servicer and the Depositor
The master servicer under each Pooling and Servicing Agreement or Master
Servicing Agreement, as applicable, will be named in the related prospectus
supplement. The entity serving as master servicer may have normal business
relationships with the depositor or the depositor's affiliates.
Each Agreement will provide that the master servicer may not resign from its
obligations and duties under the Agreement except upon a determination that
its duties thereunder are no longer permissible under applicable law. The
master servicer may, however, be removed from its obligations and duties as
set forth in the Agreement. No such resignation will become effective until
the trustee or a successor servicer has assumed the master servicer's
obligations and duties under the Agreement.
Each Agreement will further provide that neither the master servicer, the
depositor nor any director, officer, employee, or agent of the master servicer
or the depositor will be under any liability to the related trust fund or
securityholders for any action taken or for refraining from the taking of any
action in good faith pursuant to the
- - 46
Agreement, or for errors in judgment; provided, however, that neither the
master servicer, the depositor nor any such person will be protected against
any liability which would otherwise be imposed by reason of wilful
misfeasance, bad faith or gross negligence in the performance of duties
thereunder or by reason of reckless disregard of obligations and duties
thereunder. Each 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 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 related to any specific loan or
loans (except any such loss, liability or expense otherwise reimbursable
pursuant to the Agreement) 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, each 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 Agreement and which in
its opinion may involve it in any expense or liability. The master servicer or
the depositor may, however, in its discretion undertake any such action which
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
securityholders thereunder. In such event, the legal expenses and costs of
such action and any liability resulting therefrom will be expenses, costs and
liabilities of the 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 securityholders.
In general, 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
each Agreement, provided that
o that person is qualified to sell mortgage loans to, and service mortgage
loans on behalf of, Fannie Mae or Freddie Mac and
o the related merger, consolidation or succession does not adversely affect
the then current rating or ratings of the class or classes of securities
of the related series that have been rated.
Events of Default; Rights Upon Event of Default
Pooling and Servicing Agreement; Master Servicing Agreement. The applicable
prospectus supplement may provide for other Events of Default under any
Pooling and Servicing Agreement or Master Servicing Agreement, but if it does
not, the Events of Default will consist of
o any failure by the master servicer to distribute or cause to be
distributed to securityholders of any class any required payment (other
than an advance) which continues unremedied for five 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, the depositor and
the trustee by the holders of securities of such class evidencing not
less than 25% of the total distributions allocated to such class
("percentage interests");
o any failure by the master servicer to make an advance as required under
the Agreement, unless cured as specified therein;
o any failure by the master servicer duly to observe or perform in any
material respect any of its other covenants or agreements in the
Agreement which continues unremedied for thirty 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, the depositor and the trustee
by the holders of securities of any class evidencing not less than 25% of
the aggregate percentage interests constituting such class; and
o certain events of insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceeding and certain actions by or on behalf
of the master servicer indicating its insolvency, reorganization or
inability to pay its obligations.
If specified in the related Prospectus Supplement, the Agreement will permit
the trustee to sell the Trust Fund Assets and the other assets of the trust
fund described under "Credit Enhancement" herein in the event that payments in
respect thereto are insufficient to make payments required in the Agreement.
The assets of the trust fund will be sold only under the circumstances and in
the manner specified in the related prospectus supplement.
The applicable prospectus supplement may provide for steps required to be
taken if an Event of Default remains unremedied, but if it does not, so long
as an Event of Default under an Agreement remains unremedied, the depositor or
the trustee may, and at the direction of holders of securities of any class
evidencing not less than 25% of the aggregate percentage interests
constituting such class and under such other circumstances as may be
47
specified in such Agreement, the trustee shall terminate all of the rights and
obligations of the master servicer under the Agreement relating to such trust
fund and in and to the related Trust Fund Assets, whereupon the trustee will
succeed to all of the responsibilities, duties and liabilities of the master
servicer under the Agreement, including, if specified in the related
prospectus supplement, the obligation to make advances, and will be entitled
to similar compensation arrangements. In the event that the trustee is
unwilling or unable so to act, it may appoint, or petition a court of
competent jurisdiction for the appointment of, a mortgage loan servicing
institution with a net worth of a least $10,000,000 to act as successor to the
master servicer under the Agreement. Pending that appointment, the trustee is
obligated to act in such capacity. The trustee and any such successor may
agree upon the servicing compensation to be paid, which in no event may be
greater than the compensation payable to the master servicer under the
Agreement.
Unless otherwise provided in the related prospectus supplement, no
securityholder, solely by virtue of such holder's status as a securityholder,
will have any right under any Agreement to institute any proceeding with
respect to such Agreement, unless such holder previously has given to the
trustee written notice of default and unless the holders of securities of any
class of such series evidencing not less than 25% of the aggregate percentage
interests constituting such class have made written request upon the trustee
to institute such proceeding in its own name as trustee thereunder and have
offered to the trustee reasonable indemnity, and the trustee for 60 days has
neglected or refused to institute any such proceeding.
Indenture. The applicable prospectus supplement may provide for other
Events of Default, but if it does not, the Events of Default under each
Indenture will consist of:
o a default in the payment of any principal of or interest on any note of
such series which continues unremedied for five days after the giving of
written notice of such default is given as specified in the related
prospectus supplement;
o failure to perform in any material respect any other covenant of the
depositor or the trust fund in the Indenture which continues for a period
of thirty (30) days after notice thereof 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; or
o any other Event of Default provided with respect to notes of that series
including but not limited to certain defaults on the part of the issuer,
if any, of a credit enhancement instrument supporting such notes.
If an Event of Default with respect to the notes of any series at the time
outstanding occurs and is continuing, either the trustee or the holders of a
majority of the then aggregate outstanding amount of the notes of such series
may declare the principal amount (or, if the notes of that series have an
interest rate of 0%, such portion of the principal amount as may be specified
in the terms of that series, as provided in the related prospectus supplement)
of all the notes of such series to be due and payable immediately. Such
declaration may, under certain circumstances, be rescinded and annulled by the
holders of more than 50% of the percentage interests of the notes of such
series.
If, following an Event of Default with respect to any series of notes, the
notes of such series have been declared to be due and payable, the trustee
may, in its discretion, notwithstanding such acceleration, elect to maintain
possession of the collateral securing the notes of such series and to continue
to apply distributions on such collateral as if there had been no declaration
of acceleration if such collateral continues to provide sufficient funds for
the payment of principal of and interest on the notes of such series as they
would have become due if there had not been such a declaration. In addition,
the trustee may not sell or otherwise liquidate the collateral securing the
notes of a series following an Event of Default, other than a default in the
payment of any principal or interest on any note of such series for five days
or more, unless
o the holders of 100% of the percentage interests of the notes of such
series consent to such sale,
o the proceeds of such sale or liquidation are sufficient to pay in full
the principal of and accrued interest, due and unpaid, on the outstanding
notes of such series at the date of such sale or
o the trustee determines that such collateral would not be sufficient on an
ongoing basis to make all payments on such notes as such payments would
have become due if such notes had not been declared due and payable, and
the trustee obtains the consent of the holders of 66 2/3% of the
percentage interests of the notes of such series.
In the event that the trustee liquidates the collateral in connection with
an Event of Default involving a default for five days or more in the payment
of principal of or interest on the notes of a series, the Indenture provides
that the trustee will have a prior lien on the proceeds of any such
liquidation for unpaid fees and expenses. As a result, upon the occurrence of
such an Event of Default, the amount available for distribution to the
noteholders would be
48
less than would otherwise be the case. However, the 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 such an Event of Default.
In the event the principal of the notes of a series is declared due and
payable, as described above, the holders of any such notes issued at a
discount from par may be entitled to receive no more than an amount equal to
the unpaid principal amount thereof less the amount of such discount which is
unamortized.
Subject to the provisions of the Indenture relating to the duties of the
trustee, in case an Event of Default shall occur and be continuing with
respect to a series of notes, the trustee shall be under no obligation to
exercise any of the rights or powers under the Indenture at the request or
direction of any of the holders of notes of such series, unless such holders
offered to the trustee security or indemnity satisfactory to it against the
costs, expenses and liabilities which might be incurred by it in complying
with such request or direction. Subject to such provisions for indemnification
and certain limitations contained in the Indenture, the holders of a majority
of the then aggregate outstanding amount of the notes of such series shall
have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the trustee or exercising any trust or
power conferred on the trustee with respect to the notes of such series, and
the holders of a majority of the then aggregate outstanding amount of the
notes of such series may, in certain cases, waive any default with respect
thereto, except a default in the payment of principal or interest or a default
in respect of a covenant or provision of the Indenture that cannot be modified
without the waiver or consent of all the holders of the outstanding notes of
such series affected thereby.
Amendment
The applicable prospectus supplement may specify other amendment provisions,
but if it does not, each Agreement may be amended by the depositor, the master
servicer and the trustee, without the consent of any of the securityholders,
(a) to cure any ambiguity;
(b) to correct any defective provision in the Agreement or to supplement
any provision in the Agreement that may be inconsistent with any other
provision in it; or
(c) to make any other revisions with respect to matters or questions
arising under the Agreement which are not inconsistent with the provisions
in it,
provided that such action will not adversely affect in any material respect
the interests of any securityholder. An amendment will be deemed not to
adversely affect in any material respect the interests of the securityholders
if the person requesting such amendment obtains a letter from each Rating
Agency requested to rate the class or classes of securities of such series
stating that such amendment will not result in the downgrading or withdrawal
of the respective ratings then assigned to such securities.
In addition, to the extent provided in the related Agreement, an Agreement
may be amended without the consent of any of the securityholders, to change
the manner in which the Security Account is maintained, provided that any such
change does not adversely affect the then current rating on the class or
classes of securities of such series that have been rated. Moreover, the
related Agreement may be amended to modify, eliminate or add to any of its
provisions to the extent necessary to maintain the qualification of the
related trust fund as a REMIC or to avoid or minimize the risk of imposition
of any tax on the REMIC, if a REMIC election is made with respect to the trust
fund, or to comply with any other requirements of the Code, if the trustee has
received an opinion of counsel to the effect that the action is necessary or
helpful to maintain the qualification, avoid or minimize that risk or comply
with those requirements, as applicable.
The applicable prospectus supplement may specify other amendment provisions,
but if it does not, each Agreement may also be amended by the depositor, the
master servicer and the trustee with consent of holders of securities of such
series evidencing not less than 66% of the aggregate percentage interests of
each class affected thereby for the purpose of adding any provisions to or
changing in an manner or eliminating any of the provisions of the Agreement or
of modifying in any manner the rights of the holders of the related
securities; provided, however, that no such amendment may
o reduce in any manner the amount of or delay the timing of, payments
received on loans which are required to be distributed on any security
without the consent of the holder of such security, or
o reduce the aforesaid percentage of securities of any class the holders of
which are required to consent to any such amendment without the consent
of the holders of all securities of such class covered by such Agreement
then outstanding.
49
If a REMIC election is made with respect to a trust fund, the trustee will not
be entitled to consent to an amendment to the related Agreement without having
first received an opinion of counsel to the effect that such amendment will
not cause such trust fund to fail to qualify as a REMIC.
Termination; Optional Termination
Pooling and Servicing Agreement; Trust Agreement. The applicable prospectus
supplement may provide for the timing by which the Agreement terminates, but
if it does not, the obligations created by each Pooling and Servicing
Agreement and Trust Agreement for each series of securities will terminate
upon the payment to the related securityholders of all amounts held in the
Security Account or by the master servicer and required to be paid to them
pursuant to such Agreement following the later of
(i) the final payment of or other liquidation of the last of the Trust
Fund Assets subject thereto or the disposition of all property acquired upon
foreclosure of any such Trust Fund Assets remaining in the trust fund and
(ii) the purchase by the master servicer or, if REMIC treatment has been
elected and if specified in the related prospectus supplement, by the holder
of the residual interest in the REMIC (see "Federal Income Tax Consequences"
below), from the related trust fund of all of the remaining Trust Fund
Assets and all property acquired in respect of such Trust Fund Assets.
Any purchase of Trust Fund Assets and property acquired in respect of Trust
Fund Assets evidenced by a series of securities will be made at the option of
the master servicer, or the party specified in the related prospectus
supplement, including the holder of the REMIC residual interest, at a price
specified in the related prospectus supplement. The exercise of such right
will effect early retirement of the securities of that series, but the right
of the master servicer, or the other party or, if applicable, the holder of
the REMIC residual interest, to so purchase is subject to the principal
balance of the related Trust Fund Assets being less than the percentage
specified in the related prospectus supplement of the aggregate principal
balance of the Trust Fund Assets at the cut-off date for the series. The
foregoing is subject to the provision that if a REMIC election is made with
respect to a trust fund, any repurchase pursuant to clause (ii) above will be
made only in connection with a "qualified liquidation" of the REMIC within the
meaning of Section 860F(g)(4) of the Code.
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 trustee for cancellation of all the notes
of such series or, with certain limitations, upon deposit with the trustee of
funds sufficient for the payment in full of all of the notes of such series.
In addition to such discharge with certain limitations, the Indenture will
provide that, if so specified with respect to the notes of any series, the
related trust fund will be discharged from any and all obligations in respect
of the notes of such series (except for certain obligations relating to
temporary notes and exchange of notes, to register the transfer of or exchange
notes of such series, to replace stolen, lost or mutilated notes of such
series, to maintain paying agencies and to hold monies for payment in trust)
upon the deposit with the trustee, in trust, of money and/or direct
obligations of or obligations guaranteed by the United States of America which
through the payment of interest and principal in respect thereof in accordance
with their terms will provide money in an amount sufficient to pay the
principal of and each installment of interest on the notes of such series on
the last scheduled distribution date for such notes and any installment of
interest on such notes in accordance with the terms of the Indenture and the
notes of such series. In the event of any such defeasance and discharge of
notes of such series, holders of notes of such series would be able to look
only to such money and/or direct obligations for payment of principal and
interest, if any, on their notes until maturity.
The Trustee
The trustee under each Agreement will be named in the applicable prospectus
supplement. The commercial bank or trust company serving as trustee may have
normal banking relationships with the depositor, the master servicer and any
of their respective affiliates.
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Certain Legal Aspects of the Loans
The following discussion contains summaries, which are general in nature, of
certain legal matters relating to the loans. Because such legal aspects are
governed primarily by applicable state law (which laws may differ
substantially), the descriptions do not, except as expressly provided below,
reflect the laws of any particular state, nor encompass the laws of all states
in which the security for the loans is situated. The descriptions are
qualified in their entirety by reference to the applicable federal laws and
the appropriate laws of the states in which loans may be originated.
General
The loans for a series may be secured by deeds of trust, mortgages, security
deeds or deeds to secure debt, depending upon the prevailing practice in the
state in which the property subject to the loan is located. Deeds of trust are
used almost exclusively in California instead of mortgages. A mortgage creates
a lien upon the real property encumbered by the mortgage, which lien is
generally not prior to the lien for real estate taxes and assessments.
Priority between mortgages depends on their terms and generally on the order
of recording with a state or county office. There are two parties to a
mortgage, the mortgagor, who is the borrower and owner of the mortgaged
property, and the mortgagee, who is the lender. Under the mortgage instrument,
the mortgagor delivers to the mortgagee a note or bond and the mortgage.
Although a deed of trust is similar to a mortgage, a deed of trust formally
has three parties, the borrower-property owner called the trustor (similar to
a mortgagor), a lender (similar to a mortgagee) called the beneficiary, and a
third-party grantee called the trustee. Under a deed of trust, the borrower
grants the property, irrevocably until the debt is paid, in trust, generally
with a power of sale, to the trustee to secure payment of the obligation. A
security deed and a deed to secure debt are special types of deeds which
indicate on their face that they are granted to secure an underlying debt. By
executing a security deed or deed to secure debt, the grantor conveys title
to, as opposed to merely creating a lien upon, the subject property to the
grantee until such time as the underlying debt is repaid. The trustee's
authority under a deed of trust, the mortgagee's authority under a mortgage
and the grantee's authority under a security deed or deed to secure debt are
governed by law and, with respect to some deeds of trust, the directions of
the beneficiary.
Cooperatives. Certain of the loans may be cooperative loans. The
cooperative owns all the real property that comprises the project, including
the land, separate dwelling units and all common areas. The cooperative is
directly responsible for project management and, in most cases, payment of
real estate taxes and hazard and liability insurance. If there is a blanket
mortgage on the cooperative and/or underlying land, as is generally the case,
the cooperative, as project mortgagor, is also responsible for meeting these
mortgage obligations. A blanket mortgage is ordinarily incurred by the
cooperative in connection with the construction or purchase of the
cooperative's apartment building. The interest of the occupant under
proprietary leases or occupancy agreements to which that cooperative is a
party are generally subordinate to the interest of the holder of the blanket
mortgage in that building. If the cooperative is unable to meet the payment
obligations arising under its blanket mortgage, the mortgagee holding the
blanket mortgage could foreclose on that mortgage and terminate all
subordinate proprietary leases and occupancy agreements. In addition, the
blanket mortgage on a cooperative may provide financing in the form of a
mortgage that does not fully amortize with a significant portion of principal
being due in one lump sum at final maturity. The inability of the cooperative
to refinance this mortgage and its consequent inability to make such final
payment could lead to foreclosure by the mortgagee providing the financing. A
foreclosure in either event by the holder of the blanket mortgage could
eliminate or significantly diminish the value of any collateral held by the
lender who financed the purchase by an individual tenant-stockholder of
cooperative shares or, in the case of a trust fund including cooperative
loans, the collateral securing the cooperative loans.
The cooperative is owned by tenant-stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive
proprietary leases or occupancy agreements which confer exclusive rights to
occupy specific units. Generally, a tenant-stockholder of a cooperative must
make a monthly payment to the cooperative representing such tenant-
stockholder's pro rata share of the cooperative's payments for its blanket
mortgage, real property taxes, maintenance expenses and other capital or
ordinary expenses. An ownership interest in a cooperative and accompanying
rights is financed through a cooperative share loan evidenced by a promissory
note and secured by a security interest in the occupancy agreement or
proprietary lease and in the related cooperative shares. The lender takes
possession of the share certificate and a counterpart of the proprietary lease
or occupancy agreement, and a financing statement covering the proprietary
lease or occupancy agreement and the cooperative shares is filed in the
appropriate state and local offices to perfect the lender's interest in its
collateral. Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in
the security agreement covering the assignment of the proprietary lease or
occupancy agreement and the pledge of cooperative shares.
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Foreclosure
Deed of Trust. Foreclosure of a deed of trust is generally accomplished by
a non-judicial sale under a specific provision in the deed of trust which
authorizes the trustee to sell the property at public auction upon any default
by the borrower under the terms of the note or deed of trust. In certain
states, such foreclosure also may be accomplished by judicial action in the
manner provided for foreclosure of mortgages. In addition to any notice
requirements contained in a deed of trust, in some states (such as
California), the trustee must record a notice of default and send a copy to
the borrower-trustor, to any person who has recorded a request for a copy of
any notice of default and notice of sale, to any successor in interest to the
borrower-trustor, to the beneficiary of any junior deed of trust and to
certain other persons. In some states (including California), the borrower-
trustor has the right to reinstate the loan at any time following default
until shortly before the trustee's sale. In general, the borrower, or any
other person having a junior encumbrance on the real estate, may, during a
statutorily prescribed reinstatement period, cure a monetary default by paying
the entire amount in arrears plus other designated costs and expenses incurred
in enforcing the obligation. Generally, state law controls the amount of
foreclosure expenses and costs, including attorney's fees, which may be
recovered by a lender. After the reinstatement period has expired without the
default having been cured, the borrower or junior lienholder no longer has the
right to reinstate the loan and must pay the loan in full to prevent the
scheduled foreclosure sale. If the 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 (including California), published for a specific period of time
in one or more newspapers. In addition, some state laws require that a copy of
the notice of sale be posted on the property and sent to all parties having an
interest of record in the real property. In California, the entire process
from recording a notice of default to a non-judicial sale usually takes four
to five months.
Mortgages. Foreclosure of a mortgage is generally accomplished by judicial
action. The action is initiated by the service of legal pleadings upon all
parties having an interest in the real property. Delays in completion of the
foreclosure may occasionally result from difficulties in locating necessary
parties. Judicial foreclosure proceedings are often not contested by any of
the parties. When the mortgagee's right to foreclosure is contested, the legal
proceedings necessary to resolve the issue can be time consuming. After the
completion of a judicial foreclosure proceeding, the court generally issues a
judgment of foreclosure and appoints a referee or other court 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.
Although foreclosure sales are typically public sales, frequently no third
party purchaser bids in excess of the lender's lien because of the difficulty
of determining the exact status of title to the property, the possible
deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the
trustee or referee for an amount equal to the principal amount outstanding
under the loan, accrued and unpaid interest and the expenses of foreclosure in
which event the mortgagor's debt will be extinguished or the lender may
purchase for a lesser amount in order to preserve its right against a borrower
to seek a deficiency judgment in states where such 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 burden of
ownership, including obtaining hazard insurance 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.
Courts have imposed general equitable principles upon foreclosure, which are
generally designed to mitigate the legal consequences to the borrower of the
borrower's defaults under the loan documents. Some courts have been faced with
the issue of whether federal or state constitutional provisions reflecting due
process concerns for fair notice require that borrowers under deeds of trust
receive notice longer than that prescribed by statute. For the most part,
these cases have upheld the notice provisions as being reasonable or have
found that the sale by a trustee under a deed of trust does not involve
sufficient state action to afford constitutional protection to the borrower.
When the beneficiary under a junior mortgage or deed of trust cures the
default and reinstates or redeems by paying the full amount of the senior
mortgage or deed of trust, the amount paid by the beneficiary so to cure or
redeem becomes a part of the indebtedness secured by the junior mortgage or
deed of trust. See "Junior Mortgages; Rights of Senior Mortgagees" below.
Cooperative Loans. The cooperative shares owned by the tenant-stockholder
and pledged to the lender are, in almost all cases, subject to restrictions on
transfer as set forth in the cooperative's certificate of incorporation and
bylaws, as well as the proprietary lease or occupancy agreement, and may be
cancelled by the cooperative for
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failure by the tenant-stockholder to pay rent or other obligations or charges
owed by such tenant-stockholder, including mechanics' liens against the
cooperative apartment building incurred by such tenant-stockholder. The
proprietary lease or occupancy agreement generally permits the cooperative to
terminate such lease or agreement in the event an obligor fails to make
payments or defaults in the performance of covenants required thereunder.
Typically, the lender and the cooperative enter into a recognition agreement
which establishes the rights and obligations of both parties in the event of a
default by the tenant-stockholder on its obligations under the proprietary
lease or occupancy agreement. A default by the tenant-stockholder under the
proprietary lease or occupancy agreement will usually constitute a default
under the security agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds form the sale of the cooperative apartment,
subject, however, to the cooperative's right to sums due under such
proprietary lease or occupancy agreement. The total amount owed to the
cooperative by the tenant-stockholder, which the lender generally cannot
restrict and does not monitor, could reduce the value of the collateral below
the outstanding principal balance of the cooperative loan and accrued and
unpaid interest thereon.
Recognition agreements also provide that in the event of a foreclosure on a
cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease. Generally, the lender
is not limited in any rights it may have to dispossess the tenant-
stockholders.
In some states, foreclosure on the cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the Uniform Commercial
Code (the "UCC") and the security agreement relating to those shares. Article
9 of the UCC requires that a sale be conducted in a "commercially reasonable"
manner. Whether a foreclosure sale has been conducted in a "commercially
reasonable" manner will depend on the facts in each case. In determining
commercial reasonableness, a court will look to the notice given the debtor
and the method, manner, time, place and terms of the foreclosure. Generally, a
sale conducted according to the usual practice of banks selling similar
collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to
reimbursement is subject to the right of the cooperative to receive sums due
under the proprietary lease or occupancy agreement. If there are proceeds
remaining, the lender must account to the tenant-stockholder for the surplus.
Conversely, if a portion of the indebtedness remains unpaid, the tenant-
stockholder is generally responsible for the deficiency. See "Anti-Deficiency
Legislation and Other Limitations on Lenders" below.
In the case of foreclosure on a building which was converted from a rental
building to a building owned by a cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property
subject to rent control and rent stabilization laws which apply to certain
tenants who elected to remain in the building but who did not purchase shares
in the cooperative when the building was so converted.
Environmental Risks
Real property pledged as security to a lender may be subject to unforeseen
environmental risks. Under the laws of certain states, contamination of a
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 such property. In addition, under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), the EPA may impose a lien on property where EPA has incurred
clean-up costs. However, a CERCLA lien is subordinate to pre-existing,
perfected security interests.
Under the laws of some states, and under CERCLA, it is conceivable that a
secured lender may be held liable as an "owner" or "operator" for the costs of
addressing releases or threatened releases of hazardous substances at a
Property, even though the environmental damage or threat was caused by a prior
or current owner or operator. CERCLA imposes liability for such costs on any
and all "responsible parties," including owners or operators. However, CERCLA
excludes from the definition of "owner or operator" a secured creditor who
holds indicia of ownership primarily to protect its security interest (the
"secured creditor exclusion") but without "participating in the management" of
the Property. Thus, if a lender's activities begin to encroach on the actual
management of a contaminated facility or property, the lender may incur
liability as an "owner or operator" under CERCLA. Similarly, if a lender
forecloses and takes title to a contaminated facility or property, the lender
may incur
53
CERCLA liability in various circumstances, including, but not limited to, when
it holds the facility or property as an investment (including leasing the
facility or property to third party), or fails to market the property in a
timely fashion.
Whether actions taken by a lender would constitute participation in the
management of a mortgaged property, or the business of a borrower, so as to
render the secured creditor exemption unavailable to a lender, was
historically a matter of judicial interpretation of the statutory language.
Court decisions were inconsistent and, in fact, in 1990, the Court of Appeals
for the Eleventh Circuit suggested that the mere capacity of the lender to
influence a borrower's decisions regarding disposal of hazardous substances
was sufficient participation in the management of a borrower's business to
deny the protection of the secured creditor exemption to the lender. In 1996,
Congress enacted the Asset Conservation, Lender Liability and Deposit
Insurance Protection Act ("Asset Conservation Act"), which provides that, in
order to be deemed to have participated in the management of a mortgaged
property, a lender must actually participate in the operational affairs of the
property or the borrower. The Asset Conservation Act also provides that
participation in the management of the property does not include "merely
having the capacity to influence, or unexercised right to control" operations.
Rather, a lender will lose the protection of the secured creditor exemption
only if it exercises decision-making control over the borrower's environmental
compliance and hazardous substance handling and disposal practices, or assumes
day-to-day management of all operational functions of the mortgaged property.
If a lender is or becomes liable, it can bring an action for contribution
against any other "responsible parties," including a previous owner or
operator, who created the environmental hazard, but those persons or entities
may be bankrupt or otherwise judgment proof. The costs associated with
environmental cleanup may be substantial. It is conceivable that such costs
arising from the circumstances set forth above would result in a loss to
certificateholders.
CERCLA does not apply to petroleum products, and the secured creditor
exclusion does not govern liability for cleanup costs under federal laws other
than CERCLA, in particular Subtitle I of the federal Resource Conservation and
Recovery Act ("RCRA"), which regulates underground petroleum storage tanks
(except heating oil tanks). The EPA has adopted a lender liability rule for
underground storage tanks under Subtitle I of RCRA. Under that rule, a holder
of a security interest in an underground storage tank or real property
containing an underground storage tank is not considered an operator of the
underground storage tank as long as petroleum is not added to, stored in or
dispensed from the tank. Moreover, under the Asset Conservation Act, the
protections accorded to lenders under CERCLA are also accorded to holders of
security interests in underground petroleum storage tanks. It should be noted,
however, that liability for cleanup of petroleum contamination may be governed
by state law, which may not provide for any specific protection for secured
creditors.
In general, at the time the loans were originated no environmental
assessment, or a very limited environmental assessment, of the Properties was
conducted.
Rights of Redemption
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property from the foreclosure sale. In certain
other states (including California), this right of redemption applies only to
sales following judicial foreclosure, and not to sales pursuant to a non-
judicial power of sale. In most states where the right of redemption is
available, statutory redemption may occur upon payment of the foreclosure
purchase price, accrued interest and taxes. In other states, redemption may be
authorized if the former borrower pays only a portion of the sums due. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The exercise of a right of redemption
would defeat the title of any purchaser from the lender subsequent to
foreclosure or sale under a deed of trust. Consequently, the practical effect
of the redemption right 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.
Anti-Deficiency Legislation and Other Limitations On Lenders
Certain states have imposed statutory and judicial restrictions that limit
the remedies of a beneficiary under a deed of trust or a mortgagee under a
mortgage. In some states, including California, statutes and case law limit
the right of the beneficiary or mortgagee to obtain a deficiency judgment
against borrowers financing the purchase of their residence or following sale
under a deed of trust or certain other foreclosure proceedings. A deficiency
judgment is a personal judgment against the borrower equal in most cases to
the difference between the amount due to the lender and the fair market value
of the real property at the time of the foreclosure sale. In certain states,
including California, if a lender simultaneously originates a loan secured by
a senior lien on a particular property and a loan secured by a junior lien on
the same property, such a lender as the holder of the junior lien may be
54
precluded from obtaining a deficiency judgment with respect to the excess of
the aggregate amount owed under both such loans over the proceeds of any sale
under a deed of trust or other foreclosure proceedings. As a result of these
prohibitions, it is anticipated that in most instances the master servicer
will utilize the non-judicial foreclosure remedy and will not seek deficiency
judgments against defaulting borrowers.
Some state 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 certain other states, the lender has the option of bringing a
personal action against the borrower on the debt without first exhausting such
security; however, in some of these states, the lender, following judgment on
such 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. In some states, exceptions to the anti-
deficiency statutes are provided for in certain instances where the value of
the lender's security has been impaired by acts or omissions of the borrower,
for example, in the event of waste of the property. 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.
Generally, Article 9 of the UCC governs foreclosure on cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
cooperative loan, would be the shares of the cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
and state laws affording relief to debtors, may interfere with or affect the
ability of the secured mortgage lender to realize upon its security. For
example, in a proceeding under the federal Bankruptcy Code, a lender may not
foreclose on a mortgaged property without the permission of the bankruptcy
court. The rehabilitation plan proposed by the debtor may provide, if the
mortgaged property is not the debtor's principal residence and the court
determines that the value of the mortgaged property is less than the principal
balance of the mortgage loan, for the reduction of the secured indebtedness to
the value of the mortgaged property as of the date of the commencement of the
bankruptcy, rendering the lender a general unsecured creditor for the
difference, and also may reduce the monthly payments due under such mortgage
loan, change the rate of interest and alter the mortgage loan repayment
schedule. The effect of any such proceedings under the federal Bankruptcy
Code, including but not limited to any automatic stay, could result in delays
in receiving payments on the loans underlying a series of securities and
possible reductions in the aggregate amount of such payments.
The federal tax laws provide priority to certain tax liens over the lien of
a mortgage or secured party.
Due-On-Sale Clauses
Generally, each conventional loan will contain a due-on-sale clause which
will generally provide that if the mortgagor or obligor sells, transfers or
conveys the Property, the loan or contract may be accelerated by the mortgagee
or secured party. Court decisions and legislative actions have placed
substantial restriction on the right of lenders to enforce such clauses in
many states. For instance, the California Supreme Court in August 1978 held
that due-on-sale clauses were generally unenforceable. However, the Garn-St
Germain Depository Institutions Act of 1982 (the "Garn-St Germain Act"),
subject to certain exceptions, preempts state constitutional, statutory and
case law prohibiting the enforcement of due-on-sale clauses. 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.
FHLMC 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.
As to loans secured by an owner-occupied residence, the Garn-St Germain Act
sets forth nine specific instances in which a mortgagee covered by the Act may
not exercise its rights under a due-on-sale clause, notwithstanding the fact
that a transfer of the property may have occurred. The inability to enforce a
due-on-sale clause may result in transfer of the related Property to an
uncreditworthy person, which could increase the
55
likelihood of default or may result in a mortgage bearing an interest rate
below the current market rate being assumed by a new home buyer, which may
affect the average life of the loans and the number of loans which may extend
to maturity.
In addition, under federal bankruptcy law, due-on-sale clauses may not be
enforceable in bankruptcy proceedings and may, under certain circumstances, be
eliminated in any modified mortgage resulting from such bankruptcy proceeding.
Enforceability of Prepayment and Late Payment Fees
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states,
there are or may be specific limitations upon the late charges which a lender
may collect from a borrower for delinquent payments. Certain states also limit
the amounts that a lender may collect from a borrower as an additional charge
if the loan is prepaid. Under certain state laws, prepayment charges may not
be imposed after a certain period of time following the origination of
mortgage loans with respect to prepayments on loans secured by liens
encumbering owner-occupied residential properties. Since many of the
Properties will be owner-occupied, it is anticipated that prepayment charges
may not be imposed with respect to many of the loans. The absence of such a
restraint on prepayment, particularly with respect to fixed rate loans having
higher Loan Rates, may increase the likelihood of refinancing or other early
retirement of such loans or contracts. Late charges and prepayment fees are
typically retained by servicers as additional servicing compensation.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control Act
of 1980, enacted in March 1980 ("Title V") provides that state usury
limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. 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. The statute authorized the states to reimpose
interest rate limits by adopting, before April 1, 1983, a law or
constitutional provision which expressly rejects an application of the federal
law. Fifteen states adopted such a law prior to the April 1, 1983 deadline. In
addition, even where Title V is not so rejected, any state is authorized by
the law to adopt a provision limiting discount points or other charges on
mortgage loans covered by Title V. Certain states have taken action to
reimpose interest rate limits and/or to limit discount points or other
charges.
Home Improvement Contracts
General. Some home improvement contracts may in addition to being secured
by mortgages on real estate, also be secured by purchase money security
interests in home improvements financed thereby (such home improvement
contracts are hereinafter referred to in this section as "contracts"). These
contracts generally are "chattel paper" or constitute "purchase money security
interests" each as defined in the UCC. 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 designated
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, among other things, give
notice of the trust fund's ownership of the contracts. In general, 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 trust fund's interest in the
contracts could be defeated.
Security Interests in Home Improvements. The contracts that are secured by
the home improvements financed thereby grant to the originator of such
contracts a purchase money security interest in such home improvements to
secure all or part of the purchase price of such 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. Such purchase
money security interests are assignable. In general, a purchase money security
interest grants to the holder a security interest that has priority over a
conflicting security interest in the same collateral and the proceeds of such
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 such home improvement must generally be
perfected by a timely fixture filing. In general, 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
56
goods that are deemed to lose such characterization upon incorporation of such
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 the real estate law, a creditor can
repossess a home improvement securing a contract by voluntary surrender, by
"self-help" repossession that is "peaceful" (i.e., without breach of the
peace) or, in the absence of voluntary surrender and the ability to repossess
without breach of the peace, by judicial process. The holder of a contract
must give the debtor a number of days' notice, which varies from 10 to 30 days
depending on the state, prior to commencement of any repossession. The UCC and
consumer protection laws in most states place restrictions on repossession
sales, including requiring prior notice to the debtor and commercial
reasonableness in effecting such a sale. The law in most states also requires
that the debtor be given notice of any sale prior to resale of the unit that
the debtor may redeem at or before such 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 would have no assets with which to pay a judgment.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
Consumer Protection Laws. The so-called holder in due course rule of the
Federal Trade Commission is intended to defeat the ability of the transferor
of a consumer credit contract which is the seller of goods which gave rise to
the transaction (and certain related lenders and assignees) to transfer such
contract free of notice of claims by the debtor thereunder. The effect of this
rule is to subject the assignee of such a contract to all claims and defenses
which the debtor could assert against the seller of goods. Liability under
this rule is limited to amounts paid under a contract; however, the obligor
also may be able to assert the rule to set off remaining amounts due as a
defense against a claim brought by the trustee against such obligor. Numerous
other federal and state consumer protection laws impose requirements
applicable to the origination and lending pursuant to the contracts, including
the Truth in Lending Act, the Federal Trade Commission Act, the Fair Credit
Billing Act, the Fair Credit Reporting Act, the Equal Credit Opportunity Act,
the Fair Debt Collection Practices Act and the Uniform Consumer Credit Code.
In the case of some of these laws, the failure to comply with their provisions
may affect the enforceability of the related contract.
Applicability of Usury Laws. Title V of the Depository Institutions
Deregulation and Monetary Control Act of 1980, as amended ("Title V"),
provides that, subject to the following conditions, state usury limitations
shall not apply to any contract which is secured by a first lien on certain
kinds of consumer goods. The contracts would be covered if they satisfy
certain conditions governing, among other things, the terms of any
prepayments, late charges and deferral fees and requiring a 30-day notice
period prior to instituting any action leading to repossession of the related
unit.
Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen
states adopted such a law prior to the April 1, 1983 deadline. In addition,
even where Title V was not so rejected, any state is authorized by the law to
adopt a provision limiting discount points or other charges on loans covered
by Title V.
Installment Contracts
The loans may also consist of installment contracts. Under an installment
contract the seller (hereinafter referred to in this section as the "lender")
retains legal title to the property and enters into an agreement with the
purchaser hereinafter referred to in this section as the "borrower") for the
payment of the purchase price, plus interest, over the term of such contract.
Only after full performance by the borrower of the contract is the lender
obligated to convey title to the property to the purchaser. As with mortgage
or deed of trust financing, during the effective period of the installment
contract, the borrower is generally responsible for maintaining the property
in good condition and for paying real estate taxes, assessments and hazard
insurance premiums associated with the property.
The method of enforcing the rights of the lender under an installment
contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to its terms. The terms of installment contracts
generally provide that upon a default by the borrower, the borrower loses his
or her right to occupy the property, the entire indebtedness is accelerated,
and the buyer's equitable interest in the property is forfeited. The lender in
such a situation does not have to foreclose in
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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 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 contract, the courts will permit ejectment of the
buyer and a forfeiture of his or her interest in the property. However, most
state legislatures have enacted provisions by analogy to mortgage law
protecting borrowers under installment contracts from the harsh consequences
of forfeiture. Under such 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
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 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 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
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act of
1940, as amended (the "Relief Act"), a borrower who enters military service
after the origination of such borrower's loan (including a borrower who is a
member of the National Guard or is in reserve status at the time of the
origination of the loan and is later called to active duty) may not be charged
interest above an annual rate of 6% during the period of such borrower's
active duty status, unless a court orders otherwise upon application of the
lender. It is possible that such interest rate limitation could have an
effect, for an indeterminate period of time, on the ability of the master
servicer to collect full amounts of interest on certain of the loans. Unless
otherwise provided in the related prospectus supplement, any shortfall in
interest collections resulting from the application of the Relief Act could
result in losses to securityholders. The Relief Act also imposes limitations
which would impair the ability of the master servicer to foreclose on an
affected loan during the borrower's period of active duty status. Moreover,
the Relief Act permits the extension of a loan's maturity and the re-
adjustment of its payment schedule beyond the completion of military service.
Thus, in the event that such a loan goes into default, there may be delays and
losses occasioned by the inability to realize upon the Property in a timely
fashion.
Junior Mortgages and Rights of Senior Mortgagees
To the extent that the loans comprising the trust fund for a series are
secured by mortgages which are junior to other mortgages held by other lenders
or institutional investors, the rights of the trust fund (and therefore the
securityholders), as mortgagee under any such junior mortgage, are subordinate
to those of any mortgagee under any senior mortgage. The senior mortgagee has
the right to receive hazard insurance and condemnation proceeds and to cause
the property securing the 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 a
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 such 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 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 which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee 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
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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.
The form of credit line trust deed or mortgage generally used by most
institutional lenders which make revolving credit line loans typically
contains a "future advance" clause, which provides, in essence, that
additional amounts advanced to or on behalf of the borrower by the beneficiary
or lender are to be secured by the deed of trust or mortgage. Any amounts so
advanced after the cut-off date with respect to any Mortgage will not be
included in the trust fund. The priority of the lien securing any advance made
under the clause may depend in most states on whether the deed of trust or
mortgage is called and recorded as a credit line deed of trust or mortgage. If
the beneficiary or lender advances additional amounts, the advance is entitled
to receive the same priority as amounts initially advanced under the trust
deed or mortgage, notwithstanding the fact that there may be junior trust
deeds or mortgages and other liens which intervene between the date of
recording of the trust deed or mortgage and the date of the future advance,
and notwithstanding that the beneficiary or lender had actual knowledge of
such intervening junior trust deeds or mortgages and other liens at the time
of the advance. In most states, the trust deed or mortgage lien securing
mortgage loans of the type which includes home equity credit lines applies
retroactively to the date of the original recording of the trust deed or
mortgage, provided that the total amount of advances under the home equity
credit line does not exceed the maximum specified principal amount of the
recorded trust deed or mortgage, except as to advances made after receipt by
the lender of a written notice of lien from a judgment lien creditor of the
trustor.
The Title I Program
General. Certain of the loans contained in a trust fund may be loans
insured under the FHA Title I Credit Insurance program created pursuant to
Sections 1 and 2(a) of the National Housing Act of 1934 (the "Title I
Program"). Under the Title I Program, the FHA is authorized and empowered to
insure qualified lending institutions against losses on eligible loans. The
Title I Program operates as a coinsurance program in which the FHA insures up
to 90% of certain losses incurred on an individual insured loan, including the
unpaid principal balance of the loan, but only to the extent of the insurance
coverage available in the lender's FHA insurance coverage reserve account. The
owner of the loan bears the uninsured loss on each loan.
The types of loans which are eligible for insurance by the FHA under the
Title I Program include property improvement loans ("Property Improvement
Loans" or "Title I Loans"). A Property Improvement Loan or Title I Loan means
a loan made to finance actions or items that substantially protect or improve
the basic livability or utility of a property and includes single family
improvement loans.
There are two basic methods of lending or originating such loans which
include a "direct loan" or a "dealer loan". With respect to a direct loan, the
borrower makes application directly to a lender without any assistance from a
dealer, which application may be filled out by the borrower or by a person
acting at the direction of the borrower who does not have a financial interest
in the loan transaction, and the lender may disburse the loan proceeds solely
to the borrower or jointly to the borrower and other parties to the
transaction. With respect to a dealer loan, the dealer, who has a direct or
indirect financial interest in the loan transaction, assists the borrower in
preparing the loan application or otherwise assists the borrower in obtaining
the loan from lender and the lender may distribute proceeds solely to the
dealer or the borrower or jointly to the borrower and the dealer or other
parties. With respect to a dealer Title I Loan, a dealer may include a seller,
a contractor or supplier of goods or services.
Loans insured under the Title I Program are required to have fixed interest
rates and, generally, provide for equal installment payments due weekly,
biweekly, semi-monthly or monthly, except that a loan may be payable quarterly
or semi-annually in order to correspond with the borrower's irregular flow of
income. The first or last payments (or both) may vary in amount but may not
exceed 150% of the regular installment payment, and the first scheduled
payment may be due no later than two months from the date of the loan. The
note must contain a provision permitting full or partial prepayment of the
loan. The interest rate may be established by the lender and must be fixed for
the term of the loan and recited in the note. Interest on an insured loan must
accrue from the date of the loan and be calculated on a simple interest basis.
The lender must assure that the note and all other documents evidencing the
loan are in compliance with applicable federal, state and local laws.
Each insured lender is required to use prudent lending standards in
underwriting individual loans and to satisfy the applicable loan underwriting
requirements under the Title I Program prior to its approval of the loan and
disbursement of loan proceeds. Generally, the lender must exercise prudence
and diligence to determine whether the borrower and any co-maker is solvent
and an acceptable credit risk, with a reasonable ability to make payments on
the loan obligation. The lender's credit application and review must determine
whether the borrower's income will be adequate to meet the periodic payments
required by the loan, as well as the borrower's other housing and
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recurring expenses, which determination must be made in accordance with the
expense-to-income ratios published by the Secretary of HUD.
Under the Title I Program, the FHA does not review or approve for
qualification for insurance the individual loans insured thereunder at the
time of approval by the lending institution (as is typically the case with
other federal loan programs). If, after a loan has been made and reported for
insurance under the Title I Program, the lender discovers any material
misstatement of fact or that the loan proceeds have been misused by the
borrower, dealer or any other party, it shall promptly report this to the FHA.
In such case, provided that the validity of any lien on the property has not
been impaired, the insurance of the loan under the Title I Program will not be
affected unless such material misstatements of fact or misuse of loan proceeds
was caused by (or was knowingly sanctioned by) the lender or its employees.
Requirements for Title I Loans. The maximum principal amount for Title I
Loans must not exceed the actual cost of the project plus any applicable fees
and charges allowed under the Title I Program; provided that such maximum
amount does not exceed $25,000 (or the current applicable amount) for a single
family property improvement loan. Generally, the term of a Title I Loan may
not be less than six months nor greater than 20 years and 32 days. A borrower
may obtain multiple Title I Loans with respect to multiple properties, and a
borrower may obtain more than one Title I Loan with respect to a single
property, in each case as long as the total outstanding balance of all Title I
Loans in the same property does not exceed the maximum loan amount for the
type of Title I Loan thereon having the highest permissible loan amount.
Borrower eligibility for a Title I Loan requires that the borrower have at
least a one-half interest in either fee simple title to the real property, a
lease thereof for a term expiring at least six months after the final maturity
of the Title I Loan or a recorded land installment contract for the purchase
of the real property, and that the borrower have equity in the property being
improved at least equal to the amount of the Title I Loan if such loan amount
exceeds $15,000. Any Title I Loan in excess of $7,500 must be secured by a
recorded lien on the improved property which is evidenced by a mortgage or
deed of trust executed by the borrower and all other owners in fee simple.
The proceeds from a Title I Loan may be used only to finance property
improvements which substantially protect or improve the basic livability or
utility of the property as disclosed in the loan application. The Secretary of
HUD has published a list of items and activities which cannot be financed with
proceeds from any Title I Loan and from time to time the Secretary of HUD may
amend such list of items and activities. With respect to any dealer Title I
Loan, before the lender may disburse funds, the lender must have in its
possession a completion certificate on a HUD approved form, signed by the
borrower and the dealer. With respect to any direct Title I Loan, the borrower
is required to submit to the lender, promptly upon completion of the
improvements but not later than six months after disbursement of the loan
proceeds with one six month extension if necessary, a completion certificate,
signed by the borrower. The lender or its agent is required to conduct an on-
site inspection on any Title I Loan where the principal obligation is $7,500
or more, and on any direct Title I Loan where the borrower fails to submit a
completion certificate.
FHA Insurance Coverage. Under the Title I Program the FHA establishes an
insurance coverage reserve account for each lender which has been granted a
Title I insurance contract. The amount of insurance coverage in this account
is 10% of the amount disbursed, advanced or expended by the lender in
originating or purchasing eligible loans registered with FHA for Title I
insurance, with certain adjustments. The balance in the insurance coverage
reserve account is the maximum amount of insurance claims the FHA is required
to pay. Loans to be insured under the Title I Program will be registered for
insurance by the FHA and the insurance coverage attributable to such loans
will be included in the insurance coverage reserve account for the originating
or purchasing lender following the receipt and acknowledgment by the FHA of a
loan report on the prescribed form pursuant to the Title I regulations. The
FHA charges a fee of 0.50% per annum of the net proceeds (the original
balance) of any eligible loan so reported and acknowledged for insurance by
the originating lender. The FHA bills the lender for the insurance premium on
each insured loan annually, on approximately the anniversary date of the
loan's origination. If an insured loan is prepaid during the year, FHA will
not refund the insurance premium, but will abate any insurance charges falling
due after such prepayment.
Under the Title I Program the FHA will reduce the insurance coverage
available in the lender's FHA insurance coverage reserve account with respect
to loans insured under the lender's contract of insurance by (i) the amount of
the FHA insurance claims approved for payment relating to such insured loans
and (ii) the amount of insurance coverage attributable to insured loans sold
by the lender. The balance of the lender's FHA insurance coverage reserve
account will be further adjusted as required under Title I or by the FHA, and
the insurance coverage therein may be earmarked with respect to each or any
eligible loans insured thereunder, if a determination is made by the Secretary
of HUD that it is in its interest to do so. Originations and acquisitions of
new eligible loans will continue to increase a lender's insurance coverage
reserve account balance by 10% of the amount
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disbursed, advanced or expended in originating or acquiring such eligible
loans registered with the FHA for insurance under the Title I Program. The
Secretary of HUD may transfer insurance coverage between insurance coverage
reserve accounts with earmarking with respect to a particular insured loan or
group of insured loans when a determination is made that it is in the
Secretary's interest to do so.
The lender may transfer (except as collateral in a bona fide loan
transaction) insured loans and loans reported for insurance only to another
qualified lender under a valid Title I contract of insurance. Unless an
insured loan is transferred with recourse or with a guaranty or repurchase
agreement, the FHA, upon receipt of written notification of the transfer of
such loan in accordance with the Title I regulations, will transfer from the
transferor's insurance coverage reserve account to the transferee's insurance
coverage reserve account an amount, if available, equal to 10% of the actual
purchase price or the net unpaid principal balance of such loan (whichever is
less). However, under the Title I Program not more than $5,000 in insurance
coverage shall be transferred to or from a lender's insurance coverage reserve
account during any October 1 to September 30 period without the prior approval
of the Secretary of HUD.
Claims Procedures Under Title I. Under the Title I Program the lender may
accelerate an insured loan following a default on such loan only after the
lender or its agent has contacted the borrower in a face-to-face meeting or by
telephone to discuss the reasons for the default and to seek its cure. If the
borrower does not cure the default or agree to a modification agreement or
repayment plan, the lender will notify the borrower in writing that, unless
within 30 days the default is cured or the borrower enters into a modification
agreement or repayment plan, the loan will be accelerated and that, if the
default persists, the lender will report the default to an appropriate credit
agency. The lender may rescind the acceleration of maturity after full payment
is due and reinstate the loan only if the borrower brings the loan current,
executes a modification agreement or agrees to an acceptable repayment plan.
Following acceleration of maturity upon a secured Title I Loan, the lender
may either (a) proceed against the property under any security instrument, or
(b) make a claim under the lender's contract of insurance. If the lender
chooses to proceed against the property under a security instrument (or if it
accepts a voluntary conveyance or surrender of the property), the lender may
file an insurance claim only with the prior approval of the Secretary of HUD.
When a lender files an insurance claim with the FHA under the Title I
Program, the FHA reviews the claim, the complete loan file and documentation
of the lender's efforts to obtain recourse against any dealer who has agreed
thereto, certification of compliance with applicable state and local laws in
carrying out any foreclosure or repossession, and evidence that the lender has
properly filed proofs of claims, where the borrower is bankrupt or deceased.
Generally, a claim for reimbursement for loss on any Title I Loan must be
filed with the FHA no later than nine months after the date of default of such
loan. Concurrently with filing the insurance claim, the lender shall assign to
the United States of America the lender's entire interest in the loan note (or
a judgment in lieu of the note), in any security held and in any claim filed
in any legal proceedings. If, at the time the note is assigned to the United
States, the Secretary has reason to believe that the note is not valid or
enforceable against the borrower, the FHA may deny the claim and reassign the
note to the lender. If either such defect is discovered after the FHA has paid
a claim, the FHA may require the lender to repurchase the paid claim and to
accept a reassignment of the loan note. If the lender subsequently obtains a
valid and enforceable judgment against the borrower, the lender may resubmit a
new insurance claim with an assignment of the judgment. The FHA may contest
any insurance claim and make a demand for repurchase of the loan at any time
up to two years from the date the claim was certified for payment and may do
so thereafter in the event of fraud or misrepresentation on the part of the
lender.
Under the Title I Program the amount of an FHA insurance claim payment, when
made, is equal to the Claimable Amount, up to the amount of insurance coverage
in the lender's insurance coverage reserve account. For the purposes hereof,
the "Claimable Amount" means an amount equal to 90% of the sum of: (a) the
unpaid loan obligation (net unpaid principal and the uncollected interest
earned to the date of default) with adjustments thereto if the lender has
proceeded against property securing such loan; (b) the interest on the unpaid
amount of the loan obligation from the date of default to the date of the
claim's initial submission for payment plus 15 calendar days (but not to
exceed 9 months from the date of default), calculated at the rate of 7% per
annum; (c) the uncollected court costs; (d) the attorney's fees not to exceed
$500; and (e) the expenses for recording the assignment of the security to the
United States.
Consumer Protection Laws
Numerous federal and state consumer protection laws impose substantive
requirements upon mortgage lenders in connection with the origination,
servicing and enforcement of loans secured by Single Family Properties. These
laws include the federal Truth-in-Lending Act and Regulation Z promulgated
thereunder, Real Estate Settlement Procedures Act and Regulation B promulgated
thereunder, Equal Credit Opportunity Act, Fair Credit Billing Act,
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Fair Credit Reporting Act and related statutes and regulations. In particular,
Regulation Z, requires certain disclosures to the borrowers regarding the
terms of the loans; the Equal Credit Opportunity Act and Regulation B
promulgated thereunder 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; the Fair Credit Reporting Act regulates the
use and reporting of information related to the borrower's credit experience.
Certain provisions of these laws impose specific statutory liabilities upon
lenders who fail to comply therewith. In addition, violations of such laws may
limit the ability of the sellers to collect all or part of the principal of or
interest on the loans and could subject the sellers and in some cases their
assignees to damages and administrative enforcement.
Material Federal Income Tax Consequences
General
The following is a summary of the anticipated material federal income tax
consequences of the purchase, ownership, and disposition of the securities and
is based on advice of Sidley Austin Brown & Wood LLP, special counsel to the
depositor. The summary is based upon the provisions of the 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, and such a change
could apply 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, nor with certain types of investors subject to special
treatment under the federal income tax laws. 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,
but much of the discussion is applicable to other investors as well.
Prospective Investors are advised to consult their own tax advisers concerning
the federal, state, local and any other tax consequences to them of the
purchase, ownership and disposition of the securities.
The federal income tax consequences to 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
("REMIC") under the Internal Revenue Code of 1986, as amended (the
"Code");
o the securities represent an ownership interest in some or all of the
assets included in the trust fund for a series; or
o an election is made to treat the trust fund relating to a particular
series of certificates as a partnership.
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 such series.
Prior to issuance of each series of securities, the depositor shall file with
the SEC a Form 8-K on behalf of the related trust fund containing an opinion
of Sidley Austin Brown & Wood LLP with respect to the validity of the
information set forth under "Federal Income Tax Consequences" herein and in
the related prospectus supplement.
Taxation of Debt Securities
Interest and Acquisition Discount. Securities representing regular
interests in a REMIC ("Regular Interest Securities") are generally taxable to
holders in the same manner as evidences of indebtedness issued by the REMIC.
Stated interest on the Regular Interest Securities 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 Regular Interest
Securities) that 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. Securities characterized as debt for
federal income tax purposes and Regular Interest Securities will be referred
to hereinafter collectively as "Debt securities."
Debt securities that are Compound Interest securities will, and certain of
the other Debt securities may, be issued with "original issue discount"
("OID"). The following discussion is based in part on the rules governing OID
which are set forth in Sections 1271-1275 of the Code and the Treasury
regulations issued thereunder on February 2, 1994, as amended on June 11,
1996, (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.
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In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt security and its issue price. A holder
of a Debt security must include such 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 related Closing Date, the issue price for such class will be treated as
the fair market value of such class on such 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 such distributions constitute
"qualified stated interest."
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 such 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 expected to be penalized or
reasonable remedies exist to compel payment. Certain Debt securities may
provide for default remedies in the event of late payment or nonpayment of
interest. The interest on such Debt securities will be unconditionally payable
and constitute qualified stated interest, not OID. However, absent
clarification of the OID Regulations, where Debt securities do not provide for
default remedies, the interest payments will be included in the Debt
security's stated redemption price at maturity and taxed as OID. 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
either longer or shorter than the interval between subsequent distribution
dates, all or part of the interest foregone, in the case of the longer
interval, and all of the additional interest, in the case of the shorter
interval, 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 which 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 such 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 treated as payable at a qualified
variable rate and not as contingent interest if, generally,
o such 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 such
Debt security.
In the case of Compound Interest securities, certain Interest Weighted
Securities (as defined herein), 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.
The Internal Revenue Services (the "IRS") issued final regulations in June
1996 (the "Contingent Regulations") governing the calculation of OID on
instruments having contingent interest payments. The Contingent Regulations
specifically do not apply for purposes of calculating OID on debt instruments
subject to
63
Code Section 1272(a)(6), such as the Debt security. Additionally, the OID
Regulations do not contain provisions specifically interpreting Code Section
1272(a)(6). Until the Treasury issues guidance to the contrary, the trustee
intends to base its computation on Code 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 such Debt security, the
sum of the "daily portions" of such original issue discount. 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
that is not a Regular Interest Security and the principal payments on which
are 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) will
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 its issue
price plus prior accruals of OID, reduced by the total payments made with
respect to such Debt security in all prior periods, other than qualified
stated interest payments.
The amount of OID to be included in income by a holder of a debt instrument,
such as certain Classes of the Debt securities, that is subject to
acceleration due to prepayments on other debt obligations securing such
instruments (a "Pay-Through Security"), is computed by taking into account the
anticipated rate of prepayments assumed in pricing the debt instrument (the
"Prepayment Assumption"). The amount of OID that will accrue during an accrual
period on a Pay-Through Security is the excess (if any) of the 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 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: (i) 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), (ii) events which have occurred before the end of the accrual
period and (iii) 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 original issue discount 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 original issue discount 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.
The depositor may adjust the accrual of OID on a Class of Regular Interest
Securities (or other regular interests in a REMIC) in a manner that it
believes to be appropriate, to take account of realized losses on the loans,
although the OID Regulations do not provide for such adjustments. If the IRS
were to require that OID be accrued without such adjustments, the rate of
accrual of OID for a Class of Regular Interest Securities could increase.
Certain classes of Regular Interest Securities may represent more than one
class of REMIC regular interests. Unless otherwise provided in the related
prospectus supplement, the 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 such a holder who purchases such 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 such excess.
Effects of Defaults and Delinquencies. 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 such a security in any period
could significantly exceed the amount of cash distributed to such 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 deducted as a result of a loan default.
However, the timing and character of such losses or reductions in income are
uncertain and, accordingly, holders of securities should consult their own tax
advisors on this point.
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Interest Weighted Securities. It is not clear how income should be accrued
with respect to Regular Interest Securities or Stripped Securities (as defined
under "-- Tax Status as a Grantor Trust; General" herein) 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 ("Interest Weighted Securities"). The Issuer 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 that are
Regular Interest Securities the Internal Revenue Service could assert that
income derived from an 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 such holder for such 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. Such 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."
Variable Rate Debt Securities. 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 (i) the yield to maturity of such Debt
securities and (ii) in the case of Pay-Through Securities, the present value
of all payments remaining to be made on such Debt securities, should be
calculated as if the interest index remained at its value as of the issue date
of such 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. A purchaser of a security may be subject to the market
discount rules of Sections 1276-1278 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. Such market
discount would accrue in a manner to be provided in Treasury regulations but,
until such regulations are issued, such market discount would in general
accrue either (i) on the basis of a constant yield (in the case of a Pay-
Through Security, taking into account a prepayment assumption) or (ii) in the
ratio of (a) in the case of securities (or in the case of a Pass-Through
Security (as defined herein), as set forth below, the loans underlying such
security) not originally issued with original issue discount, 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 (or, in the
case of a Pass-Through Security, as described below, the loans underlying such
security) 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 (or, in the case of a Pass-Through Security, the loans),
the excess of interest paid or accrued to purchase or carry a security (or, in
the case of a Pass-Through Security, as described below, the underlying loans)
with market discount over interest received on such 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 (or in the case of a Pass-
Through Security, an underlying loan). 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. A holder who purchases a Debt security (other than an Interest
Weighted Security to the extent described above) 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 such security (and not as a separate deduction
item) on a constant yield method. Although no regulations addressing the
computation of premium accrual on securities similar to the 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 such Class. If a
holder makes an election to amortize premium on a Debt security, such 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 such
65
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.
The Treasury has issued regulations (the "Final Bond Premium Regulations")
dealing with amortizable bond premium. These regulations specifically do not
apply to prepayable debt instruments subject to Code Section 1272(a)(6) such
as the securities. Absent further guidance from the IRS, the trustee intends
to account for amortizable bond premium in the manner described above.
Prospective purchasers of the securities should consult their tax advisors
regarding the possible application of the Final Bond Premium Regulations.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a holder of a Debt security to elect to accrue all
interest, discount (including de minimis market or original issue discount)
and premium in income 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, a 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 such 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 Sidley Austin Brown & Wood LLP, special counsel
to the depositor, 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 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, (i) securities
held by a domestic building and loan association will constitute "a regular or
a residual interest in a REMIC" within the meaning of Code Section
7701(a)(19)(C)(xi) (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 (ii) securities held by a real estate investment trust
will constitute "real estate assets" within the meaning of Code Section
856(c)(5)(B), 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 Code Section 856(c)(3)(B) (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
(i) or (ii) above, then a security will qualify for the tax treatment
described in (i), (ii) or (iii) in the proportion that such REMIC assets are
qualifying assets.
The Small Business Job Protection Act of 1996, as part of the repeal of the
bad debt reserve method for thrift institutions, repealed the application of
Code Section 593(d) to any taxable year beginning after December 31, 1995.
REMIC Expenses; Single Class REMICs
As a general rule, 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 Regular Interest Securities and the holders of the
Residual Interest Securities (as defined herein) 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 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), such expenses will
be deductible only to the extent that such expenses, plus other "miscellaneous
itemized deductions" of the Holder, exceed 2% of such Holder's adjusted gross
income. In addition, for taxable years beginning after December 31, 1990, the
amount of itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds the applicable amount (which
amount will be adjusted for inflation for taxable years beginning after 1990)
will be reduced by the lesser of
o 3% of the excess of adjusted gross income over the applicable amount, or
o 80% of the amount of itemized deductions otherwise allowable for such
taxable year.
The reduction or disallowance of this deduction may have a significant
impact on the yield of the Regular Interest Security to such a Holder. In
general terms, a single class REMIC is one that either
66
o would qualify, under existing Treasury regulations, as a grantor trust if
it were not a REMIC (treating all interests as ownership interests, even
if they would be classified as debt for federal income tax purposes) or
o is similar to such a trust and which is structured with the principal
purpose of avoiding the single class REMIC rules.
The applicable prospectus supplement may provide for the allocation of REMIC
expenses, but if it does not, the expenses of the REMIC will be allocated to
holders of the related residual interest securities.
Taxation of the REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, 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
residual interests. As described above, the regular interests are generally
taxable as debt of the REMIC.
Calculation of REMIC Income. 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 original issue discount or market discount on loans and
other assets, and
o deductions, including stated interest and original issue discount accrued
on Regular Interest Securities, amortization of any premium with respect
to loans, and servicing fees and other expenses of the REMIC.
A holder of a 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 such expenses, when aggregated with
such holder's other miscellaneous itemized deductions for that year, do not
exceed two percent of such holder's adjusted gross income.
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.
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 original issue discount (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 such date, it is
possible that such premium may be recovered in proportion to payments of loan
principal.
Prohibited Transactions and Contributions Tax. The REMIC will be subject to
a 100% tax on any net income derived from a "prohibited transaction." For this
purpose, net income will be calculated without taking into account any losses
from prohibited transactions or any deductions attributable to any prohibited
transaction that resulted in a loss. In general, prohibited transactions
include:
o subject to limited exceptions, the sale or other disposition of any
qualified mortgage transferred to the REMIC;
o subject to a limited exception, the sale or other disposition of a cash
flow investment;
o the receipt of any income from assets not permitted to be held by the
REMIC pursuant to the Code; or
o the receipt of any fees or other compensation for services rendered by
the REMIC.
It is anticipated that a REMIC will not engage in any prohibited transactions
in which it would recognize a material amount of net income. In addition,
subject to a number of exceptions, a tax is imposed at the rate of 100% on
amounts contributed to a REMIC after the close of the three-month period
beginning on the Startup Day. The holders of Residual Interest securities will
generally be responsible for the payment of any such taxes imposed on
67
the REMIC. To the extent not paid by such holders or otherwise, however, such
taxes will be paid out of the trust fund and will be allocated pro rata to all
outstanding classes of securities of such REMIC.
Taxation of Holders of Residual Interest Securities
The holder of a security representing a residual interest (a "Residual
Interest Security") 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
such 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 such quarter, and
by allocating that amount among the holders (on such day) of the Residual
Interest Securities in proportion to their respective holdings on such day.
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 such income or loss. The
reporting of taxable income without corresponding distributions could occur,
for example, in certain REMIC issues in which 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
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 may also be greater in earlier years of certain REMIC
issues as a result of the fact that interest expense deductions, as a
percentage of outstanding principal on REMIC Regular Interest Securities, will
typically increase over time as lower yielding securities are paid, whereas
interest income with respect to loans will generally remain constant over time
as a percentage of loan principal.
In any event, because the holder of a residual interest is taxed on the net
income of the REMIC, the taxable income derived from a 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. Therefore, the after-tax
yield on the Residual Interest Security may be less than that of such a bond
or instrument.
Limitation on Losses. 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 such loss arises. A holder's basis in a
Residual Interest Security will initially equal such 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, as to which such holders
should consult their tax advisers.
Distributions. Distributions on a 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 a Residual Interest
Security. If the amount of such payment exceeds a 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 such excess.
Sale or Exchange. A holder of a Residual Interest Security will recognize
gain or loss on the sale or exchange of a Residual Interest Security equal to
the difference, if any, between the amount realized and such holder's adjusted
basis in the Residual Interest Security at the time of such sale or exchange.
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 such disposition.
Excess Inclusions. 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 such
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 Code Section 511, such holder's excess inclusion income will
be treated as unrelated business taxable income of such 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 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." The Small Business Job Protection Act of
1996 has eliminated the special rule permitting Section 593 institutions
("thrift institutions") to use net operating losses and other allowable
68
deductions to offset their excess inclusion income from REMIC residual
certificates 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 certificates 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 on excess inclusions on the alternative
minimum taxable income of a residual holder. First, alternative minimum
taxable income for such residual holder is determined without regard to the
special rule that taxable income cannot be less than excess inclusions.
Second, a residual holder's alternative minimum taxable income for a tax year
cannot be less than excess inclusions for the year. 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 REMIC taxable income for the quarterly period allocable to
a Residual Interest Security, over 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 such Residual Interest Security
at the beginning of such quarterly period. The adjusted issue price of a
Residual Interest 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), 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.
Under the REMIC Regulations, in certain circumstances, transfers of Residual
Interest Securities may be disregarded. 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." Disqualified Organizations include 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 1-1399 of the
Code, if such 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 can be imposed on the transferor of such 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 its allocable share of the excess inclusion income of the REMIC.
The Taxpayer Relief Act of 1997 adds provisions to the Code that will apply to
an "electing large partnership". If an electing large partnership holds a
Residual Interest Security, all interests in the electing large partnership
are treated as held by disqualified organizations for purposes of the tax
imposed upon a pass-through entity under section 860E(e) of the Code. An
exception to this tax, otherwise available to a pass-through entity that is
furnished certain affidavits by record holders of interests in the entity and
that does not know such affidavits are false, is not available to an electing
large partnership.
Under the REMIC Regulations, if a Residual Interest Security is a
"noneconomic residual interest," as described below, a transfer of a Residual
Interest Security to a United States 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. 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
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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.
The REMIC Regulations presume that the transferor of a REMIC residual
interest did not have impeding the assessment or collection of tax as a
significant purpose of the transfer if it: (i) conducts a reasonable
investigation of the transferee's financial condition and concludes that the
transferee has historically paid its debts as they come due and finds no
significant evidence indicating that the transferee will not continue to pay
its debts as they come due in the future, and (ii) receives a representation
from the transferee that the transferee understands the tax obligations
associated with holding a residual interest and intends to pay those taxes as
they come due.
Proposed Treasury regulations issued on February 4, 2000 (the "New Proposed
Regulations") would modify the safe harbor under which transfers of
noneconomic residual interests are treated as not disregarded for federal
income tax purposes. Under the New Proposed Regulations, a transfer of a
noneconomic residual interest will not qualify under this safe harbor unless
the present value of the anticipated tax liabilities associated with holding
the residual interest does not exceed the sum of the present value of the sum
of (i) any consideration given to the transferee to acquire the interest, (ii)
future distributions on the interest, and (iii) any anticipated tax savings
associated with holding the interest as the REMIC generates losses. For
purposes of this calculation, the present value is calculated using a discount
rate equal to applicable federal rate. The New Proposed Regulations have a
proposed effective date of February 4, 2000.
If a transfer of a Residual Interest is disregarded, the transferor would be
liable for any federal income tax imposed upon taxable income derived by the
transferee from the REMIC. The REMIC Regulations provide no guidance as to how
to determine if a significant purpose of a transfer is to impede the
assessment or collection of tax. A similar type of limitation exists with
respect to certain transfers of residual interests by foreign persons to
United States persons. See "-- Tax Treatment of Foreign Investors."
Mark to Market Rules. Prospective purchasers of a REMIC Residual Interest
Security should be aware that a REMIC Residual Interest Security acquired
after January 3, 1995 cannot be marked-to-market.
In addition, President Clinton's Fiscal Year 2001 Budget Proposal contains a
provision under which a REMIC would be secondarily liable for the tax
liability of its residual interest. The proposal states that it would be
effective for REMICs created after the date of enactment. It is unknown
whether this provision will be included in any bill introduced to Congress
this year or if introduced whether it will be enacted. Prospective investors
in REMIC residual interests should consult their tax advisors regarding the
New Proposed Regulations and the Fiscal Year 2001 Budget Proposals.
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.
Tax Status as a Grantor Trust
General. As specified in the related prospectus supplement if a REMIC or
partnership election is not made, in the opinion of Sidley Austin Brown & Wood
LLP, special counsel to the depositor, 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 I of Subchapter J of the Code and not as an
association taxable as a corporation (the securities of such series, "Pass-
Through Securities"). In some series there will be no separation of the
principal and interest payments on the loans. In such circumstances, a Holder
will be considered to have purchased a pro rata undivided interest in each of
the loans. In other cases ("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.
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 fees
to the trustee and the servicer and similar fees (collectively, the "Servicing
Fee")), at the same time and in the same manner as such 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 Servicing Fees. In
the case of Pass-Through Securities other than Stripped Securities, such
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, such 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 such Servicing Fees under Section 162 or
Section 212 of the Code
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to the extent that such Servicing Fees represent "reasonable" compensation for
the services rendered by the trustee and the servicer (or third parties that
are compensated for the performance of services). In the case of a
noncorporate holder, however, Servicing Fees (to the extent not otherwise
disallowed, e.g., because they exceed reasonable compensation) will be
deductible in computing such holder's regular tax liability only to the extent
that such fees, when added to other miscellaneous itemized deductions, exceed
2% of adjusted gross income and may not be deductible to any extent in
computing such holder's alternative minimum tax liability. In addition, for
taxable years beginning after December 31, 1990, the amount of itemized
deductions otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds the applicable amount (which amount will be
adjusted for inflation in taxable years beginning after 1990) will be reduced
by the lesser of (i) 3% of the excess of adjusted gross income over the
applicable amount or (ii) 80% of the amount of itemized deductions otherwise
allowable for such taxable year.
Discount or Premium on Pass-Through Securities. 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, generally, 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 a 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
certificate, rather than with respect to the security. 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.
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 such 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 such principal
payment is made. Such 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. Certain Stripped Securities ("Ratio Strip
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 original issue discount,
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 such stripped interest.
Servicing fees in excess of reasonable servicing fees ("excess servicing")
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 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.
71
The Code. OID Regulations and judicial decisions provide no direct guidance
as to how the interest and original issue discount rules are to apply to
Stripped Securities and other Pass-Through Securities. Under the method
described above for Pay-Through Securities (the "Cash Flow Bond Method"), a
prepayment assumption is used and periodic recalculations are made which 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 the Stripped
Securities which technically represent ownership interests in the underlying
loans, rather than being debt instruments "secured by" those loans. For tax
years beginning after August 5, 1997 the Taxpayer Relief Act of 1997 may allow
use of the Cash Flow Bond Method with respect to Stripped Securities and other
Pass-Through Securities because it provides that such method applies to any
pool of debt instruments the yield on which may be affected by prepayments.
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; provided that the applicable prospectus
supplement may provide for the reporting of OID on an alternative basis. 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 original issue discount must be calculated separately for each loan
underlying a security.
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 a
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 a Holder's recognition of income.
In the case of a Stripped Security that is an Interest Weighted Security,
the trustee intends, absent contrary authority, to report income to security
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 Contingent 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 "real estate assets" within the meaning of Section
856(c)(5)(B) of the Code and "loans secured by an interest in real property"
within the meaning of Section 7701(a)(19)(C)(v) of the Code; and interest
income attributable to the 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 trust funds as to which a
partnership election is made, a Holder's tax basis in its security is the
price such holder pays for a security, plus amounts of original issue 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. In the case of a security held by a bank, thrift,
or similar institution described in Section 582 of the Code, however, gain or
loss realized on the sale or exchange of a Regular Interest Security will be
taxable as ordinary income or loss. In addition, gain from the disposition of
a Regular Interest Security that might otherwise be capital gain will be
treated as ordinary income to the extent of the excess, if any, of (i) the
amount that would have been includible in the holder's income if the
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yield on such Regular Interest security had equaled 110% of the applicable
federal rate as of the beginning of such holder's holding period, over the
amount of ordinary income actually recognized by the holder with respect to
such Regular Interest security. In general, the maximum tax rate on ordinary
income for individual taxpayers is 39.6% and the maximum tax rate on long-term
capital gains for such taxpayers is 20%. The maximum tax rate on both ordinary
income and long-term capital gains of corporate taxpayers is 35%.
Miscellaneous Tax Aspects
Backup Withholding. Subject to the discussion below with respect to trust
funds as to which a partnership election is made, a Holder, other than a
holder of a REMIC Residual security, may, under certain circumstances, be
subject to "backup withholding" at a rate of 31% 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 trustee with its taxpayer identification number
("TIN");
o furnishes the 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 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 Nonresidents (as defined below). Holders
should consult their tax advisers as to their qualification for exemption from
backup withholding and the procedure for obtaining the exemption.
The 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.
Tax Treatment of Foreign Investors
Subject to the discussion below with respect to trust funds 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 ("Nonresidents"), such interest will normally qualify as portfolio
interest (except where the recipient is a holder, directly or by attribution,
of 10% or more of the capital or profits interest in the issuer, or the
recipient is a controlled foreign corporation to which the issuer is a related
person) and will be exempt from federal income tax. Upon receipt of
appropriate ownership statements, the issuer normally will be relieved of
obligations to withhold tax from such interest payments. 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
Nonresidents. 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. They will, however, generally be subject to the
regular United States income tax.
Payments to holders of 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, a 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 which
would require such amounts to be taken into account at an earlier time in
order to prevent the avoidance of tax. Such 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 will be disregarded
for all federal tax purposes. A Residual Interest Security has tax avoidance
potential unless, at the time of the
73
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
transfers a Residual Interest Security to a United States 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."
Tax Characterization of the Trust Fund as a Partnership
Sidley Austin Brown & Wood LLP, special counsel to the depositor, will
deliver its opinion that a trust fund for which a partnership election is made
will not be an association (or publicly traded partnership) taxable as a
corporation for federal income tax purposes. This opinion will be based on the
assumption that the terms of the 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 securities 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, 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 certificateholders 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. Special counsel to the depositor will, except
as otherwise provided in the related prospectus supplement, advise the
depositor 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 such 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, the notes will not be considered issued
with OID. The stated interest thereon will be taxable to a noteholder as
ordinary interest income when received or accrued in accordance with such
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 such 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.
A holder of a note that has a fixed maturity date of not more than one year
from the issue date of such note (a "Short-Term Note") 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.
74
Sale or Other Disposition. 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 such 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 such noteholder with respect to such 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. Interest payments made (or accrued) to a noteholder who is
a nonresident alien, foreign corporation or other non-United States person (a
"foreign 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 owner trustee or other person who is otherwise required to
withhold U.S. tax with respect to the notes (the "Withholding Agent")
with an appropriate statement, signed under penalties of perjury,
certifying that the beneficial owner who is an individual or corporation
for federal income tax purposes of the note is a foreign person and
providing the foreign person's name and address.
Generally, this statement is made on an IRS Form W-8BEN ("W-8BEN"), which is
effective for the remainder of the year of signature plus three full calendar
years unless a change in circumstances makes any information on the form
incorrect. Notwithstanding the preceding sentence, a W-8BEN with a U.S.
taxpayer identification number will remain effective until a change in
circumstances makes any information on the form incorrect, provided that the
Withholding Agent reports at least annually to the beneficial owner on IRS
Form 1042-S. The beneficial owner must inform the Withholding Agent within 30
days of such change and furnish a new W-8BEN. A noteholder who is not an
individual or corporation (or an entity treated as a corporation for federal
income tax purposes) holding the Notes on its own behalf may nave
substantially increased reporting requirements. In particular, in the case of
notes held by a foreign partnership (or foreign trust), the partners (or
beneficiaries) rather than the partnership (or trust) will be required to
provide the certification discussed above, and the partnership (or trust) will
be required to provide certain additional information.
If a note is held through a securities clearing organization or certain
other financial institutions, the organization or institution may provide the
relevant signed statement to the withholding agent; in that case, however, the
signed statement must be accompanied by a Form W-8BEN or substitute form
provided by the foreign person that owns the note. If such interest is not
portfolio interest, then it will be subject to United States federal income
and withholding tax at a rate of 30 percent, 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 such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and 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 on 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 special counsel to the Company, 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 special counsel to the
depositor, the trust fund might be treated as a publicly traded
75
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) would 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 master
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.
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
are Indexed securities or 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. As a partnership, the trust fund will not be subject
to federal income tax. Rather, each certificateholder will be required to
separately take into account such 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.
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 (i) the interest that accrues on
the certificates in accordance with their terms for such month, including
interest accruing at the Pass-Through Rate for such month and interest on
amounts previously due on the certificates but not yet distributed; (ii) 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; (iii) prepayment premium payable to the certificateholders for
such month; and (iv) any other amounts of income payable to the
certificateholders for such month. Such 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 Company.
Based on the economic arrangement of the parties, 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, 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 such 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 such 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.
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) will constitute "unrelated
business taxable income" generally taxable to such a holder under the Code.
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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 such 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, 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 such discount in income currently as it
accrues over the life of the loans or to offset any such premium against
interest income on the loans. As indicated above, a portion of such market
discount income or premium deduction may be allocated to certificateholders.
Section 708 Termination. Pursuant to final regulations issued on May 9,
1997 under Code Section 708, a sale or exchange of 50% or more of the capital
and profits in a partnership would cause a deemed contribution of assets of
the partnership (the "old partnership") to a new partnership (the "new
partnership") in exchange for interests in the new partnership. Such interests
would be deemed distributed to the partners of the old partnership in
liquidation thereof, which would not constitute a sale or exchange.
Accordingly under these new regulations, if the trust fund were characterized
as a partnership and a sale of certificates terminated the partnership under
Code Section 708, the purchaser's basis in its ownership interest would not
change.
Disposition of Certificates. Generally, 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 such 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 such certificates, and, upon sale or
other disposition of some of the certificates, allocate a portion of such
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).
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, such 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
77
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 owner trustee is required to keep or have kept
complete and accurate books of the trust fund. Such 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 (i)
the name, address and taxpayer identification number of the nominee and (ii)
as to each beneficial owner (x) the name, address and identification number of
such person, (y) whether such person is a United States person, a tax-exempt
entity or a foreign government, an international organization, or any wholly
owned agency or instrumentality of either of the foregoing, and (z) certain
information on certificates that were held, bought or sold on behalf of such
person throughout the year. 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, as amended 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, as calculated for this purpose which may exceed the
distributions to certificateholders, 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, IRS Form W-9 or the holder's
certification of nonforeign status signed under penalties of perjury. A holder
who is not an individual or corporation (or an entity treated as a corporation
for federal income tax purposes) holding the Notes on its own behalf may have
substantially increased reporting requirements. In particular, if the holder
is a foreign partnership (or foreign trust), the partners (or beneficiaries)
rather than the partnership (or trust) will be required to provide the
certification discussed above, and the partnership (or trust) will be required
to provide certain additional information.
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-8 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
78
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 percent, 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.
Backup Withholding. Distributions made on the certificates and proceeds
from the sale of the certificates will be subject to a "backup" withholding
tax 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 consequences described in "Federal
Income Tax Consequences," potential investors should consider the state and
local income tax consequences of the acquisition, ownership, and disposition
of the securities. State and local income tax law may differ substantially
from the corresponding federal law, and this discussion does not purport to
describe any aspect of the income tax laws of any state or locality.
Therefore, potential investors should consult their own tax advisors with
respect to the various state and local tax consequences of an investment in
the securities.
ERISA Considerations
The following describes certain considerations under ERISA and the Code,
which apply only to securities of a series that is 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 such securities.
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 and Keogh plans as well as
collective investment funds and separate accounts in which such plans,
accounts or arrangements are invested) (collectively, "Plans") subject to
ERISA or to Section 4975 of the Code and on persons who are fiduciaries with
respect to such 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. 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
ERISA Section 3(32)) and, if no election has been made under Section 410(d) of
the Code, church plans (as defined in ERISA Section 3(33)), are not subject to
requirements imposed by ERISA and Section 4975 of the Code. Accordingly,
assets of such plans may be invested in securities without regard to the
considerations described above and below, subject to the provisions of
applicable state law. Any such plan which is qualified and exempt from
taxation under Code Sections 401(a) and 501(a), however, is subject to the
prohibited transaction rules set forth in Code Section 503.
On November 13, 1986, the United States Department of Labor (the "DOL")
issued final regulations concerning the definition of what constitutes the
assets of a Plan. (Labor Reg. Section 2510.3-101). Under this regulation, the
underlying assets and properties of corporations, partnerships 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. However, the regulation generally provides that, in addition to
certain other technical exceptions, the assets of a corporation or partnership
in which a Plan invests will not be deemed for purposes of ERISA to be assets
of such Plan if the equity interest acquired by the investing Plan is a
publicly-offered security. A publicly-offered security, as defined in the
Labor Reg. Section 2510.3-101, is a security that is widely held, freely
transferable and registered under the Securities Exchange Act of 1934, as
amended.
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 ("Parties in
Interest") having certain specified relationships to a Plan and impose
additional prohibitions where Parties in Interest are fiduciaries with respect
to such Plan. Because the loans may be deemed Plan assets of each Plan that
purchases equity securities, an investment in equity securities by a Plan
might be a prohibited transaction under
79
ERISA Sections 406 and 407 and subject to an excise tax under Code Section
4975 unless a statutory, regulatory or administrative exemption applies.
Depending on the relevant facts and circumstances, certain prohibited
transaction exemptions may apply to the purchase or holding of the securities
- -- for example, Prohibited Transaction Class Exemption ("PTCE") 96-23, which
exempts certain transactions effected on behalf of a Plan by an "in-house
asset manager"; PTCE 95-60, which exempts certain transactions by insurance
company general accounts; PTCE 91-38, which exempts certain transactions by
bank collective investment funds; PTCE 90-1, which exempts certain
transactions by insurance company pooled separate accounts; or PTCE 84-14,
which exempts certain transactions effected on behalf of a Plan by a
"qualified professional asset manager". There can be no assurance that any of
these exemptions will apply with respect to any Plan's investment in
securities, or that such an exemption, if it did apply, would apply to all
prohibited transactions that may occur in connection with such investment.
Furthermore, these exemptions would not apply to transactions involved in
operation of the trust if, as described above, the assets of the trust were
considered to include Plan assets.
In Prohibited Transaction Exemption 83-1 ("PTE 83-1"), the DOL exempted from
ERISA's prohibited transaction rules certain transactions relating to the
operation of residential mortgage pool investment trusts and the purchase,
sale and holding of "mortgage pool pass-through certificates" in the initial
issuance of such certificates. PTE 83-1 permits, subject to certain
conditions, transactions which might otherwise be prohibited between Plans and
Parties in Interest with respect to those Plans related to the origination,
maintenance and termination of mortgage pools consisting of mortgage loans
secured by first or second mortgages or deeds of trust on single-family
residential property, and the acquisition and holding of certain mortgage pool
pass-through certificates representing an interest in such mortgage pools by
Plans. If the general conditions (discussed below) of PTE 83-1 are satisfied,
investments by a Plan in securities that represent interests in a pool
consisting of loans ("Single Family Securities") will be exempt from the
prohibitions of ERISA Sections 406(a) and 407 (relating generally to
transactions with Parties in Interest who are not fiduciaries) if the Plan
purchases the Single Family Securities at no more than fair market value and
will be exempt from the prohibitions of ERISA Sections 406(b)(1) and (2)
(relating generally to transactions with fiduciaries) if, in addition, the
purchase is approved by an independent fiduciary, no sales commission is paid
to the pool sponsor, the Plan does not purchase more than 25% of all Single
Family Securities, and at least 50% of all Single Family Securities are
purchased by persons independent of the pool sponsor or pool trustee. PTE 83-1
does not provide an exemption for transactions involving Subordinate
Securities. Accordingly, unless otherwise provided in the related prospectus
supplement, no transfer of a Subordinate Security or a security which is not a
Single Family Security may be made to a Plan.
The discussion in this and the next succeeding paragraph applies only to
Single Family Securities. The depositor believes that, for purposes of PTE 83-
1, the term "mortgage pass-through certificate" would include: (i) securities
issued in a series consisting of only a single class of securities; and (ii)
senior securities issued in a series in which there is only one class of
senior securities; provided that the securities in the case of clause (i), or
the senior securities in the case of clause (ii), evidence the beneficial
ownership of both a specified percentage (greater than 0%) of future interest
payments and a specified percentage (greater than 0%) of future principal
payments on the loans. It is not clear whether a class of securities that
evidences beneficial ownership of a specified percentage of interest payments
only or principal payments only, or a notional amount of either principal or
interest payments would be a "mortgage pass-through certificate" for purposes
of PTE 83-1.
o PTE 83-1 sets forth three general conditions which must be satisfied for
any transaction to be eligible for exemption the maintenance of a system
of insurance or other protection for the pooled mortgage loans and
property securing such loans, and for indemnifying securityholders
against reductions in pass-through payments due to property damage or
defaults in loan payments in an amount not less than the greater of one
percent of the aggregate principal balance of all covered pooled mortgage
loans or the principal balance of the largest covered pooled mortgage
loan;
o the existence of a pool trustee who is not an affiliate of the pool
sponsor; and
o a limitation on the amount of the payment retained by the pool sponsor,
together with other funds inuring to its benefit, to not more than
adequate consideration for selling the mortgage loans plus reasonable
compensation for services provided by the pool sponsor to the pool.
The depositor believes that the first general condition referred to above will
be satisfied with respect to the securities in a series issued without a
subordination feature, or the senior securities only in a series issued with a
subordination feature, provided that the subordination and Reserve Account,
subordination by shifting of interests, pool insurance or other form of credit
enhancement described under "Credit Enhancement" herein (such subordination,
pool insurance or other form of credit enhancement being the system of
insurance or other protection referred to above) with respect to a series of
securities is maintained in an amount not less than the greater of one percent
of the aggregate principal balance of the loans or the principal balance of
the largest loan. See "Description
80
of the Securities" herein. In the absence of a ruling that the system of
insurance or other protection with respect to a series of securities satisfies
the first general condition referred to above, there can be no assurance that
these features will be so viewed by the DOL. In any event, the trustee will
not be affiliated with the depositor.
Each Plan fiduciary who is responsible for making the investment decisions
whether to purchase or commit to purchase and to hold Single Family Securities
must make its own determination as to whether the first and third general
conditions, and the specific conditions described briefly in the preceding
paragraph, of PTE 83-1 have been satisfied, or as to the availability of any
other prohibited transaction exemptions.
The DOL has granted to certain underwriters individual administrative
exemptions (the "Underwriter Exemptions") from certain of the prohibited
transaction rules of ERISA and the related excise tax provisions of Section
4975 of the Code with respect to the initial purchase, the holding and the
subsequent resale by Plans of securities, including certificates, issued by
entities that hold investment pools consisting of certain receivables, loans
and other obligations and the servicing, operation and management of such
investment pools, provided the conditions and requirements of the Underwriter
Exemptions are met.
While each Underwriter Exemption is an individual exemption separately
granted to a specific underwriter, the terms and conditions which generally
apply to the Underwriter Exemptions are substantially identical, and include
the following:
(1) the acquisition of the securities by a Plan is on terms (including
the price for the securities) that are at least as favorable to the Plan as
they would be in an arm's-length transaction with an unrelated party;
(2) the rights and interests evidenced by the securities acquired by the
Plan are not subordinated to the rights and interests evidenced by other
securities of the issuer, unless the entity holds only certain types of
assets, such as mortgages on real property (a "Designated Transaction");
(3) the securities acquired by the Plan have received a rating at the
time of such acquisition that is one of the three highest generic rating
categories (four, in a Designated Transaction) from Standard & Poor's
Ratings Group, a Division of The McGraw-Hill Companies ("S&P"), Moody's
Investors Service, Inc. ("Moody's"), or Fitch, Inc. ("Fitch") (each, a
"Rating Agency");
(4) the trustee must not be an affiliate of any other member of the
Restricted Group as defined below;
(5) the sum of all payments made to and retained by the underwriters in
connection with the distribution of the securities represents not more than
reasonable compensation for underwriting the securities; the sum of all
payments made to and retained by the seller pursuant to the assignment of
the loans to the issuer represents not more than the fair market value of
such loans; the sum of all payments made to and retained by the servicer and
any sub-servicer represents not more than reasonable compensation for such
person's services under the agreement pursuant to which the loans are pooled
and reimbursements of such person's reasonable expenses in connection
therewith;
(6) 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 as amended; and
(7) for certain types of issuers, the documents establishing the issuer
and governing the transaction must contain certain provisions intended to
protect the assets of the issuer from creditors of the sponsor.
The issuer must also meet the following requirements:
(i) the corpus of the issuer must consist solely of assets of the type
that have been included in other investment pools;
(ii) securities in such other investment pools must have been rated in
one of the three highest rating categories (four, in a Designated
Transaction) of S&P, Moody's, or Fitch for at least one year prior to the
Plan's acquisition of securities; and
(iii) securities evidencing interests in such other investment pools must
have been purchased by investors other than Plans for at least one year
prior to any Plan's acquisition of securities.
Moreover, the Underwriter Exemptions generally provide relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when
a Plan fiduciary causes a Plan to acquire securities of an issuer holding
receivables as to which the fiduciary (or its affiliate) is an obligor,
provided that, among other requirements:
o in the case of an acquisition in connection with the initial issuance of
certificates, at least fifty percent (50%) of each class of certificates
in which Plans have invested, and at least fifty percent (50%) of
aggregate interests in the issuer are acquired by persons independent of
the Restricted Group;
o such fiduciary (or its affiliate) is an obligor with respect to not more
than five percent (5%) of the fair market value of the obligations
contained in the investment pool;
81
o the Plan's investment in securities of any class does not exceed twenty-
five percent (25%) of all of the securities of that class outstanding at
the time of the acquisition; and
o immediately after the acquisition, no more than twenty-five percent (25%)
of the assets of any Plan with respect to which such person is a
fiduciary is invested in securities representing an interest in one or
more issuers containing assets sold or serviced by the same entity.
The Underwriter Exemptions generally do not apply to Plans sponsored by the
seller, the related Underwriter, the trustee, the master servicer, any insurer
with respect to the loans, any counterparty to a swap contained in the trust,
any obligor with respect to loans included in the investment pool constituting
more than five percent (5%) of the aggregate unamortized principal balance of
the assets in the trust fund, or any affiliate of such parties (the
"Restricted Group").
The Underwriter Exemptions provide exemptive relief to certain mortgage-
backed and asset-backed securities transactions using pre-funding accounts.
Mortgage loans or other secured receivables (the "Obligations") supporting
payments to securityholders, and having a value equal to no more than twenty-
five percent (25%) of the total principal amount of the securities being
offered by the issuer, may be transferred to the issuer within a 90-day or
three-month period following the closing date (the "Pre-Funding Period"),
instead 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:
(1) The ratio of the amount allocated to the pre-funding account to the
total principal amount of the securities being offered (the "Pre-Funding
Limit") must not exceed twenty-five percent (25%).
(2) All obligations transferred after the closing date (the "additional
obligations") must meet the same terms and conditions for eligibility as the
original obligations used to create the issuer, which terms and conditions
have been approved by a Rating Agency.
(3) The transfer of such additional obligations to the issuer during the
Pre-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 Pre-Funding Period than the rating that was obtained
at the time of the initial issuance of the securities by the issuer.
(4) 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 Pre-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.
(5) In order to insure that the characteristics of the additional
obligations are substantially similar to the original obligations which were
transferred to the issuer:
(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 such letter, the independent accountant must use the same type
of procedures as were applicable to the Obligations transferred to the
issuer as of the closing date.
(6) The Pre-Funding Period 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.
(7) 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 ("permitted investments").
(8) 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 Pre-Funding Period;
(iii) the percentage and/or dollar amount of the Pre-Funding Limit for
the issuer; and
(iv) that the amounts remaining in the pre-funding account at the end
of the Pre-Funding Period will be remitted to securityholders as
repayments of principal.
(9) The related 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.
82
The rating of a security may change. If the rating of a security declines
below the lowest permitted level, the security will no longer be eligible for
relief under the Underwriter Exemption, and consequently may not be purchased
by or sold to a Plan (although a Plan that had purchased the security when it
had a permitted rating would not be required by the Underwriter Exemption to
dispose of it.)
The prospectus supplement for each series of securities will indicate the
classes of securities, if any, offered thereby as to which it is expected that
an Underwriter Exemption will apply.
Any Plan fiduciary which proposes to cause a Plan to purchase securities
should consult with its counsel concerning the impact of ERISA and the Code,
the applicability of PTE 83-1 and the Underwriter Exemptions, and the
potential consequences in their specific circumstances, prior to making such
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.
Legal Investment
The prospectus supplement for each series of securities will specify which,
if any, of the classes of securities offered thereby constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA"). Classes of securities that qualify as "mortgage related
securities" will be legal investments for persons, trusts, corporations,
partnerships, associations, business trusts, and business entities (including
depository institutions, life insurance companies and pension funds) created
pursuant to or existing under the laws of the United States or of any state
(including the District of Columbia and Puerto Rico) whose authorized
investments are subject to state regulations to the same extent as, under
applicable law, obligations issued by or guaranteed as to principal and
interest by the United States or any such entities. Under SMMEA, if a state
enacts legislation prior to October 4, 1991 specifically limiting the legal
investment authority of any such entities with respect to "mortgage related
securities", securities will constitute legal investments for entities subject
to such legislation only to the extent provided therein. Approximately twenty-
one states adopted such legislation prior to the October 4, 1991 deadline.
SMMEA provides, however, that in no event will the enactment of any such
legislation affect the validity of any contractual commitment to purchase,
hold or invest in securities, or require the sale or other disposition of
securities, so long as such contractual commitment was made or such securities
were acquired prior to the enactment of such legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in securities
without limitations as to the percentage of their assets represented thereby,
federal credit unions may invest in mortgage related securities, and national
banks may purchase securities for their own account without regard to the
limitations generally applicable to investment securities set forth in 12
U.S.C. 24 (Seventh), subject in each case to such regulations as the
applicable federal authority may prescribe. In this connection, federal credit
unions should review the National Credit Union Administration ("NCUA") Letter
to Credit Unions No. 96, as modified by Letter to Credit Unions No. 108, which
includes guidelines to assist federal credit unions in making investment
decisions for mortgage related securities and the NCUA's regulation
"Investment and Deposit Activities" (12 C.F.R. Part 703), which sets forth
certain restrictions on investment by federal credit unions in mortgage
related securities (in each case whether or not the class of securities under
consideration for purchase constituted a "mortgage related security"). The
NCUA issued final regulations effective December 2, 1991 that restrict and in
some instances prohibit the investment by Federal Credit Unions in certain
types of mortgage related securities.
All depository institutions considering an investment in the securities
(whether or not the class of securities under consideration for purchase
constitutes a "mortgage related security") should review the Federal Financial
Institutions Examination Council's Supervisory Policy Statement on the
Securities Activities (to the extent adopted by their respective regulators)
(the "Policy Statement") setting forth, in relevant part, certain securities
trading and sales practices deemed unsuitable for an institution's investment
portfolio, and guidelines for (and restrictions on) investing in mortgage
derivative products, including "mortgage related securities", which are "high-
risk mortgage securities" as defined in the Policy Statement. According to the
Policy Statement, such "high-risk mortgage securities" include securities such
as securities not entitled to distributions allocated to principal or
interest, or Subordinated Securities. Under the Policy Statement, it is the
responsibility of each depository institution to determine, prior to purchase
(and at stated intervals thereafter), whether a particular mortgage derivative
product is a "high-risk mortgage security", and whether the purchase (or
retention) of such a product would be consistent with the Policy Statement.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders guidelines or agreements generally
governing investments made by a particular investor, including, but not
limited to "prudent
83
investor" provisions, percentage-of-assets limits and provisions which may
restrict or prohibit investment in securities which are not "interest bearing"
or "income paying," or in securities which are issued in book-entry form.
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase securities or to
purchase securities representing more than a specified percentage of the
investor's assets. Investors should consult their own legal advisors in
determining whether and to what extent the securities constitute legal
investments for such investors.
Method of Distribution
Securities are being offered hereby in series from time to time (each series
evidencing or relating to a separate trust fund) through any of the following
methods:
o by negotiated firm commitment underwriting and public reoffering by
underwriters;
o by agency placements through one or more placement agents primarily with
institutional investors and dealers; and
o by placement directly by the depositor with institutional investors.
A prospectus supplement will be prepared for each series which will describe
the method of offering being used for that series and will set forth the
identity of any underwriters thereof and either the price at which such series
is being offered, the nature and amount of any underwriting discounts or
additional compensation to such underwriters and the proceeds of the offering
to the depositor, or the method by which the price at which the underwriters
will sell the securities will be determined. Each prospectus supplement for an
underwritten offering will also contain information regarding the nature of
the underwriters' obligations, any material relationship between the depositor
and any underwriter and, where appropriate, information regarding any
discounts or concessions to be allowed or reallowed to dealers or others and
any arrangements to stabilize the market for the securities so offered. In
firm commitment underwritten offerings, the underwriters will be obligated to
purchase all of the securities of such series if any such securities are
purchased. Securities may be acquired by the underwriters for their own
accounts and may be resold from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
varying prices determined at the time of sale.
This prospectus, together with the related prospectus supplement, may be
used by Countrywide Securities Corporation, an affiliate of CWABS, Inc. and
Countrywide Home Loans, Inc., in connection with offers and sales related to
market making transactions in the securities in which Countrywide Securities
Corporation acts as principal. Countrywide Securities Corporation may also act
as agent in such transactions. Sales in such transactions will be made at
prices related to prevailing prices at the time of sale.
Underwriters and agents may be entitled under agreements entered into with
the depositor to indemnification by the depositor against certain civil
liabilities, including liabilities under the Securities Act of 1933, as
amended, or to contribution with respect to payments which such underwriters
or agents may be required to make in respect thereof.
If a series is offered other than through underwriters, the prospectus
supplement relating thereto will contain information regarding the nature of
such offering and any agreements to be entered into between the depositor and
purchasers of securities of such series.
Legal Matters
The validity of the securities of each series, including certain federal
income tax consequences with respect thereto, will be passed upon for the
depositor by Sidley Austin Brown & Wood LLP, 875 Third Avenue, New York, New
York 10022.
Financial Information
A new trust fund will be formed with respect to each series of securities
and no trust fund will engage in any business activities or have any assets or
obligations prior to the issuance of the related series of securities.
Accordingly, no financial statements with respect to any trust fund will be
included in this prospectus or in the related prospectus supplement.
84
Rating
It is a condition to the issuance of the securities of each series offered
hereby and by the 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 (each, a "Rating Agency") specified in the related
prospectus supplement.
Any such rating would be based on, among other things, the adequacy of the
value of the Trust Fund Assets and any credit enhancement with respect to such
class and will reflect such Rating Agency's assessment solely of the
likelihood that holders of a class of securities of such class will receive
payments to which such securityholders are entitled under the related
Agreement. Such rating will not constitute an assessment of the likelihood
that principal prepayments on the related loans will be made, the degree to
which the rate of such prepayments might differ from that originally
anticipated or the likelihood of early optional termination of the series of
securities. Such 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. Each security rating should be
evaluated independently of any other security rating. Such 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 such rating will remain in effect for
any given period of time or that it may not be lowered or withdrawn entirely
by the Rating Agency in the future if in its judgment circumstances in the
future so warrant. In addition to being lowered or withdrawn due to any
erosion in the adequacy of the value of the Trust Fund Assets or any credit
enhancement with respect to a series, such rating might also be lowered or
withdrawn among other reasons, because of an adverse change in the financial
or other condition of a credit enhancement provider or a change in the rating
of such credit enhancement provider's long term debt.
The amount, type and nature of credit enhancement, if any, established with
respect to a series of securities will be determined on the basis of criteria
established by each Rating Agency rating classes of such series. Such 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 such class. 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 accurately predicts 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 the residential real
estate markets should experience an overall decline in property values such
that the outstanding 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 the Properties, the rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced
in the mortgage lending industry. In addition, adverse economic conditions
(which may or may not affect real property values) may affect the timely
payment by mortgagors of scheduled payments of principal and interest on the
loans and, accordingly, the rates of delinquencies, foreclosures and losses
with respect to any trust fund. To the extent that such losses are not covered
by credit enhancement, such losses will be borne, at least in part, by the
holders of one or more classes of the securities of the related series.
85
Index to Defined Terms
Term Page
- ---- ----
Accretion Directed ................................................. 25
Accrual ............................................................ 27
Agreements ......................................................... 39
APR ................................................................ 16
Asset Conservation Act ............................................. 54
Available Funds .................................................... 22
Belgian Cooperative ................................................ 31
BIF ................................................................ 40
Capitalized Interest Account ....................................... 42
Cash Flow Bond Method .............................................. 72
CERCLA ............................................................. 53
Claimable Amount ................................................... 61
Class Security Balance ............................................. 23
Clearstream, Luxembourg Participants ............................... 31
Code ............................................................... 22
COFI securities .................................................... 29
Collateral Value ................................................... 16
Combined Loan-to-Value Ratio ....................................... 16
Component Securities ............................................... 25
Contingent Regulations ............................................. 64
cooperative loans .................................................. 14
cooperatives ....................................................... 14
Cut-off Date Principal Balance ..................................... 21
Debt securities .................................................... 62
Definitive Security ................................................ 30
Detailed Description ............................................... 14
DOL ................................................................ 79
DTC ................................................................ 30
Eleventh District .................................................. 28
ERISA .............................................................. 22
Euroclear Operator ................................................. 31
Euroclear Participants ............................................. 31
European Depositaries .............................................. 30
FHA ................................................................ 14
FHLBSF ............................................................. 28
Final Bond Premium Regulations ..................................... 66
Financial Intermediary ............................................. 30
Fitch .............................................................. 81
Fixed Rate ......................................................... 26
Floating Rate ...................................................... 26
foreign person ..................................................... 75
Funding Period ..................................................... 42
Garn-St Germain Act ................................................ 55
Indenture .......................................................... 20
Insurance Proceeds ................................................. 41
Insured Expenses ................................................... 41
Term Page
- ---- ----
Interest Only ...................................................... 26
Interest Weighted Securities ....................................... 65
Inverse Floating Rate .............................................. 26
IRS ................................................................ 64
L/C Bank ........................................................... 33
L/C Percentage ..................................................... 33
Liquidation Expenses ............................................... 7
Liquidation Proceeds ............................................... 41
Loan Rate .......................................................... 14
Loan-to-Value Ratio ................................................ 16
Master Servicing Agreement ......................................... 13
Master Servicing Fee ............................................... 46
Moody's ............................................................ 35
Morgan ............................................................. 31
Mortgage ........................................................... 39
National Cost of Funds Index ....................................... 29
NCUA ............................................................... 83
New Proposed Regulations ........................................... 70
Nonresidents ....................................................... 73
Notional Amount Securities ......................................... 25
Obligations ........................................................ 82
OID ................................................................ 62
OID Regulations .................................................... 62
OTS ................................................................ 29
PACs ............................................................... 26
Partial Accrual .................................................... 27
Parties in Interest ................................................ 79
Pass-Through Securities ............................................ 70
Pay-Through Security ............................................... 64
Permitted Investments .............................................. 34
Planned Principal Class ............................................ 26
Plans .............................................................. 79
Policy Statement ................................................... 83
Pool Insurance Policy .............................................. 36
Pool Insurer ....................................................... 36
Pooling and Servicing Agreement .................................... 20
Pre-Funded Amount .................................................. 42
Pre-Funding Account ................................................ 42
Pre-Funding Limit .................................................. 82
Pre-Funding Period ................................................. 82
Prepayment Assumption .............................................. 64
Primary Mortgage Insurance Policy .................................. 15
Prime Rate ......................................................... 30
Principal Only ..................................................... 27
Principal Prepayments .............................................. 23
Properties ......................................................... 15
86
Term Page
- ---- ----
Property Improvement Loans ......................................... 59
Purchase Price ..................................................... 20
Rating Agency ...................................................... 81
Ratio Strip Securities ............................................. 71
RCRA ............................................................... 54
Record Date ........................................................ 21
Refinance Loan ..................................................... 16
Regular Interest Securities ........................................ 62
Relevant Depositary ................................................ 30
Relief Act ......................................................... 58
REMIC .............................................................. 62
Residual Interest Security ......................................... 68
Restricted Group ................................................... 82
Retained Interest .................................................. 21
Rules .............................................................. 30
S&P ................................................................ 81
SAIF ............................................................... 41
Scheduled Principal Class .......................................... 26
SEC ................................................................ 34
Security Account ................................................... 40
Security Owners .................................................... 30
Security Register .................................................. 21
Sellers ............................................................ 13
Senior Securities .................................................. 33
Term Page
- ---- ----
Sequential Pay ..................................................... 26
Servicing Fee ...................................................... 70
Short-Term Note .................................................... 74
Single Family Properties ........................................... 15
Single Family Securities ........................................... 80
SMMEA .............................................................. 83
Strip .............................................................. 26
Stripped Securities ................................................ 70
Subsequent Loans ................................................... 42
Support Class ...................................................... 26
TACs ............................................................... 26
Targeted Principal Class ........................................... 26
Terms and Conditions ............................................... 32
TIN ................................................................ 73
Title I Loans ...................................................... 59
Title I Program .................................................... 59
Title V ............................................................ 56
Trust Agreement .................................................... 13
Trust Fund Assets .................................................. 13
UCC ................................................................ 53
Underwriter Exemptions ............................................. 81
VA ................................................................. 14
VA Guaranty ........................................................ 45
Variable Rate ...................................................... 26
87
$630,000,000
(Approximate)
Asset-Backed Certificates, Series 2002-S1
CWABS, INC.
Depositor
[Countrywide(R) Home Loans Logo]
Seller
Countrywide Home Loans Servicing LP
Master Servicer
PROSPECTUS SUPPLEMENT
Countrywide Securities Corporation
Credit Suisse First Boston
Deutsche Bank Securities
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 2002-S1 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 2002-S1 Asset-Backed Certificates and with respect
to their unsold allotments or subscriptions. In addition, all dealers selling
the Series 2002-S1 Asset-Backed Certificates will be required to deliver a
prospectus supplement and prospectus until 90 days after the date of the
prospectus supplement.
April 26, 2002