PROSPECTUS SUPPLEMENT
(To Prospectus dated May 13, 2002)
$304,695,000
(Approximate)
ABFC Asset-Backed Certificates, Series 2002-SB1
BANC OF AMERICA MORTGAGE CAPITAL CORPORATION
Seller
LITTON LOAN SERVICING LP
Servicer
ASSET BACKED FUNDING CORPORATION
Depositor
---------------------
Initial Certificate Pass-Through
Class Balance(1) Rate
- ----- ---------- ----
AI-1........................ $ 63,045,000 3.538%(2)
AI-2........................ $ 9,384,000 4.300%(2)
AI-3........................ $ 23,262,000 4.955%(2)
AI-4........................ $ 15,330,000 6.471%(2)
AII-1....................... $147,891,000 One-Month LIBOR plus 0.43%(3)
A-IO........................ (4) (5)
M-1......................... $ 21,313,000 6.438%(6)
M-2......................... $ 14,208,000 7.076%(6)
M-3......................... $ 10,262,000 7.765%(6)
- --------------------
(1) Plus or minus 5%.
(2) The Class AI-1, Class AI-2, Class AI-3 and Class AI-4 Certificates will
be subject to a fixed-rate net funds cap and the Class AI-4
Certificates' pass-through rate will increase by 0.50% following the
optional termination date.
(3) The Class AII-1 Certificates will be subject to a maximum rate cap and
an adjustable-rate net funds cap and the margin will double following
the optional termination date.
(4) The notional amount for any distribution date will be equal to the
lesser of (i) $16,786,000 and (ii) the aggregate principal balance of
the fixed-rate mortgage loans as of the first day of the related
collection period.
(5) The Class A-IO Certificates will bear interest at a per annum rate
equal to 5.75% for the first ten distribution dates, 4.75% for the next
ten distribution dates, 3.75% for the next ten distribution dates and
will not bear interest after the distribution date in October 2004.
(6) The Class M-1, Class M-2 and Class M-3 Certificates will be subject to
a pool cap and their pass-through rates will increase by 0.50%
following the optional termination date. Only the nine classes of
certificates identified above are being offered by this prospectus
supplement and the accompanying prospectus.
The Certificates
o Represent ownership interests in a trust consisting primarily of a pool
of first and second lien residential mortgage loans. The mortgage loans
will consist of conventional fixed-rate and adjustable-rate mortgage
loans.
o The Class AI-1, Class AI-2, Class AI-3, Class AI-4, Class AII-1 and
Class A-IO Certificates will be senior certificates.
o The Class M-1, Class M-2 and Class M-3 Certificates are subordinate to
and provide credit enhancement for the Class A Certificates. The Class
M-2 and Class M-3 Certificates are also subordinate to and provide
credit enhancement for the Class M-1 Certificates. The Class M-3
Certificates are subordinate to and provide credit enhancement for the
Class M-2 Certificates.
Credit Enhancement
o Excess Interest - Certain excess interest received from the mortgage
loans will be use to cover losses incurred during the period the excess
interest accrued.
o Overcollateralization - Certain excess interest received from the
mortgage loans will be applied as payments of principal on the
certificates to maintain a required level of overcollateralization.
o Subordination - The subordinate certificates are subordinate in right
of certain payments to the senior certificates.
Neither the Securities and Exchange Commission nor any state securities
commission has approved the offered certificates or determined that this
prospectus supplement or the accompanying prospectus is accurate or complete.
Any representation to the contrary is a criminal offense.
The underwriters will purchase and offer the offered certificates to investors
at varying prices to be determined at the time of sale. The Depositor expects
that the offered certificates will be available for delivery to investors in
book-entry form through The Depository Trust Company, Clearstream Banking or the
Euroclear System on or about May 15, 2002. Total proceeds to the Depositor for
the offered certificates will be approximately 100.23% of the initial principal
balance of the offered certificates, before deducting expenses payable by the
Depositor.
Banc of America Securities LLC
Greenwich Capital Markets, Inc.
JPMorgan
The date of this Prospectus Supplement is May 13, 2002
Carefully consider the "Risk Factors" beginning on page S-11 of this prospectus
supplement and on page 10 in the accompanying prospectus.
The offered certificates are not insured or guaranteed by any governmental
agency or instrumentality.
The offered certificates represent interests in the trust only and will not be
obligations of or represent interests in any other entity. This prospectus
supplement may be used to offer and sell the offered certificates only if
accompanied by the prospectus.
TABLE OF CONTENTS
Page
----
SUMMARY OF PROSPECTUS SUPPLEMENT..........................S-5
RISK FACTORS.............................................S-11
Mortgage loans originated by troubled
originator..........................................S-11
No assurance underwriting standards were
followed............................................S-11
Nature of sub-prime mortgage loans may
increase risk of loss...............................S-11
There are risks involving unpredictability of
prepayments and the effect of prepayments
on yields...........................................S-11
There are risks relating to alternatives to
foreclosure.........................................S-12
There is a risk that interest payments may be
insufficient to maintain
overcollateralization...............................S-12
There is a risk that mortgage interest rates will
affect the offered certificates.......................S-13
There are risks relating to subordinate loans.........S-13
There are risks in holding subordinate
certificates........................................S-14
There is a risk that interest payments on the
mortgage loans may be insufficient to pay
interest on your certificates.......................S-14
There is a risk relating to the potential
inadequacy of credit enhancement for the
offered certificates................................S-15
There is a risk because the certificates are not
obligations of any entity...........................S-15
Rights of the NIMS Insurer............................S-15
There is a risk that there may be a delay in
receipt of liquidation proceeds, and that
liquidation proceeds may be less than the
outstanding balance of the mortgage loan............S-16
There is an increased risk of loss relating to
high combined loan-to-value ratios..................S-16
There are risks relating to geographic
concentration of the mortgage loans.................S-16
Recent developments may increase the risk of
loss on the mortgage loans..........................S-17
There are risks relating to balloon loans.............S-17
The lack of a secondary market may limit your
ability to sell your certificates...................S-17
Violations of federal and state laws may cause
losses on your certificates.........................S-17
In the event the seller is not able to repurchase
or replace defective mortgage loans you may
suffer losses on your certificates..................S-18
THE MORTGAGE POOL........................................S-19
Page
----
General...............................................S-19
Fixed-Rate Mortgage Loan Statistics...................S-20
Adjustable-Rate Mortgage Loan Statistics..............S-26
The Index.............................................S-35
Terms of the Mortgage Loans...........................S-36
THE SELLER...............................................S-37
THE ORIGINATOR...........................................S-37
UNDERWRITING STANDARDS...................................S-37
THE SERVICER.............................................S-41
THE POOLING AND SERVICING AGREEMENT......................S-42
General...............................................S-42
Assignment of the Mortgage Loans......................S-43
Payments on Mortgage Loans; Deposits to
Collection Account and Distribution
Account.............................................S-44
Advances..............................................S-45
The Trustee...........................................S-46
Servicing and Other Compensation and
Payment of Expenses.................................S-46
Pledge and Assignment of Servicer's Rights............S-46
Optional Termination..................................S-47
Optional Purchase of Defaulted Loans..................S-47
Events of Servicing Termination.......................S-47
Rights upon Event of Servicing Termination............S-47
Voting Rights.........................................S-48
Amendment.............................................S-48
Rights of the NIMS Insurer under the Pooling
and Servicing Agreement.............................S-48
DESCRIPTION OF THE CERTIFICATES..........................S-49
General...............................................S-49
Book-Entry Certificates...............................S-49
Allocation of Available Funds.........................S-53
Interest Distributions................................S-53
Principal Distributions...............................S-54
Allocation of Losses..................................S-58
Application of Monthly Excess Cashflow
Amounts.............................................S-59
Pass-Through Rates....................................S-61
Calculation of LIBOR..................................S-63
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS............S-63
Sensitivity of the Class A-IO Certificates............S-65
Additional Information................................S-65
Weighted Average Lives................................S-65
Final Scheduled Distribution Dates....................S-77
USE OF PROCEEDS..........................................S-77
S-2
CERTAIN MATERIAL FEDERAL INCOME
TAX CONSEQUENCES......................................S-77
General...............................................S-77
Taxation of Regular Interests.........................S-77
Taxation of the Basis Risk Arrangements...............S-78
REMIC Taxes and Reporting.............................S-79
STATE TAXES..............................................S-79
ERISA CONSIDERATIONS.....................................S-80
RECENT DEVELOPMENTS --- PROPOSED
CALIFORNIA LEGISLATION................................S-82
LEGAL INVESTMENT.........................................S-82
METHOD OF DISTRIBUTION...................................S-82
LEGAL MATTERS............................................S-83
RATINGS..................................................S-83
INDEX OF PRINCIPAL DEFINITIONS...........................S-84
ANNEX I - GLOBAL CLEARANCE,
SETTLEMENT AND TAX DOCUMENTATION
PROCEDURES................................................A-1
S-3
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
The Depositor describes the certificates in two separate documents that
progressively provide more detail:
o the accompanying prospectus, which provides general
information, some of which may not apply to your certificates,
and
o this prospectus supplement, which describes the specific terms
of your certificates.
If the description of the terms of your certificates varies between
this prospectus supplement and the accompanying prospectus, you should rely on
the information in this prospectus supplement.
Cross-references are included in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The foregoing Table of Contents and the Table of
Contents included in the accompanying prospectus provide the pages on which
these captions are located.
You can find a listing of the pages where capitalized terms used in
this prospectus supplement and the accompanying prospectus are defined under the
caption "Index of Principal Definitions" beginning on page S-84 in this document
and under the caption "Index of Significant Definitions" beginning on page 119
in the accompanying prospectus. Any capitalized terms used but not defined in
this prospectus supplement have the meanings assigned in the accompanying
prospectus.
----------------------------
This prospectus supplement and the accompanying prospectus contain
forward-looking statements relating to future economic performance or
projections and other financial items. Such forward-looking statements, together
with related qualifying language and assumptions, are found in the material,
including each of the tables, set forth under "Risk Factors" and "Yield,
Prepayment and Maturity Considerations." Forward-looking statements are also
found elsewhere in this prospectus supplement and the accompanying prospectus,
and may be identified by, among other things, the use of forward-looking words
such as "expects," "intends," "anticipates," "estimates," "believes," "may" or
other comparable words. Such statements involve known and unknown risks,
uncertainties and other important factors that could cause the actual results or
performance to differ materially from such forward-looking statements. Those
risks, uncertainties and other factors include, among others, general economic
and business conditions, competition, changes in political, social and economic
conditions, regulatory initiatives and compliance with government regulations,
customer preference and various other matters, many of which are beyond the
Depositor's control. These forward-looking statements speak only as of the date
of this prospectus supplement. The Depositor expressly disclaims any obligation
or undertaking to update or revise forward-looking statements to reflect any
change in the Depositor's expectations or any change in events, conditions or
circumstances on which any forward-looking statement is based.
S-4
Summary of Prospectus Supplement
Because this is a summary, it does not contain all the information that
may be important to you. You should read the entire accompanying prospectus (the
"Prospectus") and this prospectus supplement (the "Prospectus Supplement")
carefully before you decide to purchase a certificate. If capitalized terms are
not defined in this Prospectus Supplement, they are defined in the Prospectus.
Issuer
ABFC 2002-SB1 Trust (the "Trust").
Title of Series
ABFC Asset-Backed Certificates, Series 2002-SB1.
The Certificates
The Class AI-1, Class AI-2, Class AI-3, Class AI-4, Class AII-1, Class A-IO,
Class M-1, Class M-2, Class M-3, Class B, Class CE, Class P and Class R
Certificates are the entire ownership interest in a trust fund which is composed
of first and second lien mortgage loans. The Trust will issue the certificates
pursuant to a pooling and servicing agreement among Asset Backed Funding
Corporation, as depositor, Litton Loan Servicing LP, as servicer, and LaSalle
Bank National Association, as trustee. The Trust is offering the Class AI-1,
Class AI-2, Class AI-3, Class AI-4, Class AII-1, Class A-IO, Class M-1, Class
M-2 and Class M-3 Certificates as book-entry securities clearing through The
Depository Trust Company ("DTC") (in the United States) or Clearstream Banking
("Clearstream") or the Euroclear System ("Euroclear") (in Europe). See
"Description of the Certificates--Book-Entry Certificates" in this Prospectus
Supplement.
The Offered Certificates
The underwriters are offering to sell the Class AI-1, Class AI-2, Class AI-3,
Class AI-4, Class AII-1, Class A-IO, Class M-1, Class M-2 and Class M-3
Certificates. The Class B, Class CE, Class P and Class R Certificates are not
being offered pursuant to this prospectus supplement.
Depositor of Mortgage Loans
Asset Backed Funding Corporation will deposit the mortgage loans in the Trust.
The depositor is a Delaware corporation and a wholly-owned, indirect subsidiary
of Bank of America Corporation. The depositor is an affiliate of Banc of America
Securities LLC, one of the underwriters.
Mortgage Loan Originator
Superior Federal Bank, FSB (the "Originator") originated or acquired
substantially all of the mortgage loans in the Trust. The Originator was formed
in 2001 to assume the operations of Superior Bank, FSB, an insolvent federal
savings bank ("Old Superior"). The Office of Thrift Supervision closed Old
Superior on July 27, 2001 and appointed the Federal Deposit Insurance
Corporation (the "FDIC") as receiver of Old Superior and conservator of the
Originator. The FDIC transferred all of Old Superior's assets to the Originator.
The Originator ceased accepting loan applications on January 11, 2002. The
mortgage loans will not be insured or guaranteed by the FDIC. Substantially all
of the mortgage loans were originated or acquired generally in accordance with
the underwriting standards described in "Underwriting Standards" in this
Prospectus Supplement.
Mortgage Loan Seller
On the closing date, the mortgage loans will be sold to the depositor by Banc of
America Mortgage Capital Corporation, an affiliate of the depositor, which
acquired the mortgage loans from the Originator.
Servicer
Litton Loan Servicing LP will service the mortgage loans. Subject to certain
limitations, the servicer must advance delinquent payments of principal and
interest on the mortgage loans, other than with respect to simple interest
mortgage loans and REO Properties. See "The Pooling and Servicing
Agreement--Advances" in this Prospectus Supplement and "Description of the
Securities--Advances in Respect of Delinquencies" in the Prospectus.
Trustee
LaSalle Bank National Association, a national banking association.
S-5
NIMS Insurer
After the closing date, a separate trust may be established to issue net
interest margin securities secured by all or a portion of the Class CE and Class
P Certificates. Those net interest margin securities may or may not have the
benefit of a financial guaranty insurance policy that guarantees payments on
those securities. The insurer that would issue any financial guaranty insurance
policy, if any, is referred to in this prospectus supplement as the "NIMS
Insurer." The references to the NIMS Insurer in this prospectus supplement are
applicable only if there is a NIMS Insurer. If the net interest margin
securities are so insured, the NIMS Insurer will have a number of rights under
the pooling and servicing agreement that could adversely affect
certificateholders. Any insurance policy issued by the NIMS Insurer will not
cover, and will not benefit in any manner whatsoever the offered certificates.
See "Risk Factors--Certain rights of the NIMS Insurer may preempt the rights of
holders of offered certificates" in this prospectus supplement for additional
information.
Cut-off Date
April 1, 2002.
Closing Date
On or about May 15, 2002.
Final Scheduled Distribution Dates
The final scheduled distribution date for each class of offered certificates
(other than the Class A-IO Certificates) is set forth below:
Final Scheduled
Class Distribution Date
----- -----------------
Class AI-1
March 25, 2018
Class AI-2
October 25, 2021
Class AI-3
July 25, 2030
Class AI-4
December 25, 2031
Class AII-1
December 25, 2030
Class M-1
October 25, 2031
Class M-2
August 25, 2031
Class M-3
June 25, 2031
Each such final scheduled distribution date has been calculated as described
under "Yield, Prepayment and Maturity Considerations--Final Scheduled
Distribution Dates" in this Prospectus Supplement.
The Mortgage Pool
On the closing date, the Trust will acquire a pool of fixed and adjustable-rate
mortgage loans.
The total mortgage pool had the following aggregate characteristics as of the
cut-off date (percentages are based on the aggregate principal balance of the
mortgage loans):
Aggregate Current Principal Balance $315,746,856.18
Average Outstanding Principal
Balance $79,653.60
Range of Outstanding Principal $8,113.97 to
Balances $496,487.31
Average Original Principal Balance $79,911.72
Range of Original Principal $8,125.00 to
Balances $499,000.00
Loans with Prepayment Penalties 78.25%
Index:
Six-Month LIBOR 46.82%
1 YR CMT 0.02%
Fixed-Rate 53.16%
Weighted Average Mortgage Interest
Rate 10.001%
Weighted Average Net Mortgage
Interest Rate 9.491%
Range of Mortgage Interest Rates 6.000% to 16.000%
Weighted Average Credit Score 586
Range of Credit Scores 405 to 805
Weighted Average CLTV 78.24%
Weighted Average Original Term to
Maturity 307 Months
Weighted Average Remaining Term to
Stated Maturity 303 Months
Percentage of Balloon Loans 16.98%
Percentage of Simple Interest
Mortgage Loans 0.69%
Percentage of Second Liens 10.34%
Max ZIP Code Concentration (%) 0.45%
Max ZIP Code Concentration (ZIP) 01841
S-6
Top 5 Geographic Concentrations:
New York 16.50%
Florida 13.11%
Pennsylvania 9.08%
Michigan 6.44%
New Jersey 6.00%
For the Adjustable-Rate Mortgage
Loans Only:
Weighted Average Mortgage Interest
Rates by Index:
Six-Month LIBOR 9.917%
1 YR CMT 9.250%
Weighted Average Gross margin by
Index:
Six-Month LIBOR 7.746%
1 YR CMT 2.950%
Weighted Average Maximum Mortgage
Interest Rate 15.918%
Range of Maximum Mortgage Interest
Rates 12.750% to 20.250%
Weighted Average Minimum Mortgage
Interest Rate 8.916%
Range of Minimum Mortgage Interest
Rates 5.750% to 13.250%
Weighted Average Initial Rate
Adjustment Cap 3.000%
Range of Initial Rate Adjustment
Cap 2.000% to 3.000%
Weighted Average Periodic Rate
Adjustment Cap 1.000%
Range of Periodic Rate Adjustment
Caps 1.000% to 2.000%
Weighted Average Months to Next
Adjustment Date 24 months
Range of Months to Next Adjustment
Date 8 to 35 months
Weighted Average Interest
Adjustment Frequency 6 months
The fixed-rate mortgage loans will consist of conventional fixed-rate mortgage
loans with the following characteristics as of the cut-off date (percentages are
based on the aggregate principal balance of the fixed-rate mortgage loans):
Aggregate Current Principal Balance $167,855,114.51
Average Outstanding Principal
Balance $66,398.38
Range of Outstanding Principal $8,113.97 to
Balances $496,487.31
Average Original Principal Balance $66,677.39
Range of Original Principal $8,125.00 to
Balances $499,000.00
Loans with Prepayment Penalties 80.34%
Weighted Average Mortgage Interest
Rate 10.074%
Weighted Average Net Mortgage
Interest Rate 9.564%
Range of Mortgage Interest Rates 6.000% to 16.000%
Weighted Average Credit Score 596
Range of Credit Scores 427 to 792
Weighted Average CLTV 76.45%
Weighted Average Original Term to
Maturity 261 months
Weighted Average Remaining Term to
Stated Maturity 256 months
Percentage of Balloon Loans 31.93%
Percentage of Simple Interest
Mortgage Loans 1.30%
Percentage of Second Liens 19.44%
Max ZIP Code Concentration (%) 0.55%
Max ZIP Code Concentration (ZIP) 11746
Top 5 Geographic Concentrations:
New York 18.87%
Florida 12.94%
Pennsylvania 8.90%
Indiana 5.92%
Michigan 4.81%
The adjustable-rate mortgage loans will consist of conventional adjustable-rate
mortgage loans with the following characteristics as of the cut-off date
(percentages are based on the aggregate principal balance of the adjustable-rate
mortgage loans):
Aggregate Current Principal Balance $147,891,741.87
Average Outstanding Principal
Balance $102,988.68
Range of Outstanding Principal $9,448.34 to
Balances $489,648.51
Average Original Principal Balance $103,210.04
Range of Original Principal $11,000.00 to
Balances $491,000.00
Loans with Prepayment Penalties 75.88%
Weighted Average Mortgage Interest
Rate 9.917%
Weighted Average Mortgage Interest
Rate 9.407%
Range of Mortgage Interest Rates 6.000% to 14.250%
Weighted Average Credit Score 575
Range of Credit Scores 405 to 805
Weighted Average CLTV 80.28%
S-7
Weighted Average Original Term to
Maturity 360 months
Weighted Average Remaining Term to
Stated Maturity 356 months
Percentage of Simple Interest
Mortgage Loans 0.00%
Percentage of Balloon Loans 0.00%
Percentage of Second Lien 0.00%
Max ZIP Code Concentration (%) 0.83%
Max ZIP Code Concentration (ZIP) 01841
Top 5 Geographic Concentrations:
New York 13.80%
Florida 13.30%
Pennsylvania 9.28%
Michigan 8.29%
New Jersey 8.03%
See "The Mortgage Pool" in this Prospectus Supplement for more information about
the mortgage loans.
Distributions--General
The distribution date will be the 25th day of each month or, if such day is not
a business day, the next business day, beginning on May 28, 2002. Distributions
will generally include payments made on the mortgage loans during the related
collection period and any advances by the servicer. The collection period for
any distribution date is the period from the second day of the calendar month
preceding the month in which the distribution date occurs through the first day
of the calendar month in which the distribution date occurs.
Record Date
The record date for each distribution date will be as follows: for the offered
certificates (other than the Class AII-1 Certificates), the last business day of
the month preceding the month in which the distribution date occurs (or the
closing date, in the case of the first distribution date) and for the Class
AII-1 Certificates, the business day before such distribution date (unless
definitive certificates are issued).
Interest Distributions
On each distribution date, you will be entitled to receive interest accrued on
your certificate during the related accrual period and any interest which you
earned previously but which you did not receive. The accrual period for all
offered certificates, other than the Class AII-1 Certificates, is the month
immediately preceding the month in which such distribution date occurs. The
accrual period for the Class AII-1 Certificates is the period from the
distribution date in the prior month (or the closing date, in the case of the
first distribution date) through the day prior to the current distribution date.
Interest will be calculated for all offered certificates, other than the Class
AII-1 Certificates, on the basis of a 360-day year consisting of twelve 30-day
months. Interest will be calculated for the Class AII-1 Certificates on the
basis of the actual number of days in the accrual period, based on a 360-day
year.
There are certain circumstances which could reduce the amount of interest paid
to you. See "Description of the Certificates--Interest Distributions" in this
Prospectus Supplement.
Pass-Through Rates
Interest will accrue on the Class AI-1, Class AI-2, Class AI-3 and Class AI-4
Certificates during each accrual period at a rate equal to the lesser of (i) the
applicable per annum rate for such class as set forth on the cover page, plus,
on each distribution date following the optional termination date in the case of
the Class AI-4 Certificates, 0.50% per annum and (ii) the Fixed-Rate Net Funds
Cap as described under "Description of the Certificates--Pass Through Rates.
Interest will accrue on the Class AII-1 Certificates during each accrual period
at a rate equal to the lesser of (i) the sum of one-month LIBOR plus a margin of
0.43% on or prior to the optional termination date or a margin of 0.86% after
the optional termination date and (ii) the Adjustable-Rate Net Funds Cap as
described under "Description of the Certificates--Pass Through Rates" in this
Prospectus Supplement.
Interest will accrue on the Class A-IO Certificates during each accrual period
at a per annum rate equal to 5.75% during the first ten interest accrual
periods, 4.75% during the next ten interest accrual periods and 3.75% during the
following ten interest accrual periods. No interest will accrue on the Class
A-IO Certificates thereafter.
Interest will accrue on the Class M-1, Class M-2 and Class M-3 Certificates
during each accrual period at a rate equal to the lesser of (i) the applicable
per annum rate for such class as set forth on the cover page, plus, on each
distribution date following the optional termination date, 0.50% per annum and
(ii) the Pool Cap as described under "Description of the Certificates--Pass
Through Rates.
S-8
Principal Distributions
On each distribution date, you will receive a distribution of principal if there
are funds available on that date for your class of certificates. You should
review the priority of payments described under "Description of the
Certificates--Principal Distributions" in this Prospectus Supplement.
Credit Enhancement
Credit enhancement reduces the risk of harm caused to holders of certificates by
shortfalls in payments received on the mortgage loans. Credit enhancement can
reduce the effect of shortfalls on all classes, or it can allocate shortfalls so
they affect some classes before others. This transaction employs the following
four forms of credit enhancement. See "Description of the Certificates" in this
Prospectus Supplement.
Monthly Excess Cashflow. Because more interest is expected to be paid by the
mortgagors than is necessary to pay the interest earned on the certificates, we
expect there to be excess interest each month. The excess interest will be used
to maintain overcollateralization, to pay interest that was previously earned
but not paid to the certificates, and to reimburse the certificates for losses
and certain shortfalls that they experienced previously.
Overcollateralization. If the total assets in the Trust exceed the total
principal amount of the certificates, there is overcollateralization available
to absorb losses on the mortgage loans before such losses affect the
certificates. On the closing date, the total initial principal balance of the
mortgage loans will equal $315,746,856.18, while the total initial principal
amount of the certificates is only $311,010,000.00. This results in
overcollateralization equal to approximately 1.50% of the total initial
principal balance of the mortgage loans. If the level of overcollateralization
falls below what is required under the pooling and servicing agreement, the
excess interest described in the next section will be paid to the certificates
as principal. This will have the effect of reducing the principal balance of the
certificates faster than the principal balance of the mortgage loans until the
required level of overcollateralization is reached.
Subordination. On each distribution date, classes that are lower in order of
payment priority will not receive payments until the classes that are higher in
order of payment priority have been paid. If there are insufficient funds on a
distribution date to pay all classes, the subordinate classes are the first to
forego payment.
Application of Realized Losses. If, on any distribution date after the balances
of the certificates have been reduced by the amount of cash paid on that date,
the total principal balance of the certificates is greater than the total
principal balance of the mortgage loans, the principal balance of the
certificates that are lowest in order of payment priority will be reduced by the
amount of such excess.
Optional Termination
The majority holder of the Class CE certificates has the option to purchase all
the mortgage loans and any properties that the Trust acquired in satisfaction of
any of the mortgage loans. If such certificateholder fails to exercise this
option, the servicer (or an affiliate) may do so. If both parties fail to
terminate the Trust, the NIMS Insurer, if any, may do so. This option can be
exercised when the total principal balance of the mortgage loans, including the
mortgage loans related to REO properties, is 10% or less of the total principal
balance of the mortgage loans on the cut-off date. If the option is exercised,
your certificate will be retired earlier than it would be otherwise and you will
be entitled to the following amounts to the extent available therefor:
o the outstanding principal balance of your certificate;
o one month's interest on such balance at the related pass-through rate;
o any interest previously earned but not paid; and
o other than in the case of the Class A-IO Certificates, any "Cap
Carryover Amount," as described in this Prospectus Supplement, from all
previous distribution dates.
You will receive the last two items only to the extent that there is enough cash
to make such payments. See "The Pooling and Servicing Agreement--Optional
Termination" in this Prospectus Supplement.
Certain Material Federal Income Tax Consequences
The trustee will elect to treat the assets of the Trust, exclusive of the
arrangement intended to protect against basis risk for the certificates, as
comprised of multiple real estate mortgage investment conduits (each, a "REMIC")
in a tiered structure for federal income tax purposes.
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For further information regarding the federal income tax consequences of
investing in the offered certificates, see "Certain Material Federal Income Tax
Consequences" in this Prospectus Supplement and "Federal Income Tax
Consequences" in the Prospectus.
Ratings
The Trust will not issue the certificates unless they receive the respective
ratings set forth below from Standard & Poor's, a division of The McGraw-Hill
Companies, Inc. ("S&P") and Fitch Ratings ("Fitch"):
Class S&P Fitch
----- --- -----
AI-1 AAA AAA
AI-2 AAA AAA
AI-3 AAA AAA
AI-4 AAA AAA
AII-1 AAA AAA
A-IO AAA AAA
M-1 AA AA
M-2 A A
M-3 BBB BBB
The ratings on the certificates indicate the likelihood that you will receive
all funds to which you are entitled by the terms of your certificate. The rating
agency that issues the rating reviews the nature and credit quality of the
mortgage loans and the soundness of the structure which the depositor has
created to allow the payments on the mortgage loans to flow to the holders of
the certificates. A rating is not a recommendation to buy, sell or hold
securities and the rating agency can revise or withdraw it at any time. A rating
does not address the likelihood of the payment of any Cap Carryover Amount, the
frequency of prepayments on the mortgage loans or the effect of such prepayments
on your yield. See "Yield, Prepayment and Maturity Considerations" and "Ratings"
in this Prospectus Supplement and "Yield Considerations" in the Prospectus.
Legal Investment
You should consult with counsel to see if you are permitted to buy the offered
certificates, since legal investment rules will vary depending on the type of
entity purchasing the offered certificates, whether that entity is subject to
regulatory authority, and if so, by whom. The offered certificates will not be
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984, as amended. See "Legal Investment" in this Prospectus
Supplement and in the Prospectus.
ERISA Considerations
If you are a fiduciary of any employee benefit plan or other retirement
arrangement subject to the Employee Retirement Income Security Act of 1974, as
amended, or Section 4975 of the Internal Revenue Code of 1986 or any materially
similar provisions of applicable federal, state or local law, you should consult
with counsel as to whether you can buy or hold an offered certificate. See
"ERISA Considerations" in this Prospectus Supplement and in the Prospectus.
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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.
Mortgage loans originated by troubled originator
Although substantially all of the mortgage loans were originated or
purchased by the Originator, which is the recapitalized FDIC-controlled
successor to Old Superior, the financial difficulties suffered by Old Superior
may have nevertheless adversely affected the standards and procedures under
which the mortgage loans were originated and the manner in which such mortgage
loans were serviced prior to the servicing transfer to Litton Loan Servicing LP.
In addition, the portfolio of mortgage loans originated by Old Superior, which
were underwritten using standards substantially similar to those used by the
Originator, has generally underperformed the mortgage loan portfolios of other
sub-prime mortgage loan originators over the past several years. Further, Litton
Loan Servicing LP assumed servicing responsibilities for the pool of mortgage
loans from the Originator in three stages prior to the cut-off date. During and
immediately after the period of a servicing transfer, servicing disruptions can
occur resulting in increased delinquencies and losses on the affected mortgage
loans. Although the seller will make certain representations and warranties with
respect to the mortgage loans and will repurchase any mortgage loan as to which
a breach of a representation or warranty would materially adversely affect a
certificateholder, there can be no assurance that such remedy will apply to all
problems that may arise with respect to a mortgage loan as a result of the
troubled history of the Originator or any servicing disruptions.
No assurance underwriting standards were followed
The description of the Originator's underwriting guidelines contained
under "Underwriting Standards" below is a summary of the underwriting guidelines
supplied to the seller by the Originator. There can be no assurance, and the
depositor and the seller make no representation, that such guidelines were
applied by the Originator on a consistent basis and without material exceptions.
Nature of sub-prime mortgage loans may increase risk of loss
All of the mortgage loans are of sub-prime credit quality; i.e., do not
meet the customary credit standards of Freddie Mac and Fannie Mae. The
Originator made mortgage loans to borrowers that typically had limited access to
traditional mortgage financing for a variety of reasons, including impaired or
limited past credit history, lower credit scores, high loan-to-value ratios or
high debt-to-income ratios. As a result of these factors, delinquencies and
liquidation proceedings are more likely with these mortgage loans than with
mortgage loans that satisfy customary credit standards. In the event these
mortgage loans do become delinquent or subject to liquidation, you may face
delays in receiving payment and losses if the credit enhancements are
insufficient to cover the delays and losses.
There are risks involving unpredictability of prepayments and the effect of
prepayments on yields
Mortgagors may prepay their mortgage loans in whole or in part at any
time. We cannot predict the rate at which mortgagors will repay their mortgage
loans. A prepayment of a mortgage loan generally will result in a prepayment on
the certificates.
o If you purchase your certificates at a discount and principal
is repaid more slowly than you anticipate, then your yield may
be lower than you anticipate.
o If you purchase your certificates at a premium, or if you
purchase a Class A-IO Certificate (which has no principal
balance) and principal is repaid faster than you anticipate,
then your yield may be lower than you anticipate. If you are
purchasing Class A-IO Certificates, you should consider the
risk that if a rapid rate of principal payments on the
fixed-rate mortgage loans reduces the aggregate principal
balance of the mortgage loans below $16,786,000 before October
1, 2004, you may not recover your initial investment. See
"Yield, Prepayment and Maturity Considerations--Yield on the
Class A-IO Certificates" in this Prospectus Supplement for a
more detailed description of risks associated with the
purchase of the Class A-IO Certificates, including a table
demonstrating the particular sensitivity of the Class A-IO
Certificates to the rate of prepayments.
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o The rate of prepayments on the mortgage loans will be
sensitive to prevailing interest rates. Generally, if
prevailing interest rates decline significantly below the
interest rates on the fixed-rate mortgage loans, those
mortgage loans are more likely to prepay than if prevailing
rates remain above the interest rates on such mortgage loans.
Conversely, if prevailing interest rates rise significantly,
the prepayments on fixed-rate mortgage loans are likely to
decrease.
o The prepayment behavior of the adjustable-rate mortgage loans
and of the fixed-rate mortgage loans may respond to different
factors, or may respond differently to the same factors. If at
the time of their first adjustment, the interest rates on any
of the adjustable-rate mortgage loans would be subject to
adjustment to a rate higher than the then prevailing mortgage
interest rates available to the related borrowers, such
borrowers may prepay their adjustable-rate mortgage loans.
Adjustable-rate mortgage loans may also suffer an increase in
defaults and liquidations following upward adjustments of
their interest rates, especially following their initial
adjustments.
o Approximately 78.25% of the mortgage loans (by aggregate
principal balance as of the cut-off date) require the
mortgagor to pay a penalty if the mortgagor prepays the
mortgage loan during periods ranging from one year to five
years after the mortgage loan was originated. A prepayment
penalty may discourage a mortgagor from prepaying the mortgage
loan during the applicable period. Such prepayment penalties
will be distributed to holders of the Class P Certificates and
not to holders of the offered certificates.
o The seller may be required to purchase mortgage loans from the
Trust in the event certain breaches of representations and
warranties have not been cured. In addition, the servicer (or
its affiliates) has the option to purchase mortgage loans that
are at least 120 days or more delinquent under the
circumstances described in the pooling and servicing
agreement. These purchases will have the same effect on the
holders of the offered certificates as a prepayment of the
mortgage loans.
o If the rate of default and the amount of losses on the
mortgage loans is higher than you expect, then your yield may
be lower than you expect.
o The overcollateralization provisions are intended to result in
an accelerated rate of principal distributions to holders of
the offered certificates.
See "Yield, Prepayment and Maturity Considerations" for a description
of factors that may influence the rate and timing of prepayments on the mortgage
loans.
There are risks relating to alternatives to foreclosure
Certain of the mortgage loans may become delinquent after the closing
date. The servicer may either foreclose on any such mortgage loan or work out an
agreement with the mortgagor, which may involve waiving or modifying certain
terms of the mortgage loan. If the servicer extends the payment period or
accepts a lesser amount than stated in the mortgage note in satisfaction of the
mortgage note, your yield may be reduced.
There is a risk that interest payments may be insufficient to maintain
overcollateralization
Because the weighted average of the interest rates on the mortgage
loans is expected to be higher than the weighted average of the interest rates
on the certificates, the mortgage loans are expected to generate more interest
than is needed to pay interest owed on the certificates as well as certain fees
and expenses of the Trust. After these financial obligations of the Trust are
covered, the available excess interest will be used to maintain
overcollateralization. Any remaining interest will then be used to compensate
for losses that occur on the mortgage loans. We cannot assure you, however, that
enough excess interest will be generated to maintain the overcollateralization
level required by the rating agencies. The factors described below will affect
the amount of excess interest that the mortgage loans will generate:
o Every time a mortgage loan is prepaid in full or repurchased,
excess interest will be reduced because the mortgage loan will
no longer be outstanding and generating interest or, in the
case of a partial prepayment, will be generating less
interest.
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o Every time a mortgage loan is liquidated or written off,
excess interest will be reduced because such mortgage loan
will no longer be outstanding and generating interest.
o If the rates of delinquencies, defaults or losses on the
mortgage loans are higher than expected, excess interest will
be reduced by the amount necessary to compensate for any
shortfalls in cash available on such date to pay
certificateholders.
o The pass-through rate of the Class AII-1 Certificates is based
on one-month LIBOR while the adjustable-rate mortgage loans
have rates that are adjustable based on an index that is
different from the index used to determine the pass-through
rate on the Class AII-1 Certificates. As a result, the
pass-through rate on the Class AII-1 Certificates may increase
relative to interest rates on the adjustable-rate mortgage
loans, thus requiring that more of the interest generated by
the adjustable-rate mortgage loans be applied to cover
interest on the Class AII-1 Certificates.
There is a risk that mortgage interest rates will affect the offered
certificates
The Class AII-1 Certificates will accrue interest at a pass-through
rate based on the one-month LIBOR index plus a margin, but are subject to a cap.
The other classes of offered certificates (other than the Class A-IO
Certificates) will accrue interest at a fixed pass-through rate, subject to a
cap. The cap on interest paid on the Class AI-1, Class AI-2, Class AI-3, Class
AI-4 and Class AII-1 Certificates will be based on the weighted average of the
interest rates on the mortgage loans in the related loan group, adjusted for
overcollateralization and net of certain expenses of the Trust. The cap on
interest paid on the Class M-1, Class M-2, Class M-3 and Class B Certificates
will be based on the weighted average of the interest rates on the mortgage
loans, adjusted for overcollateralization and net of certain expenses of the
Trust.
The pass-through rate on the Class AII-1 Certificates adjusts monthly
while the mortgage interest rates on the adjustable-rate mortgage loans may
adjust less frequently. Substantially all of the adjustable-rate mortgage loans
have periodic and maximum limitations on adjustments to the mortgage loan rate.
Consequently, the operation of these interest rate caps may limit increases in
the pass-through rate for extended periods in a rising interest rate
environment.
Although holders of the offered certificates (other than the Class A-IO
Certificates) will be entitled to receive any cap carryover amounts from and to
the limited extent of funds available for such payments, there is no assurance
that those funds will be available or sufficient to pay such cap carryover
amounts. Investors in the Class AII-1 Certificates should also note that if the
interest rate on those certificates is based on the maximum cap rate, no cap
carryover will accrue during such period on those certificates.
There are risks relating to subordinate loans
Approximately 10.34% of the mortgage loans (by aggregate principal
balance as of the cut-off date) evidence a second lien that is subordinate to
the rights of the mortgagee under a first mortgage. The proceeds from any
liquidation, insurance or condemnation proceedings will be available to satisfy
the outstanding principal balance of such junior mortgage loans only to the
extent that the claims of any senior mortgage loans have been satisfied in full,
including any foreclosure costs. In circumstances where the servicer determines
that it would be uneconomical to foreclose on the related mortgaged property,
the servicer may write-off the entire outstanding principal balance of the
related mortgage loan as bad debt. The foregoing considerations will be
particularly applicable to junior mortgage loans that have high combined
loan-to-value ratios because the servicer is more likely to determine that
foreclosure would be uneconomical. You should consider the risk that to the
extent losses on mortgage loans are not covered by available credit enhancement,
such losses will be borne by the holders of the certificates.
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There are risks in holding subordinate certificates
The protections afforded the senior certificates in this transaction
create risks for the subordinate certificates. Prior to any purchase of any
subordinate certificates, consider the following factors that may adversely
impact your yield:
o Because the subordinate certificates receive interest and
principal distributions after the senior certificates receive
such distributions, there is a greater likelihood that the
subordinate certificates will not receive the distributions to
which they are entitled on any distribution date.
o If a simple interest mortgage loan becomes delinquent or the
servicer determines not to advance a delinquent payment on an
actuarial mortgage loan because such amount is not recoverable
from a mortgagor, there may be a shortfall in distributions on
the certificates which will impact the subordinate
certificates.
o With respect to simple interest mortgage loans, if monthly
payments are made in any month less than 30 days after the
previous payment or shortfalls in interest collections result
from prepayments in full, there may be a shortfall in
distributions on the certificates. This will
disproportionately impact the subordinate certificates. In
addition, the portion of the shortfalls in the amount of
interest collections on actuarial mortgage loans that are
attributable to prepayments in full and are not covered by the
servicer and shortfalls in interest collections on any
mortgage loans arising from the timing of partial principal
prepayments may result in a shortfall in distributions on the
certificates, which will disproportionately impact the
subordinate certificates.
o The subordinate certificates are not expected to receive
principal distributions until, at the earliest, May 2005.
o Losses resulting from the liquidation of defaulted mortgage
loans will first reduce monthly excess cashflow then reduce
the level of overcollateralization, if any, for the
certificates. If there is no overcollateralization, losses
will be allocated to the subordinate certificates. A loss
allocation results in a reduction in a certificate balance
without a corresponding distribution of cash to the holder. A
lower certificate balance will result in less interest
accruing on the certificate.
o The earlier in the transaction that a loss on a mortgage loan
occurs, the greater the impact on yield.
See "Description of the Certificates" and "Yield, Prepayment and
Maturity Considerations" in this Prospectus Supplement for more detail.
There is a risk that interest payments on the mortgage loans may be insufficient
to pay interest on your certificates
When a mortgage loan is prepaid in full, the mortgagor is charged
interest only up to the date on which payment is made, rather than for an entire
month. This may result in a shortfall in interest collections available for
payment on the next distribution date. Similarly, with respect to simple
interest mortgage loans, the mortgagor is only charged interest up to the date
on which payment is made. Therefore, if a mortgagor makes a payment on a simple
interest mortgage loan in any month less than 30 days after the previous payment
date, a shortfall in interest collections available for payment on the next
distribution date may result. The servicer is required to cover a portion of the
shortfall in interest collections that are attributable to prepayments in full
on actuarial mortgage loans, but only up to one-half of the servicing fee for
the related accrual period. The servicer is not required to cover any shortfall
in interest collections that are attributable to prepayments in full or the
timing of monthly payments on simple interest mortgage loans. If the credit
enhancement is insufficient to cover this shortfall in excess of the amount
covered by the servicer, you may incur a loss.
In addition, the servicer will not cover shortfalls in interest
collections arising from the application of the Soldiers' and Sailors' Civil
Relief Act of 1940, as amended, or similar state laws.
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There is a risk relating to the potential inadequacy of credit enhancement for
the offered certificates
The credit enhancement features described in the summary are intended
to enhance the likelihood that holders of the offered certificates will receive
regular payments of interest and principal.
If delinquencies or defaults occur on the mortgage loans, neither the
servicer nor any other entity will advance scheduled monthly payments of
interest and principal on delinquent or defaulted actuarial mortgage loans if
such advances are not likely to be recovered. Neither the servicer nor any other
entity will advance scheduled monthly payments of principal and interest on
simple interest mortgage loans and REO properties. We cannot assure you that the
applicable credit enhancement will adequately cover any shortfalls in cash
available to pay your certificates as a result of such delinquencies or
defaults.
If substantial losses occur as a result of defaults and delinquent
payments on the mortgage loans, you may suffer losses.
There is a risk because the certificates are not obligations of any entity
The offered certificates represent an interest in the trust fund only.
No other person will insure or guarantee the offered certificates or will have
any obligation with respect to the certificates except for the obligations of
the depositor and the seller pursuant to certain limited representations and
warranties made with respect to the mortgage loans and of the servicer with
respect to its servicing obligations under the pooling and servicing agreement.
No government agency or instrumentality will guarantee or insure the
certificates or the underlying mortgage loans. Proceeds of the assets included
in the trust fund (including the mortgage loans) will be the sole source of
payments on the offered certificates. You will not be able to receive money from
any entity in the event that such proceeds are not enough to make all payments
provided for under the offered certificates.
Rights of the NIMS Insurer
After the closing date, a separate trust may be established to issue
net interest margin securities secured by all or a portion of the Class CE and
Class P Certificates. A NIMS Insurer may issue a financial guaranty insurance
policy that guarantees payments on those securities. If the net interest margin
securities are so insured, the NIMS Insurer will have a number of rights under
the pooling and servicing agreement that could adversely affect
certificateholders. Pursuant to the pooling and servicing agreement, unless the
NIMS Insurer fails to make a required payment under the policy insuring the net
interest margin securities and the failure is continuing or a NIMS Insurer is
the subject of a bankruptcy proceeding, the NIMS Insurer will be entitled to
exercise, among others, the following rights of the holders of the offered
certificates, without their consent, and the holders of the offered certificates
may exercise such rights only with the prior written consent of the NIMS
Insurer:
o the right to provide notices of servicer defaults and the
right to direct the trustee to terminate the rights and
obligations of the servicer under the pooling and servicing
agreement upon a default by the servicer;
o the right to remove the trustee or any co-trustee or custodian
pursuant to the pooling and servicing agreement for failure of
such party to perform its obligations thereunder; and
o the right to direct the trustee to make investigations and
take actions pursuant to the pooling and servicing agreement.
In addition, unless the NIMS Insurer fails to make a required payment
under the policy insuring the net interest margin securities and the failure is
continuing or a NIMS Insurer is the subject of a bankruptcy proceeding, the NIMS
Insurer's consent will be required before, among other things,
o the removal of the servicer, any successor servicer or the
trustee;
o the appointment of any subservicer or co-trustee;
S-15
o any otherwise permissible waivers of prepayment penalties or
extensions of due dates for payment granted by the servicer
with respect to more than 5% of the number of mortgage loans,
or
o any amendment to the pooling and servicing agreement.
Investors in the Offered Certificates should note that:
o any insurance policy issued by the NIMS Insurer will not
cover, and will not benefit in any manner whatsoever the
offered certificates;
o the rights granted to the NIMS Insurer are extensive;
o the interests of the NIMS Insurer may be inconsistent with,
and adverse to the interests of the holders of the offered
certificates and the NIMS Insurer has no obligation or duty to
consider the interests of the offered certificates in
connection with the exercise or nonexercise of the NIMS
Insurer's rights; and
o the NIMS Insurer's exercise of its rights and consents may
negatively affect the offered certificates and the existence
of the NIMS Insurer's rights, whether or not exercised, may
adversely affect the liquidity of the offered certificates,
relative to other asset-backed certificates backed by
comparable mortgage loans and with comparable payment
priorities and ratings.
There is a risk that there may be a delay in receipt of liquidation
proceeds, and that liquidation proceeds may be less than the outstanding balance
of the mortgage loan
Substantial delays could be encountered in connection with the
liquidation of delinquent mortgage loans. Further, liquidation expenses such as
legal fees, real estate taxes and maintenance and preservation expenses will
reduce the portion of liquidation proceeds payable to you. If a mortgaged
property fails to provide adequate security for the mortgage loan, you will
incur a loss on your investment if the credit enhancements are insufficient to
cover the loss.
There is an increased risk of loss relating to high combined loan-to-value
ratios
Mortgage loans with combined loan-to-value ratios in excess of 80% may
present a greater risk of loss than mortgage loans with combined loan-to-value
ratios of equal to or below 80%. Approximately 41.79% of the mortgage loans (by
aggregate principal balance as of the cut-off date) had a combined loan-to-value
ratio in excess of 80% as of the cut-off date, and are not covered by a primary
mortgage insurance policy.
There are risks relating to geographic concentration of the mortgage loans
The following states have the highest concentrations of mortgage loans,
based on the aggregate principal balance of the mortgage loans as of the cut-off
date: approximately 16.50% in New York, approximately 13.11% in Florida,
approximately 9.08% in Pennsylvania, approximately 6.44% in Michigan and
approximately 6.00% in New Jersey.
Properties in Florida may be particularly susceptible to certain types
of uninsurable hazards such as hurricanes.
In addition, the conditions below will have a disproportionate impact
on the mortgage loans in general:
o Economic conditions in states listed above which may or may
not affect real property values may affect the ability of
mortgagors to repay their loans on time.
o Declines in the residential real estate markets in the states
listed above may reduce the values of properties located in
those states, which would result in an increase in the
combined loan-to-value ratios.
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o Any increase in the market value of properties located in the
states listed above would reduce the combined loan-to-value
ratios and could, therefore, make alternative sources of
financing available to the mortgagors at lower interest rates,
which could result in an increased rate of prepayment of the
mortgage loans.
Recent developments may increase the risk of loss on the mortgage loans
On September 11, 2001, the United States was subjected to multiple
terrorist attacks, resulting in the loss of many lives and massive property
damage and destruction in New York City and the Washington, D.C. metropolitan
area. Although the damaged and destroyed properties consisted primarily of
commercial and government buildings, these tragic events may nevertheless have
an adverse effect on the value of residential real estate in the United States,
particularly in the New York and Washington, D.C. metropolitan areas. In
addition, it is possible (although the depositor cannot predict the likelihood)
that these events, or any consequential events involving the United States, may
have a temporary or sustained adverse effect on the U.S. economy generally, or
economic conditions in the New York or Washington, D.C. metropolitan areas or
other areas of the United States.
The depositor has not made a determination as to whether any of the
mortgagors of the mortgage loans may have been adversely affected by the
terrorist attacks. However, it is possible that there may be an increase in the
number of delinquencies and foreclosures of the mortgage loans as a result of
these events.
As a result of the terrorist attacks, on September 14, 2001 President
Bush authorized the placement of 50,000 military reservists on active duty
status. To the extent that any such person is a mortgagor of a mortgage loan,
the interest rate limitations and other provisions of the Soldiers' and Sailors'
Civil Relief Act of 1940, as amended, or similar state laws, would apply to such
Mortgage Loan during the period of active duty. It is possible that the number
of reservists placed on active duty status in the near future may increase, and
may increase substantially. In addition, other borrowers who enter military
service after the origination of their mortgage loans (including borrowers who
are members of the National Guard at the time of the origination of their
mortgage loans and are later called to active duty) would be covered by the
terms of the Relief Act. See "Recent Developments -- Proposed California
Legislation" and "Description of the Certificates -- Interest Distributions" in
the Prospectus Supplement and "Certain Legal Aspects of the Mortgage Loans --
Soldiers' and Sailors' Civil Relief Act of 1940" in the Base Prospectus.
There are risks relating to balloon loans
Balloon loans pose a risk because a mortgagor must make a large lump
sum payment of principal at the end of the loan term. If the mortgagor is unable
to pay the lump sum or refinance such amount, you may suffer a loss.
Approximately 16.98% of the mortgage loans (by aggregate principal balance as of
the cut-off date) are balloon loans.
The lack of a secondary market may limit your ability to sell your certificates
The underwriters intend to make a secondary market in the certificates
they purchase, but they have no obligation to do so. There is no assurance that
such a secondary market will develop or, if it develops, that it will continue.
Consequently, you may not be able to sell your certificates readily or at prices
that will enable you to realize your desired yield. The market values of the
certificates are likely to fluctuate; these fluctuations may be significant and
could result in significant losses to you.
The secondary markets for mortgage backed securities have experienced
periods of illiquidity and can be expected to do so in the future. Illiquidity
can have a severely adverse effect on the prices of securities that are
especially sensitive to prepayment, credit, or interest rate risk, or that have
been structured to meet the investment requirements of limited categories of
investors.
S-17
Violations of federal and state laws may cause losses on your certificates
Federal and state laws regulate the underwriting, origination,
servicing and collection of the mortgage loans. These laws have changed over
time and have become more restrictive or stringent with respect to specific
activities of the servicer and the originator. Actual or alleged violations of
these federal and state laws may, among other things:
o limit the ability of the servicer to collect principal or
interest on the mortgage loans,
o provide the mortgagors with a right to rescind the mortgage
loans,
o entitle the mortgagors to refunds of amounts previously paid
or to set-off those amounts against their mortgage loan
obligations,
o result in a litigation proceeding being brought against the
Trust, and
o subject the Trust to liability for expenses, penalties and
damages resulting from the violations.
As a result, these violations or alleged violations could result in
shortfalls in the distributions due on your certificates. In addition,
approximately 0.13% of the mortgage loans (by aggregate principal balance as of
the cut-off date), will have been originated with interest rates or fees which
make them subject to the Home Ownership and Equity Protection Act of 1994 and
such mortgage loans and other mortgage loans may be subject to comparable state
laws with lower threshold tests. See "Risk Factors--Violations of Federal Laws
May Adversely Affect Ability to Collect on Loans" and "Certain Legal Aspects of
Mortgage Loans--Anti-Deficiency Legislation, the Bankruptcy Code and Other
Limitations on Lenders" in the Prospectus. The seller will make representations
and warranties with respect to each mortgage loan relating to compliance with
federal and state laws at the time of origination. The seller will be required
to repurchase or replace any mortgage loan that is not originated or serviced in
compliance with all federal, state or local laws. However, repurchase or
replacement of the affected mortgage loans will not necessarily fully compensate
the Trust or certificateholders for any losses arising from the related breach.
For example, if a mortgagor brings legal action against the Trust, the trustee
will be entitled to indemnification from Trust property for its defense costs.
The seller will not indemnify the Trust or have any other responsibility to the
Trust or certificateholders (other than to repurchase or replace such loan) for
any losses and liabilities the Trust may suffer with respect to mortgage loans
as to which the representation as to compliance with laws is breached. As a
result, shortfalls in the distributions due on your certificates could occur.
In the event the seller is not able to repurchase or replace defective mortgage
loans you may suffer losses on your certificates
The seller will make various representations and warranties related to
the mortgage loans.
If the seller fails to cure a material breach of its representations
and warranties with respect to any mortgage loan in a timely manner, the seller
will be required to repurchase or replace the defective loan. See "The Pooling
and Servicing Agreement--Assignment of the Mortgage Loans" in this Prospectus
Supplement. In the event that the seller is not able to repurchase or replace
any defective mortgage loans at the date such action is required, for financial
or other reasons, you may suffer losses on your certificates. The inability of
the seller to repurchase or replace defective mortgage loans would likely cause
the mortgage loans to experience higher rates of delinquencies, defaults and
losses. As a result, shortfalls in the distributions due on your certificates
could occur.
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The Mortgage Pool
Banc of America Mortgage Capital Corporation (the "Seller") provided
the information in the following paragraphs. None of the Depositor, any
Underwriter, the Servicer, the Trustee, or any of their respective affiliates
have made or will make any representation as to the accuracy or completeness of
such information.
Certain information with respect to the Mortgage Loans to be included
in the Mortgage Pool is set forth herein. Prior to the Closing Date, Mortgage
Loans may be removed from the Mortgage Pool and other Mortgage Loans may be
substituted therefor. The Seller believes that the information set forth herein
with respect to the Mortgage Pool as presently constituted is representative of
the characteristics of the Mortgage Pool as it will be constituted at the
Closing Date, although certain characteristics of the Mortgage Loans may vary.
General
The assets included in the Trust (the "Trust Fund") will consist of a
pool of 3,964 closed-end, fixed-rate and adjustable-rate mortgage loans (the
"Mortgage Pool") having original terms to maturity ranging from 108 months to
360 months (the "Mortgage Loans") and an aggregate principal balance as of April
1, 2002 (the "Cut-off Date") of $315,746,856.18. All Mortgage Loan statistics
set forth herein are based on principal balances, interest rates, terms to
maturity, mortgage loan counts and similar statistics as of the Cut-off Date.
All weighted averages specified herein are based on the principal balances of
the Mortgage Loans as of the Cut-off Date, as adjusted for the principal
payments received or advanced on or before such date (each, a "Cut-off Date
Principal Balance"). The "Principal Balance" of a Mortgage Loan, as of any date,
is equal to the principal balance of such Mortgage Loan at its origination, less
the sum of scheduled and unscheduled payments and other recoveries in respect of
principal made or advanced on such Mortgage Loan. References to percentages of
the Mortgage Loans mean percentages based on the aggregate of the Cut-off Date
Principal Balances of the Mortgage Loans, unless otherwise specified. The "Pool
Balance" is equal to the aggregate of the Principal Balances of the Mortgage
Loans.
The Depositor will purchase the Mortgage Loans from the Seller pursuant
to the Mortgage Loan Purchase Agreement (the "Mortgage Loan Purchase
Agreement"), dated as of the Cut-off Date, between the Seller and the Depositor.
Pursuant to the Pooling and Servicing Agreement, the Depositor will cause the
Mortgage Loans to be assigned to the Trustee for the benefit of the
Certificateholders. See "The Pooling and Servicing Agreement" in this Prospectus
Supplement.
Based on the representations made by the Originator, the Depositor
believes that each of the Mortgage Loans in the Mortgage Pool was originated or
acquired by the Originator generally in accordance with the underwriting
standards described under "Underwriting Standards."
Under the Pooling and Servicing Agreement, the Depositor will assign
the representations and warranties made by the Seller in the Mortgage Loan
Purchase Agreement to the Trustee. The Seller, subject to certain limitations,
will be obligated under the Mortgage Loan Purchase Agreement to repurchase or
substitute a similar mortgage loan for any Mortgage Loan as to which there
exists deficient documentation or an uncured breach of any such representation
or warranty, if such breach of any such representation or warranty materially
and adversely affects the Certificateholders' interests in such Mortgage Loan.
Neither the Originator nor the Depositor will make any representations or
warranties with respect to the Mortgage Loans and will have no obligation to
repurchase or substitute for Mortgage Loans with deficient documentation or that
are otherwise defective. The Originator will have no obligation with respect to
the Certificates in its capacity as Originator. The Seller is selling the
Mortgage Loans without recourse and will have no obligation with respect to the
Certificates in its capacity as Seller other than the repurchase or substitution
obligations described above.
The Mortgage Pool will consist of fixed-rate Mortgage-Loans (the
"Fixed-Rate Mortgage Loans") and adjustable-rate Mortgage Loans (the
"Adjustable-Rate Mortgage Loans"). The Fixed-Rate Mortgage Loans consist of
2,528 Mortgage Loans with an aggregate principal balance of $167,855,114.51 as
of the Cut-off Date. The Adjustable-Rate Mortgage Loans consist of 1,436
adjustable-rate Mortgage Loans with an aggregate principal balance of
$147,891,741.67 as of the Cut-off Date.
S-19
A Mortgage Loan is "Delinquent" if the scheduled monthly payment of
principal and interest on such Mortgage Loan which is payable by the related
mortgagor under the related Mortgage Note (the "Monthly Payment") due on a due
date is not paid by the close of business on the next scheduled due date for
such Mortgage Loan. Thus, a Mortgage Loan for which the mortgagor failed to make
the Monthly Payment due on May 1, 2002 will be reported as Delinquent on June 2,
2002 if the payment is not made by the close of business on June 1, 2002.
The Servicer will be required to make servicing advances on Delinquent
Mortgage Loans and make advances of delinquent payments of principal and
interest on Delinquent Mortgage Loans (other than Simple Interest Mortgage Loans
or REO Properties), each to the extent such advances are deemed recoverable,
until such Mortgage Loans become current or an REO Property.
Fixed-Rate Mortgage Loan Statistics
The Fixed-Rate Mortgage Loans consist of 2,528 Mortgage Loans. The
aggregate Principal Balance of the Fixed-Rate Mortgage Loans as of the Cut-off
Date is equal to $167,855,114.51. The Fixed-Rate Mortgage Loans have original
terms to maturity ranging from 108 to 360 months. The following statistical
information, unless otherwise specified, is based upon the aggregate Principal
Balance of the Fixed-Rate Mortgage Loans as of the Cut-off Date.
The Fixed-Rate Mortgage Loans are secured by mortgages, deeds of trust
or other similar security instruments (each, a "Mortgage") which the Seller has
represented create first or second liens on one- to four-family residential
properties consisting of one- to four-family dwelling units and individual
condominium units (each, a "Mortgaged Property"). Approximately 34.95% of the
Fixed-Rate Mortgage Loans had a Combined Loan-to-Value Ratio as of the Cut-off
Date in excess of 80% and do not have primary mortgage insurance. There can be
no assurance that the Combined Loan-to-Value Ratio of any Fixed-Rate Mortgage
Loan determined at any time after origination is less than or equal to its
original Combined Loan-to-Value Ratio. Of the Fixed-Rate Mortgage Loans, 22.60%
have scheduled Monthly Payments due on the first day of the month (the day such
Monthly Payments are due with respect to each Mortgage Loan, a "Due Date").
Approximately 80.34% of the Fixed-Rate Mortgage Loans provide for
payment by the mortgagor of a prepayment charge in limited circumstances on
certain prepayments. No such prepayment charge will be distributed to the
holders of the Offered Certificates.
Approximately 31.93% of the Fixed-Rate Mortgage Loans will not fully
amortize by their respective maturity dates (each, a "Balloon Loan"). With
respect to the majority of the Balloon Loans, the Monthly Payments for such
Balloon Loans amortize over 360 months, but the final payment (the "Balloon
Payment") is due in the 180th month following origination. The amount of the
Balloon Payment on each Balloon Loan is substantially in excess of the amount of
the scheduled Monthly Payment for such Mortgage Loan.
Each Fixed-Rate Mortgage Loan accrues interest at a per annum rate (the
"Mortgage Interest Rate") of not less than 6.000% per annum and not more than
16.000% per annum and as of the Cut-off Date the weighted average Mortgage
Interest Rate of the Fixed-Rate Mortgage Loans was approximately 10.074% per
annum.
The weighted average remaining term to maturity of the Fixed-Rate
Mortgage Loans will be approximately 256 months as of the Cut-off Date. None of
the Fixed-Rate Mortgage Loans had a first Due Date prior to August 15, 1997 or
after April 1, 2002 or will have a remaining term to maturity of less than 106
months or greater than 359 months as of the Cut-off Date. The latest maturity
date of any Fixed-Rate Mortgage Loan is February 4, 2032.
The average Principal Balance of the Fixed-Rate Mortgage Loans at
origination was approximately $66,677.39. No Fixed-Rate Mortgage Loan had a
Cut-off Date Principal Balance of greater than approximately $496,487.31 or less
than approximately $8,113.97. The average Cut-off Date Principal Balance of the
Fixed-Rate Mortgage Loans was approximately $66,398.38.
Approximately 19.44% of the Fixed-Rate Mortgage Loans are secured by a
second Mortgage that is junior to a first mortgage lien (a "First Lien") on the
related Mortgaged Property, and approximately 80.56% of the Fixed-Rate Mortgage
Loans are secured by a First Lien on the related Mortgaged Property.
S-20
The Fixed-Rate Mortgage Loans are expected to have the following
characteristics as of the Cut-off Date (the sum in any column may not equal the
total indicated due to rounding):
Cut-off Date Principal Balances of the Fixed-Rate Mortgage Loans(1)
Principal Balance % of Aggregate Principal Balance
Number of Outstanding as of of Fixed-Rate Mortgage Loans
Range of Principal Balances Mortgage Loans the Cut-off Date Outstanding as of the Cut-off Date
--------------------------- -------------- ----------------- ----------------------------------
$ 0.01 to $ 50,000.00 1,237 $ 41,325,388.09 24.62%
$ 50,000.01 to $100,000.00 879 60,412,184.23 35.99
$100,000.01 to $150,000.00 242 29,039,798.76 17.30
$150,000.01 to $200,000.00 88 15,386,130.36 9.17
$200,000.01 to $250,000.00 49 11,054,500.51 6.59
$250,000.01 to $300,000.00 16 4,443,070.19 2.65
$300,000.01 to $350,000.00 9 2,925,756.80 1.74
$350,000.01 to $400,000.00 4 1,516,100.82 0.90
$400,000.01 to $450,000.00 3 1,255,697.44 0.75
$450,000.01 to $500,000.00 1 496,487.31 0.30
----- --------------- ------
Total 2,528 $167,855,114.51 100.00%
===== =============== ======
- ------------------
(1) The average Cut-off Date Principal Balance of the Fixed-Rate Mortgage
Loans was approximately $66,398.
Property Types of the Fixed-Rate Mortgage Loans
Principal Balance % of Aggregate Principal Balance
Number of Outstanding as of of Fixed-Rate Mortgage Loans
Property Type Mortgage Loans the Cut-off Date Outstanding as of the Cut-off Date
--------------------------- -------------- ----------------- ----------------------------------
Single Family 2,185 $138,416,599.27 82.46%
2-Family 153 14,775,917.90 8.80
PUD(1) 65 5,206,084.84 3.10
Condominium 72 4,023,508.17 2.40
3-Family 32 3,523,821.66 2.10
4-Family 15 1,529,031.63 0.91
Manufactured 4 306,072.76 0.18
Mobile 2 74,078.28 0.04
----- --------------- ------
Total 2,528 $167,855,114.51 100.00%
===== =============== ======
- ------------------
(1) PUD refers to a Planned Unit Development.
Occupancy Status of the Fixed-Rate Mortgage Loans(1)
Principal Balance % of Aggregate Principal Balance
Number of Outstanding as of of Fixed-Rate Mortgage Loans
Occupancy Status Mortgage Loans the Cut-off Date Outstanding as of the Cut-off Date
--------------------------- -------------- ----------------- ----------------------------------
Primary 2,338 $157,271,620.21 93.69%
Investor 180 9,714,386.73 5.79
Secondary 10 869,107.57 0.52
----- --------------- ------
Total 2,528 $167,855,114.51 100.00%
===== =============== ======
- ------------------
(1) Based on a representation made by the borrower at the time of origination.
S-21
Purpose of the Fixed-Rate Mortgage Loans
Principal Balance % of Aggregate Principal Balance
Number of Outstanding as of of Fixed-Rate Mortgage Loans
Purpose Mortgage Loans the Cut-off Date Outstanding as of the Cut-off Date
--------------------------- -------------- ----------------- ----------------------------------
Equity Out Refinance 1,147 $ 82,803,846.29 49.33%
Rate/Term Refinance 1,065 62,625,018.99 37.31
Purchase 316 22,426,249.23 13.36
----- --------------- ------
Total 2,528 $167,855,114.51 100.00%
===== =============== ======
Mortgage Interest Rates of the Fixed-Rate Mortgage Loans(1)
Principal Balance % of Aggregate Principal Balance
Number of Outstanding as of of Fixed-Rate Mortgage Loans
Range of Mortgage Interest Rates Mortgage Loans the Cut-off Date Outstanding as of the Cut-off Date
-------------------------------- -------------- ----------------- ----------------------------------
6.000% to 6.500% 1 $ 35,693.35 0.02%
6.501% to 7.000% 13 2,180,985.48 1.30
7.001% to 7.500% 73 7,541,076.93 4.49
7.501% to 8.000% 119 12,812,842.94 7.63
8.001% to 8.500% 150 14,528,915.98 8.66
8.501% to 9.000% 215 16,748,151.95 9.98
9.001% to 9.500% 224 15,706,136.45 9.36
9.501% to 10.000% 286 18,840,694.69 11.22
10.001% to 10.500% 259 15,518,609.32 9.25
10.501% to 11.000% 280 15,400,553.68 9.17
11.001% to 11.500% 226 12,055,570.71 7.18
11.501% to 12.000% 163 9,073,099.47 5.41
12.001% to 12.500% 204 11,404,546.15 6.79
12.501% to 13.000% 133 6,729,158.47 4.01
13.001% to 13.500% 94 4,928,900.58 2.94
13.501% to 14.000% 63 3,195,961.32 1.90
14.001% to 14.500% 14 801,457.02 0.48
14.501% to 15.000% 7 215,737.71 0.13
Over 15.000% 4 137,022.31 0.08
----- --------------- ------
Total 2,528 $167,855,114.51 100.00%
===== =============== ======
- ------------------
(1) The weighted average Mortgage Interest Rate of the Fixed-Rate Mortgage
Loans as of the Cut-off Date was approximately 10.074% per annum.
S-22
Combined Loan-to-Value Ratios of the Fixed-Rate Mortgage Loans(1)
Principal Balance % of Aggregate Principal Balance
Number of Outstanding as of of Fixed-Rate Mortgage Loans
Range of Combined Loan-to-Value Ratios Mortgage Loans the Cut-off Date Outstanding as of the Cut-off Date
-------------------------------------- -------------- ---------------- ----------------------------------
5.01% to 10.00% 1 $ 23,706.93 0.01%
10.01% to 15.00% 3 76,445.44 0.05
15.01% to 20.00% 6 144,709.19 0.09
20.01% to 25.00% 11 315,353.78 0.19
25.01% to 30.00% 12 405,837.41 0.24
30.01% to 35.00% 29 1,127,102.79 0.67
35.01% to 40.00% 27 1,186,145.95 0.71
40.01% to 45.00% 42 1,790,520.13 1.07
45.01% to 50.00% 74 3,914,445.12 2.33
50.01% to 55.00% 57 3,816,002.46 2.27
55.01% to 60.00% 86 4,952,563.63 2.95
60.01% to 65.00% 142 8,808,904.21 5.25
65.01% to 70.00% 201 13,850,728.55 8.25
70.01% to 75.00% 276 20,502,440.69 12.21
75.01% to 80.00% 667 48,269,208.06 28.76
80.01% to 85.00% 483 30,875,335.35 18.39
85.01% to 90.00% 372 24,665,863.96 14.69
90.01% to 95.00% 25 2,476,794.32 1.48
95.01% to 100.00% 1 174,105.75 0.10
100.01% to 125.00% 13 478,900.79 0.29
----- --------------- ------
Total 2,528 $167,855,114.51 100.00%
===== =============== ======
- ------------------
(1) The weighted average Combined Loan-to-Value Ratio of the Fixed-Rate
Mortgage Loans as of the Cut-off Date was approximately 76.45%.
The "Combined Loan-to-Value Ratio" of a Mortgage Loan shall generally
mean the ratio, expressed as a percentage of (i) the sum of (a) the principal
amount of the Mortgage Loan at origination plus (b) the outstanding balance of
the First Lien, if any, at origination of the Mortgage Loan over (ii) the
appraised value of the related Mortgaged Property at origination or the sale
price, if the appraised value is not available.
Credit Scores of the Fixed-Rate Mortgage Loans(1)
Principal Balance % of Aggregate Principal Balance
Number of Outstanding as of of Fixed-Rate Mortgage Loans
Range of Credit Scores Mortgage Loans the Cut-off Date Outstanding as of the Cut-off Date
-------------------------------- -------------- ----------------- ----------------------------------
751 to 800 16 $ 1,928,377.76 1.15%
701 to 750 80 7,678,898.59 4.57
651 to 700 274 21,661,591.45 12.90
601 to 650 682 46,753,402.68 27.85
551 to 600 661 42,321,998.14 25.21
501 to 550 559 33,211,206.18 19.79
451 to 500 182 10,681,660.69 6.36
401 to 450 5 257,267.23 0.15
No Score Reported 69 3,360,711.79 2.00
----- --------------- ------
Total 2,528 $167,855,114.51 100.00%
===== =============== ======
- ------------------
(1) The weighted average Credit Score of the Fixed-Rate Mortgage Loans as
of the Cut-off Date was approximately 596.
S-23
Credit Classes of the Fixed-Rate Mortgage Loans
Principal Balance % of Aggregate Principal Balance
Number of Outstanding as of of Fixed-Rate Mortgage Loans
Credit Class Mortgage Loans the Cut-off Date Outstanding as of the Cut-off Date
-------------------------------- -------------- ----------------- ----------------------------------
I 522 $ 34,398,595.46 20.49%
AA 380 30,973,845.85 18.45
A+ 274 22,255,506.60 13.26
IV 387 19,905,478.09 11.86
II 303 17,810,281.00 10.61
IIB 309 15,831,989.46 9.43
ANIV 150 12,677,062.23 7.55
A 39 2,916,365.57 1.74
IIII 32 2,523,302.25 1.50
B 39 2,362,501.62 1.41
IIISE 31 2,289,153.82 1.36
AAA 9 1,201,032.09 0.72
V 21 1,168,761.74 0.70
C 16 664,758.13 0.40
D 8 490,626.18 0.29
IVPI 8 385,854.42 0.23
----- --------------- ------
Total 2,528 $167,855,114.51 100.00%
===== =============== ======
S-24
Geographic Distribution of the Fixed-Rate Mortgage Loans(1)
Principal Balance % of Aggregate Principal Balance
Number of Outstanding as of of Fixed-Rate Mortgage Loans
Location Mortgage Loans the Cut-off Date Outstanding as of the Cut-off Date
------------------------------- -------------- ----------------- ----------------------------------
Alabama 127 $ 6,000,177.65 3.57%
Arizona 8 375,072.63 0.22
Arkansas 132 6,105,419.61 3.64
California 83 5,214,003.58 3.11
Colorado 86 5,303,466.22 3.16
Connecticut 43 2,882,455.67 1.72
Delaware 10 829,414.36 0.49
District of Columbia 1 67,997.59 0.04
Florida 332 21,718,398.64 12.94
Georgia 55 3,265,634.36 1.95
Idaho 2 48,315.29 0.03
Illinois 118 6,937,795.53 4.13
Indiana 183 9,934,332.89 5.92
Iowa 3 243,108.51 0.14
Kansas 1 15,893.09 0.01
Kentucky 50 2,817,522.51 1.68
Louisiana 36 1,912,464.24 1.14
Maine 13 893,084.75 0.53
Maryland 50 5,557,500.26 3.31
Massachusetts 30 2,593,511.36 1.55
Michigan 139 8,078,938.20 4.81
Minnesota 11 414,475.38 0.25
Mississippi 42 1,800,094.55 1.07
Missouri 24 1,184,356.24 0.71
Montana 1 129,833.63 0.08
Nebraska 4 303,454.40 0.18
New Hampshire 3 510,017.12 0.30
New Jersey 65 7,071,655.77 4.21
New Mexico 4 163,048.62 0.10
New York 292 31,668,835.45 18.87
North Carolina 10 630,913.12 0.38
North Dakota 2 118,630.62 0.07
Ohio 86 5,033,361.97 3.00
Oklahoma 37 1,534,063.12 0.91
Oregon 11 726,058.20 0.43
Pennsylvania 267 14,942,684.96 8.90
Rhode Island 24 1,978,444.90 1.18
South Carolina 52 2,915,740.73 1.74
Tennessee 11 460,990.58 0.27
Utah 3 332,990.06 0.20
Vermont 1 129,874.16 0.08
Virginia 34 2,834,864.62 1.69
Washington 12 666,955.60 0.40
West Virginia 12 590,507.81 0.35
Wisconsin 17 871,400.68 0.52
Wyoming 1 47,355.28 0.03
----- --------------- ------
Total 2,528 $167,855,114.51 100.00%
===== =============== ======
- ------------------
(1) The greatest ZIP Code geographic concentration of the Fixed-Rate
Mortgage Loans, by aggregate Principal Balance of the Fixed-Rate
Mortgage Loans as of the Cut-off Date, was approximately 0.55% in the
11746 ZIP Code.
S-25
Documentation Levels of the Fixed-Rate Mortgage Loans(1)
Principal Balance % of Aggregate Principal Balance
Number of Outstanding as of of Fixed-Rate Mortgage Loans
Documentation Level Mortgage Loans the Cut-off Date Outstanding as of the Cut-off Date
------------------------------- -------------- ----------------- ----------------------------------
Full Documentation 2,232 $143,662,401.42 85.59%
Stated Income 250 20,916,540.68 12.46
Alternative Documentation 33 2,569,329.72 1.53
Limited Documentation 11 600,974.28 0.36
No Documentation 2 105,868.41 0.06
----- --------------- ------
Total 2,528 $167,855,114.51 100.00%
===== =============== ======
- ------------------
(1) For a description of each documentation level, see "Underwriting
Standards" in this Prospectus Supplement.
Prepayment Penalty Terms(1)
Principal Balance % of Aggregate Principal Balance
Number of Outstanding as of of Fixed-Rate Mortgage Loans
Prepayment Penalty Term Mortgage Loans the Cut-off Date Outstanding as of the Cut-off Date
------------------------------- -------------- ----------------- ----------------------------------
None 531 $ 33,006,599.76 19.66%
One Year 21 1,979,895.55 1.18
Two Years 3 295,241.51 0.18
Three Years 1,800 120,078,346.90 71.54
Five Years 173 12,495,030.79 7.44
----- --------------- ------
Total 2,528 $167,855,114.51 100.00%
===== =============== ======
- ------------------
(1) The weighted average prepayment penalty term for the Fixed-Rate
Mortgage Loans was approximately 30 months.
Adjustable-Rate Mortgage Loan Statistics
The Adjustable-Rate Mortgage Loans consist of 1,436 adjustable-rate
Mortgage Loans. The aggregate Principal Balance of the Adjustable-Rate Mortgage
Loans as of the Cut-off Date is equal to $147,891,741.67. The Adjustable-Rate
Mortgage Loans all have original terms to maturity of 360 months. The following
statistical information, unless otherwise specified, is based upon the aggregate
Principal Balance of the Adjustable-Rate Mortgage Loans as of the Cut-off Date.
The Adjustable-Rate Mortgage Loans are secured by Mortgages which the
Seller has represented create first liens on the related Mortgaged Properties.
Approximately 49.56% of the Adjustable-Rate Mortgage Loans had a Combined
Loan-to-Value Ratio as of the Cut-off Date in excess of 80% and do not have
primary mortgage insurance. There can be no assurance that the Combined
Loan-to-Value Ratio of any Adjustable-Rate Mortgage Loan determined at any time
after origination is less than or equal to its original Combined Loan-to-Value
Ratio. All of the Adjustable-Rate Mortgage Loans have a Due Date on the first
day of each month.
Approximately 75.88% of the Adjustable-Rate Mortgage Loans provide for
payment by the mortgagor of a prepayment charge in limited circumstances on
certain prepayments. No such prepayment charge will be distributed to the
holders of the Offered Certificates.
The weighted average remaining term to maturity of the Adjustable-Rate
Mortgage Loans will be approximately 356 months as of the Cut-off Date. None of
the Adjustable-Rate Mortgage Loans had a first Due Date prior to January 1, 1995
or after April 1, 2002 or will have a remaining term to maturity of less than
272 months or greater than 359 months as of the Cut-off Date. The month of the
latest maturity date of any Adjustable-Rate Mortgage Loan is March 1, 2032.
The average Principal Balance of the Adjustable-Rate Mortgage Loans at
origination was approximately $103,210.04. No Adjustable-Rate Mortgage Loan had
a Cut-off Date Principal Balance of greater than approximately $489,648.51 or
less than approximately $9,448.34. The average Cut-off Date Principal Balance of
the Adjustable-Rate Mortgage Loans was approximately $102,988.68.
S-26
A substantial majority of the Adjustable-Rate Mortgage Loans provide
for semi-annual adjustment to the Mortgage Interest Rate thereon and for
corresponding adjustments to the Monthly Payment amount due thereon, in each
case on each adjustment date applicable thereto (each such date, an "Adjustment
Date"). On each Adjustment Date for each Adjustable-Rate Mortgage Loan, the
Mortgage Interest Rate thereon will be adjusted to equal the sum of the index
applicable to determining the Mortgage Interest Rate on each Adjustable-Rate
Mortgage Loan (the "Index") and a fixed percentage amount (the "Gross Margin").
The Mortgage Interest Rate on each such Adjustable-Rate Mortgage Loan will not
increase or decrease by a percentage ranging from 2.00% to 3.00% per annum on
the first related Adjustment Date (the "Initial Periodic Rate Cap") and from
1.000% to 2.000% per annum on any Adjustment Date thereafter (the "Periodic Rate
Cap"). The Adjustable-Rate Mortgage Loans have a weighted average Initial
Periodic Rate Cap of approximately 3.000% per annum and a weighted average
Periodic Rate Cap of approximately 1.000% per annum thereafter. Each Mortgage
Interest Rate on each such Adjustable-Rate Mortgage Loan will not exceed a
specified maximum Mortgage Interest Rate over the life of such Adjustable-Rate
Mortgage Loan (the "Maximum Mortgage Interest Rate") or be less than a specified
minimum Mortgage Interest Rate over the life of such Adjustable-Rate Mortgage
Loan (the "Minimum Mortgage Interest Rate"). Effective with the first Monthly
Payment due on each Adjustable-Rate Mortgage Loan after each related Adjustment
Date, the Monthly Payment amount will be adjusted to an amount that will
amortize fully the outstanding Principal Balance of the related Mortgage Loan
over its remaining term, and pay interest at the Mortgage Interest Rate as so
adjusted. None of the Adjustable-Rate Mortgage Loans are Balloon Loans. Due to
the application of the Periodic Rate Caps and the Maximum Mortgage Interest
Rates, the Mortgage Interest Rate on each such Mortgage Loan, as adjusted on any
related Adjustment Date, may be less than the sum of the Index and the related
Gross Margin, rounded as described herein. See "--The Index" in this Prospectus
Supplement. The Depositor has no information as to whether any of the
Adjustable-Rate Mortgage Loans permit the related mortgagor to convert the
adjustable Mortgage Interest Rate thereon to a fixed Mortgage Interest Rate.
The Adjustable-Rate Mortgage Loans had Mortgage Interest Rates as of
the Cut-off Date of not less than 6.000% per annum and not more than 14.250% per
annum and the weighted average Mortgage Interest Rate was approximately 9.917%
per annum. As of the Cut-off Date, the Adjustable-Rate Mortgage Loans had Gross
Margins ranging from 2.950% to 11.875%, Minimum Mortgage Interest Rates ranging
from 5.750% per annum to 13.250% per annum and Maximum Mortgage Interest Rates
ranging from 12.750% per annum to 20.250% per annum. As of the Cut-off Date, the
weighted average Gross Margin was approximately 7.744%, the weighted average
Minimum Mortgage Interest Rate was approximately 8.916% per annum and the
weighted average Maximum Mortgage Interest Rate was approximately 15.918% per
annum. The latest next Adjustment Date following the Cut-off Date on any
Adjustable-Rate Mortgage Loan occurs in March 2005 and the weighted average
number of months to the next Adjustment Date following the Cut-off Date for all
of the Adjustable-Rate Mortgage Loans is 24 months.
S-27
The Adjustable-Rate Mortgage Loans are expected to have the following
characteristics as of the Cut-off Date (the sum in any column may not equal the
total indicated due to rounding):
Cut-off Date Principal Balances of the Adjustable-Rate Mortgage Loans(1)
Principal Balance % of Aggregate Principal Balance
Number of Outstanding as of of Adjustable-Rate Mortgage Loans
Range of Principal Balances Mortgage Loans the Cut-off Date Outstanding as of the Cut-off Date
--------------------------- -------------- ----------------- ----------------------------------
$ .01 to $ 50,000.00 298 $ 11,192,236.80 7.57%
$ 50,000.01 to $100,000.00 581 42,057,274.36 28.44
$100,000.01 to $150,000.00 291 35,186,260.11 23.79
$150,000.01 to $200,000.00 135 23,253,683.77 15.72
$200,000.01 to $250,000.00 67 14,936,421.29 10.10
$250,000.01 to $300,000.00 27 7,317,534.64 4.95
$300,000.01 to $350,000.00 19 6,172,388.06 4.17
$350,000.01 to $400,000.00 6 2,249,276.87 1.52
$400,000.01 to $450,000.00 5 2,192,001.78 1.48
$450,000.01 to $500,000.00 7 3,334,663.99 2.25
----- --------------- ------
Total 1,436 $147,891,741.67 100.00%
===== =============== ======
- ------------------
(1) The average Cut-off Date Principal Balance of the Adjustable-Rate
Mortgage Loans was approximately $102,989.
Property Types of the Adjustable-Rate Mortgage Loans
Principal Balance % of Aggregate Principal Balance
Number of Outstanding as of of Adjustable-Rate Mortgage Loans
Property Type Mortgage Loans the Cut-off Date Outstanding as of the Cut-off Date
--------------------------- -------------- ----------------- ----------------------------------
Single Family 1,197 $116,524,093.02 78.79%
2-Family 99 13,096,832.32 8.86
PUD 49 7,274,521.09 4.92
3-Family 34 5,544,027.72 3.75
Condominium 46 4,390,976.98 2.97
4-Family 8 867,443.78 0.59
Manufactured Housing 2 123,486.68 0.08
Mobile Home 1 70,360.08 0.05
----- --------------- ------
Total 1,436 $147,891,741.67 100.00%
===== =============== ======
Occupancy Status of the Adjustable-Rate Mortgage Loans(1)
Principal Balance % of Aggregate Principal Balance
Number of Outstanding as of of Adjustable-Rate Mortgage Loans
Occupancy Status Mortgage Loans the Cut-off Date Outstanding as of the Cut-off Date
--------------------------- -------------- ----------------- ----------------------------------
Primary 1,363 $141,851,819.98 95.92%
Investor 71 5,727,697.72 3.87
Secondary 2 312,223.97 0.21
----- --------------- ------
Total 1,436 $147,891,741.67 100.00%
===== =============== ======
- ------------------
(1) Based on a representation made by the borrower at the time of
origination.
S-28
Purpose of the Adjustable-Rate Mortgage Loans
Principal Balance % of Aggregate Principal Balance
Number of Outstanding as of of Adjustable-Rate Mortgage Loans
Purpose Mortgage Loans the Cut-off Date Outstanding as of the Cut-off Date
--------------------------- -------------- ----------------- ----------------------------------
Equity Refinance 604 $ 69,674,415.33 47.11%
Purchase 411 39,230,150.43 26.53
Rate/Term Refinance 421 38,987,175.91 26.36
----- --------------- ------
Total 1,436 $147,891,741.67 100.00%
===== =============== ======
Mortgage Interest Rates of the Adjustable-Rate Mortgage Loans(1)
Principal Balance % of Aggregate Principal Balance
Number of Outstanding as of of Adjustable-Rate Mortgage Loans
Range of Mortgage Interest Rates Mortgage Loans the Cut-off Date Outstanding as of the Cut-off Date
-------------------------------- -------------- ----------------- ----------------------------------
6.001% or 6.500% 1 $ 57,612.19 0.04%
6.501% to 7.000% 7 1,117,820.44 0.76
7.001% to 7.500% 28 3,504,067.33 2.37
7.501% to 8.000% 61 8,776,707.93 5.93
8.001% to 8.500% 103 13,250,559.47 8.96
8.501% to 9.000% 167 22,510,137.78 15.22
9.001% to 9.500% 170 17,669,080.26 11.95
9.501% to 10.000% 176 18,540,072.37 12.54
10.001% to 10.500% 138 12,128,177.94 8.20
10.501% to 11.000% 150 14,507,228.77 9.81
11.001% to 11.500% 115 9,466,886.63 6.40
11.501% to 12.000% 172 14,458,474.06 9.78
12.001% to 12.500% 103 8,174,918.08 5.53
12.501% to 13.000% 29 2,349,232.88 1.59
13.001% to 13.500% 7 570,977.85 0.39
13.501% to 14.000% 8 784,214.89 0.53
Over 14.000% 1 25,572.80 0.02
----- --------------- ------
Total 1,436 $147,891,741.67 100.00%
===== =============== ======
- ------------------
(1) The weighted average Mortgage Interest Rate of the Adjustable-Rate
Mortgage Loans as of the Cut-off Date was approximately 9.917% per
annum.
S-29
Combined Loan-to-Value Ratios of the Adjustable-Rate Mortgage Loans(1)
Principal Balance % of Aggregate Principal Balance
Range of Combined Loan-to-Value Number of Outstanding as of of Adjustable-Rate Mortgage Loans
Ratios Mortgage Loans the Cut-off Date Outstanding as of the Cut-off Date
-------------------------------- -------------- ----------------- ----------------------------------
20.01% to 25.00% 2 $ 78,744.34 0.05%
25.01% to 30.00% 6 225,500.51 0.15
30.01% to 35.00% 8 600,036.80 0.41
35.01% to 40.00% 10 451,721.44 0.31
40.01% to 45.00% 5 224,047.55 0.15
45.01% to 50.00% 13 1,297,978.95 0.88
50.01% to 55.00% 19 1,562,968.80 1.06
55.01% to 60.00% 29 2,314,577.46 1.57
60.01% to 65.00% 74 5,943,299.34 4.02
65.01% to 70.00% 97 9,917,367.74 6.71
70.01% to 75.00% 139 13,860,577.34 9.37
75.01% to 80.00% 387 38,120,199.93 25.78
80.01% to 85.00% 340 35,587,548.46 24.06
85.01% to 90.00% 286 34,998,242.88 23.66
90.01% to 95.00% 20 2,643,313.50 1.79
95.01% to 105.00% 1 65,616.63 0.04
----- --------------- ------
Total 1,436 $147,891,741.67 100.00%
===== =============== ======
- ------------------
(1) The weighted average Combined Loan-to-Value Ratio of the
Adjustable-Rate Mortgage Loans as of the Cut-off Date was approximately
80.28%.
Credit Scores of the Adjustable-Rate Mortgage Loans(1)
Principal Balance % of Aggregate Principal Balance
Number of Outstanding as of of Adjustable-Rate Mortgage Loans
Range of Credit Scores Mortgage Loans the Cut-off Date Outstanding as of the Cut-off Date
-------------------------------- -------------- ----------------- ----------------------------------
801 - 850 1 $ 119,438.43 0.08%
751 - 800 4 337,482.11 0.23
701 - 750 17 2,121,599.56 1.43
651 - 700 86 11,082,340.51 7.49
601 - 650 299 37,172,025.29 25.13
551 - 600 412 42,067,578.32 28.44
501 - 550 375 36,221,417.18 24.49
451 - 500 180 14,194,267.19 9.60
401 - 450 14 999,848.08 0.68
Not Available 48 3,575,745.00 2.42
----- --------------- ------
Total 1,436 $147,891,741.67 100.00%
===== =============== ======
- ------------------
(1) The weighted average Credit Score of the Adjustable-Rate Mortgage Loans
as of the Cut-off Date was approximately 575.
S-30
Credit Classes of the Adjustable-Rate Mortgage Loans
Principal Balance % of Aggregate Principal Balance
Number of Outstanding as of of Adjustable-Rate Mortgage Loans
Credit Class Mortgage Loans the Cut-off Date Outstanding as of the Cut-off Date
-------------------------------- -------------- ----------------- ----------------------------------
I 280 $ 34,172,077.38 23.11%
IV 274 22,479,849.92 15.20
A+ 156 18,867,444.36 12.76
IIB 200 16,439,549.81 11.12
AA 120 15,549,012.01 10.51
II 166 14,562,120.31 9.85
ANIV 58 8,496,403.39 5.75
B 36 3,297,965.93 2.23
V 45 3,251,890.78 2.20
III 29 3,073,683.75 2.08
A 27 2,866,264.12 1.94
IIISE 20 2,543,088.16 1.72
C 11 1,032,563.87 0.70
IVPI 10 988,700.73 0.67
D 4 271,127.15 0.18
----- --------------- ------
Total 1,436 $147,891,741.67 100.00%
===== =============== ======
S-31
Geographic Distribution of the Adjustable-Rate Mortgage Loans(1)
Principal Balance % of Aggregate Principal Balance
Number of Outstanding as of of Adjustable-Rate Mortgage Loans
Location Mortgage Loans the Cut-off Date Outstanding as of the Cut-off Date
-------------------------------- -------------- ----------------- ----------------------------------
Alabama 35 $ 2,558,330.56 1.73
Arizona 4 367,571.39 0.25
Arkansas 11 721,331.14 0.49
California 8 1,737,318.75 1.17
Colorado 59 10,020,963.26 6.78
Connecticut 27 3,527,899.45 2.39
Delaware 2 297,119.52 0.20
District of Columbia 2 192,088.27 0.13
Florida 194 19,667,454.05 13.30
Georgia 21 1,983,526.05 1.34
Idaho 2 323,468.33 0.22
Illinois 69 7,801,474.09 5.28
Indiana 111 7,890,947.40 5.34
Iowa 8 474,533.75 0.32
Kansas 8 739,265.41 0.50
Kentucky 27 2,097,375.85 1.42
Louisiana 4 209,493.77 0.14
Maine 5 554,048.11 0.37
Maryland 10 1,068,451.74 0.72
Massachusetts 34 4,972,078.73 3.36
Michigan 147 12,254,711.05 8.29
Minnesota 11 954,674.59 0.65
Mississippi 9 461,486.55 0.31
Missouri 24 2,236,924.91 1.51
Nebraska 6 357,209.57 0.24
Nevada 1 136,929.92 0.09
New Hampshire 9 1,316,021.85 0.89
New Jersey 80 11,872,212.56 8.03
New Mexico 1 235,509.56 0.16
New York 125 20,414,032.02 13.80
North Carolina 17 1,035,325.35 0.70
Ohio 88 5,333,953.37 3.61
Oklahoma 16 1,181,066.65 0.80
Oregon 5 882,974.43 0.60
Pennsylvania 181 13,722,401.77 9.28
Rhode Island 8 1,396,396.82 0.94
South Carolina 23 2,025,728.36 1.37
South Dakota 4 324,366.63 0.22
Tennessee 2 135,659.29 0.09
Utah 4 493,671.41 0.33
Virginia 19 2,684,820.39 1.82
Washington 1 220,145.30 0.15
West Virginia 7 456,970.77 0.31
Wisconsin 6 473,386.84 0.32
Wyoming 1 80,422.09 0.05
----- --------------- ------
Total 1,436 $147,891,741.67 100.00%
===== =============== ======
- ------------------
(1) The greatest ZIP Code geographic concentration of the Adjustable-Rate
Mortgage Loans, by aggregate Principal Balance of the Adjustable-Rate
Mortgage Loans as of the Cut-off Date, was approximately 0.83% in the
01841 ZIP Code.
S-32
Documentation Levels of the Adjustable-Rate Mortgage Loans(1)
Principal Balance % of Aggregate Principal Balance
Number of Outstanding as of of Adjustable-Rate Mortgage Loans
Documentation Level Mortgage Loans the Cut-off Date Outstanding as of the Cut-off Date
-------------------------------- -------------- ----------------- ----------------------------------
Full Documentation 1,264 $124,007,381.88 83.85%
Stated Income 132 18,265,251.66 12.35
Alternative Documentation 19 3,390,995.98 2.29
Limited Documentation 19 2,116,397.28 1.43
No Documentation 2 111,714.87 0.08
----- --------------- ------
Total 1,436 $147,891,741.67 100.00%
===== =============== ======
- ------------------
(1) For a description of each documentation level, see "Underwriting
Standards" in this Prospectus Supplement.
Maximum Mortgage Interest Rates of the Adjustable-Rate Mortgage Loans(1)
Principal Balance % of Aggregate Principal Balance
Range of Maximum Mortgage Number of Outstanding as of of Adjustable-Rate Mortgage Loans
Interest Rates Mortgage Loans the Cut-off Date Outstanding as of the Cut-off Date
-------------------------------- -------------- ----------------- ----------------------------------
12.501% to 13.000% 7 $ 1,117,820.44 0.76%
13.001% to 13.500% 28 3,504,067.33 2.37
13.501% to 14.000% 61 8,776,707.93 5.93
14.001% to 14.500% 104 13,308,171.66 9.00
14.501% to 15.000% 167 22,510,137.78 15.22
15.001% to 15.500% 170 17,669,080.26 11.95
15.501% to 16.000% 176 18,540,072.37 12.54
16.001% to 16.500% 138 12,128,177.94 8.20
16.501% to 17.000% 150 14,507,228.77 9.81
17.001% to 17.500% 115 9,466,886.63 6.40
17.501% to 18.000% 172 14,458,474.06 9.78
18.001% to 18.500% 103 8,174,918.08 5.53
18.501% to 19.000% 29 2,349,232.88 1.59
19.001% to 19.500% 8 741,163.21 0.50
19.501% to 20.000% 7 614,029.53 0.42
Over 20.000% 1 25,572.80 0.02
----- --------------- ------
Total 1,436 $147,891,741.67 100.00%
===== =============== ======
- ------------------
(1) The weighted average Maximum Mortgage Interest Rate of the
Adjustable-Rate Mortgage Loans as of the Cut-off Date was approximately
15.918% per annum.
S-33
Minimum Mortgage Interest Rates of the Adjustable-Rate Mortgage Loans(1)
Principal Balance % of Aggregate Principal Balance
Range of Minimum Mortgage Number of Outstanding as of of Adjustable-Rate Mortgage Loans
Interest Rates Mortgage Loans the Cut-off Date Outstanding as of the Cut-off Date
-------------------------------- -------------- ----------------- ----------------------------------
5.501% to 6.000% 7 $ 1,117,820.44 0.76%
6.001% to 6.500% 28 3,504,067.33 2.37
6.501% to 7.000% 61 8,776,707.93 5.93
7.001% to 7.500% 104 13,308,171.66 9.00
7.501% to 8.000% 167 22,510,137.78 15.22
8.001% to 8.500% 169 17,617,181.10 11.91
8.501% to 9.000% 176 18,540,072.37 12.54
9.001% to 9.500% 139 12,180,077.10 8.24
9.501% to 10.000% 151 14,739,527.20 9.97
10.001% to 10.500% 115 9,466,886.63 6.40
10.501% to 11.000% 170 14,181,166.91 9.59
11.001% to 11.500% 104 8,219,926.80 5.56
11.501% to 12.000% 29 2,349,232.88 1.59
12.001% to 12.500% 8 741,163.21 0.50
12.501% to 13.000% 7 614,029.53 0.42
13.001% to 13.500% 1 25,572.80 0.02
----- --------------- ------
Total 1,436 $147,891,741.67 100.00%
===== =============== ======
- ------------------
(1) The weighted average Minimum Mortgage Interest Rate of the
Adjustable-Rate Mortgage Loans as of the Cut-off Date was approximately
8.916% per annum.
Gross Margins of the Adjustable-Rate Mortgage Loans(1)
Principal Balance % of Aggregate Principal Balance
Number of Outstanding as of of Adjustable-Rate Mortgage Loans
Range of Gross Margins Mortgage Loans the Cut-off Date Outstanding as of the Cut-off Date
-------------------------------- -------------- ----------------- ----------------------------------
2.501% to 3.000% 1 $ 51,899.16 0.04%
4.001% to 4.500% 2 353,082.64 0.24
4.501% to 5.000% 9 1,051,091.66 0.71
5.001% to 5.500% 30 3,384,644.31 2.29
5.501% to 6.000% 69 9,365,066.18 6.33
6.001% to 6.500% 133 17,242,048.67 11.66
6.501% to 7.000% 194 21,899,208.52 14.81
7.001% to 7.500% 199 22,028,093.47 14.89
7.501% to 8.000% 145 15,236,747.89 10.30
8.001% to 8.500% 153 13,696,310.91 9.26
8.501% to 9.000% 155 14,748,261.74 9.97
9.001% to 9.500% 90 7,247,735.74 4.90
9.501% to 10.000% 165 13,674,063.18 9.25
Over 10.000% 91 7,913,487.60 5.35
----- --------------- ------
Total 1,436 $147,891,741.67 100.00%
===== =============== ======
- ------------------
(1) The weighted average Gross Margin of the Adjustable-Rate Mortgage Loans
as of the Cut-off Date was approximately 7.744% per annum.
S-34
Months to Next Adjustment Date of the Adjustable-Rate Mortgage Loans(1)
Principal Balance % of Aggregate Principal Balance
Months of Next Adjustment Number of Outstanding as of of Adjustable-Rate Mortgage Loans
Date Mortgage Loans the Cut-off Date Outstanding as of the Cut-off Date
-------------------------------- -------------- ----------------- ----------------------------------
7 to 12 1 $ 51,899.16 0.04%
13 to 18 143 15,475,790.49 10.46
19 to 24 774 83,290,346.06 56.32
25 to 30 47 3,778,455.20 2.55
31 to 36 471 45,295,250.76 30.63
----- --------------- ------
Total 1,436 $147,891,741.67 100.00%
===== =============== ======
- ------------------
(1) The weighted average months to next Adjustment Date for the
Adjustable-Rate Mortgage Loans as of the Cut-off Date was approximately
24 months.
Prepayment Penalty Terms(1)
Principal Balance % of Aggregate Principal Balance
Number of Outstanding as of of Adjustable-Rate Mortgage Loans
Prepayment Penalty Term Mortgage Loans the Cut-off Date Outstanding as of the Cut-off Date
-------------------------------- -------------- ----------------- ----------------------------------
None 282 $ 35,677,936.07 24.12%
One Year 48 6,090,901.87 4.12
Two Years 546 52,320,906.94 35.38
Three Years 549 52,645,584.35 35.60
Five Years 11 1,156,412.44 0.78
----- --------------- ------
Total 1,436 $147,891,741.67 100.00%
===== =============== ======
- ------------------
(1) The weighted average prepayment penalty term for the Adjustable-Rate
Mortgage Loans was approximately 22.3 months.
The Index
With respect to approximately 99.96% of the Adjustable-Rate Mortgage
Loans, the Index is the average of interbank offered rates for six-month U.S.
dollar deposits in the London market based on quotations of major banks, and
most recently available as of a day specified in the related note as published
by Fannie Mae ("Six Month LIBOR") and with respect to approximately 0.04% of the
Adjustable-Rate Mortgage Loans, the Index is the weekly average yield on United
States Treasury securities adjusted to a constant maturity of one year as
published by the Federal Reserve Board in Statistical Release H.15(519) and most
recently available as of a day specified in the related note ("One Year CMT").
Listed below are some historical values for the months indicated of the two
indices.
S-35
Six-Month LIBOR
Year
-----------------------------------------------------------------------
Month 2002 2001 2000 1999 1998 1997 1996
- ----- ---- ---- ---- ---- ---- ---- ----
January 2.03% 5.26% 6.29% 4.97% 5.63% 5.69% 5.27%
February 2.03% 4.91% 6.33% 5.13% 5.70% 5.69% 5.30%
March 2.33% 4.61% 6.53% 5.06% 5.75% 5.94% 5.50%
April 2.12% 4.30% 6.73% 5.04% 5.81% 6.00% 5.56%
May -- 3.98% 7.11% 5.25% 5.75% 6.00% 5.63%
June -- 3.91% 7.00% 5.65% 5.78% 5.91% 5.79%
July -- 3.69% 6.89% 5.71% 5.75% 5.80% 5.88%
August -- 3.45% 6.83% 5.92% 5.59% 5.84% 5.77%
September -- 2.52% 6.76% 5.96% 5.25% 5.84% 5.73%
October -- 2.15% 6.72% 6.12% 4.98% 5.79% 5.57%
November -- 2.03% 6.64% 6.06% 5.15% 5.91% 5.54%
December -- 1.98% 6.20% 6.13% 5.07% 5.84% 5.60%
One Year CMT
Year
-----------------------------------------------------------------------
Month 2002 2001 2000 1999 1998 1997 1996
- ----- ---- ---- ---- ---- ---- ---- ----
January 2.16% 4.81% 6.12% 4.51% 5.24% 5.61% 5.09%
February 2.23% 4.68% 6.22% 4.70% 5.31% 5.53% 4.94%
March 2.57% 4.30% 6.22% 4.78% 5.39% 5.80% 5.34%
April 2.48% 3.98% 6.15% 4.69% 5.38% 5.99% 5.54%
May -- 3.78% 6.33% 4.85% 5.44% 5.87% 5.64%
June -- 3.58% 6.17% 5.10% 5.41% 5.69% 5.81%
July -- 3.62% 6.08% 5.03% 5.36% 5.54% 5.85%
August -- 3.47% 6.18% 5.20% 5.21% 5.56% 5.67%
September -- 2.82% 6.13% 5.25% 4.71% 5.52% 5.83%
October -- 2.33% 6.01% 5.43% 4.12% 5.46% 5.55%
November -- 2.18% 6.09% 5.55% 4.53% 5.46% 5.42%
December -- 2.22% 5.60% 5.84% 4.52% 5.53% 5.47%
If any Index becomes unpublished or is otherwise unavailable, the
Servicer will select an alternative index which is based upon comparable
information.
Terms of the Mortgage Loans
The Mortgage Loans accrue interest on a self-amortizing basis (the
"Actuarial Mortgage Loans") or a simple interest basis (the "Simple Interest
Mortgage Loans"). Approximately 0.69% of the Mortgage Loans are expected to be
Simple Interest Mortgage Loans, and approximately 99.31% of the Mortgage Loans
are expected to be Actuarial Mortgage Loans, in each case as a percentage of the
Cut-off Date Principal Balance.
For Actuarial Mortgage Loans, interest will be calculated based on a
360-day year of twelve 30-day months. When a full prepayment of principal is
made on an Actuarial Mortgage Loan during a month, the mortgagor is charged
interest only on the days of the month actually elapsed up to the date of such
prepayment, at a daily interest rate that is applied to the principal amount of
the loan so prepaid. When a partial prepayment of principal is made on an
Actuarial Mortgage Loan during a month, the mortgagor generally is not charged
interest on the amount of the partial prepayment during the month in which such
prepayment is made.
S-36
For Simple Interest Mortgage Loans, the Mortgage Loan is amortized over
a series of equal monthly payments. Each monthly interest payment is calculated
by multiplying the outstanding Principal Balance of the loan by the stated
interest rate. That product is then multiplied by a fraction, the numerator of
which is the number of days elapsed since the preceding payment of interest was
made and the denominator of which is either 365 or 360, depending on applicable
state law. Payments received on a Simple Interest Mortgage Loan are applied
first to interest accrued to the date payment is received and second to reduce
the unpaid Principal Balance of the Mortgage Loan. Accordingly, if a mortgagor
makes a payment on the Mortgage Loan less than 30 days after the previous
payment, the interest collected for the period since the preceding payment was
made will be less than 30 days' interest, and the amount of principal repaid in
such month will be correspondingly greater. Conversely, if a mortgagor makes a
payment on the Mortgage Loan more than 30 days after the previous payment, the
interest collected for the period since the preceding payment was made will be
greater than 30 days' interest, and the amount of principal repaid in the month
will be correspondingly reduced. As a result, based on the payment
characteristics of a particular mortgagor, the principal due on the final due
date of a Simple Interest Mortgage Loan may vary from the principal payment that
would be made if payments for such Mortgage Loan were always made on their due
dates.
If a mortgagor pays more than one installment on a Simple Interest
Mortgage Loan at a time, the regular installment will be treated as described
above. However, the entire amount of the additional installment will be treated
as a receipt of one or more regular principal payments and applied to reduce the
Principal Balance of the related Mortgage Loan. Although such mortgagor will not
be required to make the next monthly installment, interest will continue to
accrue on the Principal Balance of such Mortgage Loan, as reduced by the
application of the early installment. As a result, when such mortgagor pays the
next required installment on a Simple Interest Mortgage Loan, such payment may
be insufficient to cover the interest that has accrued since the last payment by
the mortgagor. Notwithstanding such insufficiency, such Mortgage Loan would be
considered to be current. This situation would continue until the monthly
installments are once again sufficient to cover all accrued interest and to
reduce the Principal Balance of such Mortgage Loan. Depending on the Principal
Balance and interest rate of the related Mortgage Loan and on the number of
installments paid early, there may be extended periods of time during which
Simple Interest Mortgage Loans in respect of which such additional installments
have been made are not amortizing and are considered current.
THE SELLER
The Depositor will purchase the Mortgage Loans from Banc of America
Mortgage Capital Corporation, a North Carolina corporation (the "Seller"). The
Seller is an affiliate of the Depositor. The Seller has its principal place of
business in Charlotte, North Carolina. The Seller will have acquired the
Mortgage Loans from the Originator. The Seller's business activities are
generally comprised of making equity or equity-like investments, making bridge
and mezzanine loans, mortgage-backed trading, and mortgage banking finance.
THE ORIGINATOR
Superior Federal Bank, FSB (the "Originator") originated or acquired
substantially all of the mortgage loans in the trust. The Originator was formed
in 2001 to assume the operations of Superior Bank, FSB, an insolvent federal
savings bank ("Old Superior"). The Office of Thrift Supervision closed Old
Superior on July 27, 2001 and appointed the Federal Deposit Insurance
Corporation as receiver of Old Superior and conservator of the Originator. The
FDIC transferred all of Old Superior's assets to the Originator. The Originator
ceased accepting new loan applications on January 11, 2002 and ceased funding
mortgage loans in its pipeline on February 22, 2002.
UNDERWRITING STANDARDS
The Depositor believes the following information accurately summarizes
the underwriting standards used by the Originator to underwrite approximately
98% of the Mortgage Loans. Approximately 2% of the Mortgage Loans, which were
acquired by the Originator when the mortgage loan portfolio of Old Superior was
transferred to it by the FDIC, were underwritten according to various standards
that the Depositor believes are substantially similar to those detailed below.
This summary is based upon underwriting guidelines provided to the Seller by the
Originator. There can be no assurance, however, that each such Mortgage Loan was
originated in accordance with the following guidelines or that each specific
criterion was satisfied individually.
S-37
The Originator financed one- to four-unit, residential attached or
detached properties. It also financed the purchase of single condominium units
and attached or detached single-family units in planned unit developments. The
Originator generally made loans to individuals with "A," "B," "C" and "D" class
credit ratings. It offered full income, stated income and alternative income
verification programs. All of its loans were either first or second liens. The
approximate minimum requirements for all applicants were:
o A two-year verified residence history;
o All sources of qualifying income had to be verified if the
applicant was applying under a program that required income
verification;
o All fixed income had to have entitlement verified;
o All self-employed applicants had to submit two years of
complete tax returns (personal and business, as applicable)
plus a current financial statement if the applicant was
applying under a program that required income verification;
o All non self-employed applicants had to submit two pay stubs
dated within the last 30 days, plus one or more of the
following: (i) signed federal income tax form 1040s for the
previous two years, (ii) two years of W-2 forms or (iii) a
letter from the employer or a verification of employment if
the applicant was applying under a program that required
income verification; and
o For verification of rental payment history, the applicant had
to submit 12 months of rent receipts plus (i) a signed
verification of rental form, (ii) six consecutive months of
canceled rent payment checks or (iii) six consecutive months
of utility bills.
Borrower loan applications were reviewed through a combination of
reviews of credit bureau reports and/or individual certifications, depending on
the program. Income was determined through various means, including applicant
interviews, written verifications with employers and review of pay stubs and tax
returns, and a determination was made that the borrower had a sufficient level
of disposable income to satisfy debt repayment requirements.
Substantially all properties were appraised by independent fee
appraisers approved by the Originator in advance of funding, although in some
instances the appraisal may have been performed by a licensed in-house appraiser
of the Originator. Loans were closed through approved attorneys, title insurers
or agents of title insurers and escrow companies, and the lien position was
insured by major title companies.
The maximum permitted loan-to-value ratio and debt-to-income ratio
guidelines for each underwriting program and class are set forth below. The
Originator generally permitted the Combined Loan-to-Value Ratio for second lien
mortgage loans to exceed the permitted maximums set forth below by 5% (10% for
classes III and III SE). Second liens were not offered for class V.
Several different underwriting classes were used to categorize
borrowers' creditworthiness. In addition to general underwriting guidelines,
each class had guidelines relating to maximum permitted loan-to-value ratio,
maximum permitted debt-to-income ratio and acceptable consumer credit and
mortgage credit delinquencies and defaults. Generally, higher numbered and later
alphabetically designated underwriting classes (as set forth in the table below)
permitted a greater number of derogatory credit items such as outstanding
judgments or prior bankruptcies and/or payment histories that included up to
three payments missed on a prior mortgage obligation than the lower numbered and
earlier alphabetically designated underwriting classes.
S-38
Each underwriting class had guidelines and standards for the type of
income, employment and asset verification performed prior to closing the loan.
Classes AA, I, II, IIB, IV and V generally required the verification of
employment and income that was stated on the borrower's application. The Class
ANIV, III and IIISE program guidelines generally required verification of
employment without verification of income that was stated on the application.
Generally, the maximum permitted loan-to-value ratios, debt-to-income ratios and
maximum number and length of late mortgage payments guidelines for each
underwriting class were as follows:
- -------------------------------- ------------------------------- -------------------------- --------------------------
Maximum Number and
Maximum Debt-to-Income Length of Late Mortgage
Class Maximum Loan-to-Value Ratio Ratio Payments
- -------------------------------- ------------------------------- -------------------------- --------------------------
AAA Unknown Unknown Unknown
- -------------------------------- ------------------------------- -------------------------- --------------------------
AA 85% 40% 0x30
- -------------------------------- ------------------------------- -------------------------- --------------------------
AA 85% 45% 1x30
- -------------------------------- ------------------------------- -------------------------- --------------------------
AA 90% 45% 0x30
- -------------------------------- ------------------------------- -------------------------- --------------------------
I 85% 45% 0x30
- -------------------------------- ------------------------------- -------------------------- --------------------------
I 85% 50% 2x30
- -------------------------------- ------------------------------- -------------------------- --------------------------
I 90% 50% 1x30
- -------------------------------- ------------------------------- -------------------------- --------------------------
II 75% 50% 0x60
- -------------------------------- ------------------------------- -------------------------- --------------------------
II 80% 45% 2x30
- -------------------------------- ------------------------------- -------------------------- --------------------------
II 85% 50% 3x30
- -------------------------------- ------------------------------- -------------------------- --------------------------
IIB 75% 50% 2x60
- -------------------------------- ------------------------------- -------------------------- --------------------------
IIB 80% 45% 2x60
- -------------------------------- ------------------------------- -------------------------- --------------------------
IIB 80% 50% 1x60
- -------------------------------- ------------------------------- -------------------------- --------------------------
IIB 85% 45% 1x60
- -------------------------------- ------------------------------- -------------------------- --------------------------
IV 80% 45% 0x120
- -------------------------------- ------------------------------- -------------------------- --------------------------
V Unknown Unknown Unknown
- -------------------------------- ------------------------------- -------------------------- --------------------------
ANIV 80% 45% 0x30
- -------------------------------- ------------------------------- -------------------------- --------------------------
ANIV 85% 45% 1x30
- -------------------------------- ------------------------------- -------------------------- --------------------------
IIISE 75% 45% 0x30
- -------------------------------- ------------------------------- -------------------------- --------------------------
IIISE 80% 45% 2x30
- -------------------------------- ------------------------------- -------------------------- --------------------------
III 75% 45% 0x30
- -------------------------------- ------------------------------- -------------------------- --------------------------
III 80% 45% 2x30
- -------------------------------- ------------------------------- -------------------------- --------------------------
The Originator offered a lower rate or margin for borrowers whose loans
had loan-to-value ratios less than 70% for classes AA, I, II and ANIV and less
than 65% for classes IIB, III, IIISE and IV. For classes AA, I and II, the
Originator also offered a partial income verification program using either 24
months of bank statements with a 50 basis point increase to the rate or margin
or 12 months of bank statements with a 50 basis point increase to the rate or
margin plus a 5% decrease in the maximum loan-to-value ratio. For class IV, the
Originator offered a partial income verification program whereby the borrower
had to prove 50% of its stated income for loan-to-value ratios up to 75% with a
25 basis point increase to the rate or margin. For classes ANIV, IIISE and III,
the Originator offered a "no ratio" program where debt-to-income ratios were not
computed in exchange for a 50 basis point increase to the rate or margin plus a
5% decrease in the maximum loan-to-value ratio. The Originator also added an
additional 35 basis points to three- to four-family properties, 75 basis points
to non-owner occupied properties, 50 basis points to low-rise condominiums (100
basis points if non-owner occupied) and 75 basis points to high-rise
condominiums (125 basis points if non-owner occupied) and lowered the maximum
loan-to-value ratios for its various programs for condominiums and non-owner
occupied properties. The rate or margin was also increased if the particular
mortgage loan did not contain a prepayment penalty. For borrowers who provided
stronger credit scores with their application, the Originator offered a rate
reduction on each of the classes listed above of 75 basis points for credit
scores above 680, 50 basis points for credit scores between 650 and 679 and 25
basis points for credit scores between 620 and 649.
S-39
In general, the Originator required all bankruptcies to have been
discharged at least two years prior to application for classes other than
classes IV and V and required all foreclosure to be at least five years old for
classes AA and ANIV. Each of the above programs (other than classes IV and V)
also had limitations on the number and duration of non-mortgage credit payments.
Notwithstanding the foregoing, no information is available to the
Seller or the Depositor with respect to the underwriting class designated "AAA"
by the Originator and limited information is available with respect to class
"V."
Down payment requirements for purchase money transactions were
verifiable certified funds of the borrower. In addition, the cash down payment
required to be provided by the borrower may have included gifts of equity
received by the borrower. For all classes with the exception of class V, if the
property was owner-occupied, a seller financed subordinate mortgage loan was
allowed.
On a case-by-case basis, the Originator may have determined that, based
upon compensating factors, a prospective borrower not strictly qualifying under
the class guidelines warranted an underwriting exception. Compensating factors
may have included, but were not limited to, low loan-to-value ratio, low
debt-to-income ratio, good credit history, stable employment and duration of
residence at the applicant's current address.
The Originator also offered a product line called "Superior Score"
based on credit score, loan-to-value ratio and mortgage payment history. The
credit score was determined by using the middle score of the primary borrower
from the merged credit reports of Experian, Equifax and TransUnion. This product
line offered first and second mortgages on owner-occupied residences. Second
mortgages were only available on primary residences. Acceptable property types
included single family homes, two- to four-family owner occupied properties and
condominiums. Documentation programs included full documentation, "lite"
documentation for all classes other than class D (the borrower was generally
only required to submit three months of bank statements or pay stubs for the
most recent 30 day period and a verbal verification of two years' employment)
and stated income for all classes other than class D (two years employment
verified through some means for self-employed borrowers - other borrowers were
eligible only if they worked in an industry where tipping was customary).
Generally, the maximum permitted loan-to-value ratios, credit scores
and maximum number and length of late mortgage payments guidelines for each
underwriting class were as follows:
- -------------------------------- ------------------------------- -------------------------- --------------------------
Maximum Number and
Maximum Loan-to-Value Length of Late Mortgage
Class Minimum Credit Score Ratio Payments
- -------------------------------- ------------------------------- -------------------------- --------------------------
A+ 580 90% 1x30 (last 12 months)
- -------------------------------- ------------------------------- -------------------------- --------------------------
A 580 90% 2x30 (last 12 months)
- -------------------------------- ------------------------------- -------------------------- --------------------------
A 560 80% 2x30 (last 12 months)
- -------------------------------- ------------------------------- -------------------------- --------------------------
4x30 (last 12 months)
B 580 85% 1x60 (last 24 months)
- -------------------------------- ------------------------------- -------------------------- --------------------------
4x30 (last 12 months)
B 540 80% 1x60 (last 24 months)
- -------------------------------- ------------------------------- -------------------------- --------------------------
6x30, 1x60, 1x90 (last
12 months), if
LTV (greater than) 75%,
C 570 80% 0x90
- -------------------------------- ------------------------------- -------------------------- --------------------------
6x30, 1x60, 1x90 (last
12 months), if
LTV (greater than) 75%,
C 520 75% 0x90
- -------------------------------- ------------------------------- -------------------------- --------------------------
No open bankruptcies, if
LTV (greater than) 65%,
D 500 70% max. 1x120
- -------------------------------- ------------------------------- -------------------------- --------------------------
S-40
For the Originator's "lite" documentation program, it added 50 basis
points to the rate or margin and decreased the maximum loan-to-value ratio by
5%, with a maximum loan-to-value ratio of 70% for class C. For the stated income
documentation program, it added 75 basis points to the rate or margin and
decreased the maximum loan-to-value ratio by 5%, with a maximum loan-to-value
ratio of 70% for class C. Second mortgages were offered for classes A+, A and B
with a 50 basis point increase to the rate or margin plus a 5% decrease in the
maximum combined loan-to-value ratio. The maximum debt-to-income ratio was 55%
for all loan-to-value ratios less than 85% and 50% for all loan-to-value ratios
greater than or equal to 85%. The rate or margin was also increased if the
particular mortgage loan did not contain a prepayment penalty.
THE SERVICER
Litton Loan Servicing LP provided the information set forth in the
following paragraphs. None of the Depositor, the Seller, the Trustee, any
Underwriter or any of their respective affiliates have made or will make any
representation as to the accuracy or completeness of such information.
Litton Loan Servicing LP (the "Servicer"), a Delaware limited
partnership, will act as the servicer of the Mortgage Loans pursuant to the
Pooling and Servicing Agreement. Litton Loan Servicing LP was formed in December
1996. As of March 1, 2002, the Servicer employed approximately 487 individuals.
The main office of the Servicer is located at 4828 Loop Central Drive, Houston,
Texas 77081. The Servicer is currently a Fannie Mae and Freddie Mac approved
servicer and an approved FHA and VA lender with a servicing portfolio of
approximately $8.4 billion as of March 1, 2002. The Servicer specializes in
servicing sub-performing mortgage loans and entering into workouts with the
related mortgagors. The Servicer is servicing in excess of 50 securitizations.
Fitch assigned the Servicer its RSS1 residential special servicer
rating on November 16, 1999. The rating is based on the Servicer's ability to
manage and liquidate nonperforming residential mortgage loans and real estate
owned assets. This RSS1 rating is the highest special servicer rating attainable
from Fitch, which reflects the Servicer's sophisticated proprietary default
management technology, the financial strength of its well-capitalized parent and
its highly experienced management and staff.
In January 2001, Fitch assigned the Servicer its RPS1 primary servicer
rating for sub-prime and high loan-to-value ratio product. The RPS1 rating is
currently the highest sub-prime primary servicer rating attainable from Fitch
for any sub-prime servicer, which is based on the strength of the Servicer's
loan administration processes including new loan set-up procedures and related
technology, loan accounting/cash management and loan reporting. The RPS1 rating
for high loan-to-value ratio product is based on the Servicer's intensive focus
on early collection and loss mitigation.
In March 2001, Moody's assigned the Servicer its top servicer quality
rating (SQ1) as a primary servicer of prime and sub-prime mortgage loans, second
liens and as a special servicer. The rating is based on the Servicer's
outstanding ability as a servicer and the stability of its servicing operations.
In April 2001, S&P raised the Servicer's ranking from "Above Average"
to "Strong" for both its residential special and sub-prime servicing categories.
The "Strong" rating is S&P's highest possible rating for these categories. The
rankings are based on the Servicer's established history of servicing distressed
assets for a diverse investor base, technological improvements that have
increased operational efficiencies, superior management depth, and very good
internal controls.
Delinquency and Foreclosure Experience. The following table sets forth
the delinquency and foreclosure experience of the mortgage loans serviced by the
Servicer as of the dates indicated. The Servicer's portfolio of mortgage loans
may differ significantly from the Mortgage Loans in terms of interest rates,
principal balances, geographic distribution, types of properties and other
possibly relevant characteristics. There can be no assurance, and no
representation is made, that the delinquency and foreclosure experience with
respect to the Mortgage Loans will be similar to that reflected in the table
below, nor is any representation made as to the rate at which losses may be
experienced on liquidation of defaulted Mortgage Loans. The actual delinquency
experience on the Mortgage Loans will depend, among other things, upon the value
of the real estate securing such Mortgage Loans and the ability of the related
mortgagor to make required payments. It should be noted that the Servicer's
business emphasizes to a certain degree the acquisition of servicing rights with
respect to non-performing and subperforming mortgage loans and the Servicer has
been an active participant in the market for such servicing rights since 1997.
The acquisition of such servicing rights may have affected the delinquency and
foreclosure experience of the Servicer.
S-41
Delinquency and Foreclosure Experience(1)
As of March 31, 2002 As of December 31, 2001
----------------------------------- -----------------------------------
% by % by
No. of Principal Principal No. of Principal Principal
Loans Balance(2) Balance Loans Balance(2) Balance
----- ---------- ------- ----- ---------- -------
Current Loans 73,526 $5,328,086,012 62.62% 72,453 $5,117,899,302 62.30%
Period of
Delinquency(3)
30 Days 10,776 $ 831,508,086 9.94% 12,261 $ 918,166,282 11.20%
60-89 4,162 $ 328,534,766 3.93% 5,266 $ 379,058,310 4.60%
90 Days or more 4,660 $ 295,483,253 3.53% 5,229 $ 318,992,310 3.90%
------- -------------- ------ ------- -------------- ------
Total Delinquency 19,598 $1,455,526,105 17.40% 22,756 $1,616,216,902 19.70%
Foreclosures/Bankruptcy(4) 15,840 $1,349,583,809 16.13% 13,865 $1,178,073,970 14.30%
Real Estate Owned 4,333 $ 321,984,954 3.85% 4,117 $ 302,723,096 3.70%
------- -------------- ------ ------- -------------- ------
Total
Portfolio 113,297 $8,365,180,880 100.00% 113,191 $8,214,913,270 100.00%
======= ============== ====== ======= ============== ======
As of December 31, 2000
-----------------------------------
% by
No. of Principal Principal
Loans Balance(2) Balance
----- ---------- -------
Current Loans 49,371 $3,500,827,158 58.83%
Period of
Delinquency(3)
30 Days 9,285 $ 653,499,039 10.98%
60-89 3,545 $ 248,529,128 4.18%
90 Days or more 10,498 $ 664,340,263 11.16%
------ -------------- ------
Total Delinquency 23,328 $1,566,368,430 26.32%
Foreclosures/Bankruptcy(4) 9,686 $ 743,491,868 12.49%
Real Estate Owned 2,135 $ 139,634,200 2.35%
------ -------------- ------
Total
Portfolio 84,520 $5,950,321,656 100.00%
====== ============== ======
- ------------------
(1) The table shows mortgage loans which were delinquent or for which
foreclosure proceedings had been instituted as of the date indicated.
(2) For the Real Estate Owned properties, the principal balance is at the
time of foreclosure.
(3) No mortgage loan is included in this section of the table as delinquent
until it is 30 days past due.
(4) Exclusive of the number of loans and principal balance shown in Period
of Delinquency.
It is unlikely that the delinquency experience of the Mortgage Loans
comprising the Mortgage Pool will correspond to the delinquency experience of
the Servicer's mortgage portfolio set forth in the foregoing table. The
statistics shown above represent the delinquency experience for the Servicer's
mortgage servicing portfolio only for the periods presented, whereas the
aggregate delinquency experience on the Mortgage Loans comprising the Mortgage
Pool will depend on the results obtained over the life of the Mortgage Pool.
There can be no assurance that the Mortgage Loans comprising the Mortgage Pool
will perform consistent with the delinquency or foreclosure experience described
herein. See "Risk Factors--Mortgage loans originated by troubled originator." It
should be noted that if the residential real estate market should experience an
overall decline in property values, the actual rates of delinquencies and
foreclosures could be higher than those previously experienced by the Servicer.
In addition, adverse economic conditions may affect the timely payment by
mortgagors of scheduled payments of principal and interest on the Mortgage Loans
and, accordingly, the actual rates of delinquencies and foreclosures with
respect to the Mortgage Pool.
THE POOLING AND SERVICING AGREEMENT
General
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement, dated as of April 1, 2002 (the "Pooling and Servicing Agreement"),
among the Depositor, the Servicer and the Trustee. The Trust Fund created under
the Pooling and Servicing Agreement will consist of (i) all of the Depositor's
right, title and interest in the Mortgage Loans, the related mortgage notes,
mortgages and other related documents, (ii) all payments on or collections in
respect of the Mortgage Loans due after the Cut-off Date, together with any
proceeds thereof, (iii) any Mortgaged Properties acquired on behalf of
Certificateholders by foreclosure or by deed in lieu of foreclosure, and any
revenues received thereon, (iv) the rights of the Trustee under all insurance
policies required to be maintained pursuant to the Pooling and Servicing
Agreement and (v) the rights of the Depositor under the Mortgage Loan Purchase
Agreement. The Offered Certificates will be transferable and exchangeable at the
corporate trust offices of the Trustee.
S-42
Assignment of the Mortgage Loans
On or about May 15, 2002 (the "Closing Date") the Depositor will
transfer to the Trust Fund all of its right, title and interest in and to each
Mortgage Loan, the related mortgage notes, mortgages and other related documents
(collectively, the "Related Documents"), including all scheduled payments with
respect to each such Mortgage Loan due after the Cut-off Date. The Trustee,
concurrently with such transfer, will deliver the Certificates to the Depositor.
Each Mortgage Loan transferred to the Trust Fund will be identified on a
schedule (the "Mortgage Loan Schedule") delivered to the Trustee pursuant to the
Pooling and Servicing Agreement. Such Mortgage Loan Schedule will include
information such as the Principal Balance of each Mortgage Loan as of the
Cut-off Date, its Mortgage Interest Rate as well as other information.
The Pooling and Servicing Agreement will require that, within the time
period specified therein, the Seller will deliver or cause to be delivered to
the Trustee (or a custodian, as the Trustee's agent for such purpose) the
mortgage notes endorsed to the Trustee on behalf of the Certificateholders and
the Related Documents. In lieu of delivery of original mortgages or mortgage
notes, if such original is not available or lost, the Seller may deliver or
cause to be delivered true and correct copies thereof, or, with respect to a
lost mortgage note, a lost note affidavit executed by the Seller or the
originator of such Mortgage Loan.
Unless otherwise required by Fitch or S&P, assignments of the Mortgage
Loans to the Trustee (or its nominee) will not be recorded in any jurisdiction,
but will be delivered to the Trustee in recordable form, so that they can be
recorded in the event recordation is necessary in connection with the servicing
of a Mortgage Loan.
Within 60 days following the Closing Date, the Trustee will review (or
cause a custodian to review) the Mortgage Loans and the Related Documents
pursuant to the Pooling and Servicing Agreement and if any Mortgage Loan or
Related Document is found to be defective in any material respect and such
defect has a material and adverse effect on the Certificateholders and is not
cured within 120 days following notification thereof to the Seller (or within 90
days of the earlier of the Seller's discovery or receipt of notification if such
defect would cause the Mortgage Loan not to be a "qualified mortgage" for REMIC
purposes), the Seller will be obligated to either (i) substitute for such
Mortgage Loan an Eligible Substitute Mortgage Loan; however, such substitution
is permitted only within two years of the Closing Date and may not be made
unless an opinion of counsel is provided to the effect that such substitution
will not disqualify the REMIC comprising the Trust Fund as a REMIC or result in
a prohibited transaction tax under the Code or (ii) purchase such Mortgage Loan
at a price (the "Purchase Price") equal to the outstanding Principal Balance of
such Mortgage Loan as of the date of purchase, plus all accrued and unpaid
interest thereon, computed at the Mortgage Interest Rate through the end of the
calendar month in which the purchase is effected, plus the amount of any
unreimbursed Advances and Servicing Advances made by the Servicer. If, however,
a Mortgage Loan is discovered to be defective in a manner that would cause it to
be a "defective obligation" within the meaning of Treasury regulations relating
to REMICs, the Seller will be obligated to cure the defect or make the required
purchase or substitution no later than 90 days after the earlier of its
discovery or receipt of notification of the defect. The Purchase Price will be
deposited in the Collection Account on or prior to the next succeeding
Determination Date after such obligation arises. The obligation of the Seller to
repurchase or substitute for a Defective Mortgage Loan is the sole remedy
regarding any defects in the Mortgage Loans and Related Documents available to
the Trustee or the Certificateholders.
In connection with the substitution of an Eligible Substitute Mortgage
Loan, the Seller will be required to deposit in the Collection Account on or
prior to the next succeeding Determination Date after such obligation arises an
amount (the "Substitution Adjustment") equal to the excess of the Purchase Price
of the related Defective Mortgage Loan over the Principal Balance (plus one
month's interest on such balance) of such Eligible Substitute Mortgage Loan.
An "Eligible Substitute Mortgage Loan" is a mortgage loan substituted
by the Seller for a Defective Mortgage Loan which must, on the date of such
substitution, (i) have an outstanding Principal Balance (or in the case of a
substitution of more than one Mortgage Loan for a Defective Mortgage Loan, an
aggregate Principal Balance), not in excess of, and not more than 5% less than,
the Principal Balance of the Defective Mortgage Loan; (ii) have a Mortgage
Interest Rate, with respect to a Fixed-Rate Mortgage Loan, not less than the
Mortgage Interest Rate of the Defective Mortgage Loan and not more than 1% in
excess of the Mortgage Interest Rate of such Defective Mortgage Loan or, with
respect to an Adjustable-Rate Mortgage Loan, have a Maximum Mortgage Interest
Rate and Minimum Mortgage Interest Rate not less than the respective rate for
the Defective Mortgage Loan and have a Gross Margin equal to or greater than the
Defective Mortgage Loan; (iii) have the same Due Date as the Defective Mortgage
Loan; (iv) have a remaining term to maturity not more than one year earlier and
not later than the remaining term to maturity of the Defective Mortgage Loan;
(v) comply with each representation and warranty as to the Mortgage Loans set
forth in the Mortgage Loan Purchase Agreement (deemed to be made as of the date
of substitution); (vi) have been underwritten or re-underwritten in accordance
with the same underwriting criteria and guidelines as the Mortgage Loans being
replaced; (vii) must be of the same or better credit quality as the Mortgage
Loan being replaced; and (viii) satisfy certain other conditions specified in
the Pooling and Servicing Agreement.
S-43
The Seller will make certain representations and warranties in the
Mortgage Loan Purchase Agreement as to the accuracy in all material respects of
certain information furnished to the Trustee with respect to each Mortgage Loan
(e.g., Cut-off Date Principal Balance and the Mortgage Interest Rate). In
addition, the Seller will represent and warrant, on the Closing Date, that,
among other things: (i) at the time of transfer to the Depositor, the Seller has
transferred or assigned all of its right, title and interest in each Mortgage
Loan and the Related Documents, free of any lien; and (ii) each Mortgage Loan
complied, at the time of origination, in all material respects with applicable
state and federal laws. Upon discovery of a breach of any such representation
and warranty which materially and adversely affects the interests of the
Certificateholders in the related Mortgage Loan and Related Documents, the
Seller will have a period of 90 days after discovery or notice of the breach to
effect a cure. If the breach cannot be cured within the 90-day period, the
Seller will be obligated to (i) substitute for such Defective Mortgage Loan an
Eligible Substitute Mortgage Loan or (ii) purchase such Defective Mortgage Loan
from the Trust Fund. The same procedure and limitations that are set forth above
for the substitution or purchase of Defective Mortgage Loans as a result of
deficient documentation relating thereto will apply to the substitution or
purchase of a Defective Mortgage Loan as a result of a breach of a
representation or warranty in the Mortgage Loan Purchase Agreement that
materially and adversely affects the interests of the Certificateholders.
Mortgage Loans required to be transferred to the Seller as described in
the preceding paragraphs are referred to as "Defective Mortgage Loans."
Pursuant to the Pooling and Servicing Agreement, the Servicer will
service and administer the Mortgage Loans as more fully set forth therein.
Payments on Mortgage Loans; Deposits to Collection Account and Distribution
Account
The Servicer will establish and maintain or cause to be maintained a
separate trust account (the "Collection Account") for the benefit of the holders
of the Certificates. The Collection Account will be an Eligible Account (as
defined herein). Upon receipt by the Servicer of amounts in respect of the
Mortgage Loans (excluding amounts representing the Servicing Fee, reimbursement
for Advances and Servicing Advances, insurance proceeds to be applied to the
restoration or repair of a Mortgaged Property or similar items), the Servicer
will deposit such amounts in the Collection Account. Amounts so deposited may be
invested in Eligible Investments (as described in the Pooling and Servicing
Agreement) maturing no later than one Business Day prior to the date on which
the amount on deposit therein is required to be deposited in the Distribution
Account. A "Business Day" is any day other than a Saturday, a Sunday or a day on
which banking institutions in the State of Delaware, the State of New York, the
State of Texas or in the city in which the corporate trust office of the Trustee
is located are authorized or obligated by law or executive order to be closed.
The Trustee will establish an account (the "Distribution Account") into which
will be deposited amounts withdrawn from the Collection Account for distribution
to Certificateholders on a Distribution Date. The Distribution Account will be
an Eligible Account. Amounts on deposit therein may be invested in Eligible
Investments maturing on or before the Business Day prior to the related
Distribution Date unless such Eligible Investments are invested in investments
managed or advised by the Trustee or an affiliate thereof, in which case such
Eligible Investments may mature on the related Distribution Date.
S-44
An "Eligible Account" is a segregated account that is (i) an account or
accounts maintained with a federal or state chartered depository institution or
trust company the short-term unsecured debt obligations of which (or, in the
case of a depository institution or trust company that is the principal
subsidiary of a holding company, the short-term unsecured debt obligations of
such holding company) are rated "A-1" (or the equivalent) by each of Standard &
Poor's, a division of The McGraw-Hill Companies, Inc. and Fitch Ratings
(together, the "Rating Agencies") at the time any amounts are held on deposit
therein, (ii) an account or accounts the deposits in which are fully insured by
the Federal Deposit Insurance Corporation (to the limits established by such
corporation), the uninsured deposits in which account are otherwise secured such
that, as evidenced by an opinion of counsel delivered to the Trustee and to each
Rating Agency, the Certificateholders will have a claim with respect to the
funds in such account or a perfected first priority security interest against
such collateral (which shall be limited to Eligible Investments) securing such
funds that is superior to claims of any other depositors or creditors of the
depository institution with which such account is maintained, (iii) a trust
account or accounts maintained with the trust department of a federal or state
chartered depository institution, national banking association or trust company
acting in its fiduciary capacity or (iv) otherwise acceptable to each Rating
Agency without reduction or withdrawal of their then current ratings of the
Certificates as evidenced by a letter from each Rating Agency to the Trustee.
Eligible Investments are specified in the Pooling and Servicing Agreement and
are limited to investments which meet the criteria of the Rating Agencies from
time to time as being consistent with their then current ratings of the
Certificates.
Advances
Subject to the following limitations, the Servicer will be obligated to
advance or cause to be advanced at least one Business Day prior to each
Distribution Date its own funds, or funds in the Collection Account that are not
included in the Available Funds for such Distribution Date, in an amount equal
to the aggregate of all payments of principal and interest, net of the Servicing
Fee, that were due during the related Collection Period on the Actuarial
Mortgage Loans, other than Balloon Payments, and that were not received by the
related Determination Date and, with respect to Balloon Loans which are
Actuarial Mortgage Loans, with respect to which the Balloon Payment is not made
when due, an assumed monthly payment that would have been due on the related Due
Date based on the original principal amortization schedule for such Balloon Loan
(any such advance, an "Advance").
The Servicer will not make any Advances of principal or interest with
respect to Simple Interest Mortgage Loans or REO Properties.
Advances with respect to Actuarial Mortgage Loans are required to be
made only to the extent the Servicer deems them to be recoverable from related
late collections, insurance proceeds or liquidation proceeds. The purpose of
making such Advances is to maintain a regular cash flow to the
Certificateholders, rather than to guarantee or insure against losses. The
Servicer will not be required, however, to make any Advances with respect to
reductions in the amount of the Monthly Payments on the Mortgage Loans due to
bankruptcy proceedings or the application of the Soldiers' and Sailors' Civil
Relief Act of 1940, as amended (the "Relief Act") or similar state laws. Subject
to the recoverability standard above, the Servicer's obligation to make Advances
as to any Actuarial Mortgage Loan will continue until the earlier of such time
as the Trust acquires title to the related Mortgaged Property or such Mortgage
Loan is paid in full by the mortgagor or disposed of by the Trust.
All Advances will be reimbursable to the Servicer from late
collections, insurance proceeds and liquidation proceeds from the Mortgage Loan
as to which such unreimbursed Advance was made. In addition, any Advances
previously made in respect of any Mortgage Loan that the Servicer deems to be
nonrecoverable from related late collections, insurance proceeds or liquidation
proceeds may be reimbursed to the Servicer out of any funds in the Collection
Account prior to the distributions on the Certificates. In the event the
Servicer fails in its obligation to make any such Advance, the Trustee, in its
capacity as successor Servicer, will be obligated to make any such Advance, to
the extent required in the Pooling and Servicing Agreement.
In the course of performing its servicing obligations, the Servicer
will pay all reasonable and customary "out-of-pocket" costs and expenses
incurred in the performance of its servicing obligations, including, but not
limited to, the cost of (i) the preservation, restoration and protection of the
Mortgaged Properties, (ii) any enforcement or judicial proceedings, including
foreclosures, and (iii) the management and liquidation of Mortgaged Properties
acquired in satisfaction of the related mortgage. Each such expenditure will
constitute a "Servicing Advance."
The Servicer's right to reimbursement for Servicing Advances is limited
to late collections on the related Mortgage Loan, including liquidation
proceeds, released mortgaged property proceeds, insurance proceeds and such
other amounts the Servicer may collect from the related mortgagor or otherwise
relating to the Mortgage Loan in respect of which such unreimbursed amounts are
owed, unless such amounts are deemed to be nonrecoverable by the Servicer, in
which event reimbursement will be made to the Servicer from general funds in the
Collection Account.
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The Trustee
LaSalle Bank National Association, a national banking association, will
act as trustee (the "Trustee") for the Certificates pursuant to the Pooling and
Servicing Agreement. The Trustee's offices for notices under the Pooling and
Servicing Agreement are located at 135 South LaSalle Street, Chicago, Illinois
60603, Attention: Asset Backed Securities Trust Services - AFBC 2002-SB1 and its
telephone number is (312) 904-0351. The principal compensation to be paid to the
Trustee in respect of its obligations under the Pooling and Servicing Agreement
will be the "Trustee Fee." The Pooling and Servicing Agreement will provide that
the Trustee and any director, officer, employee or agent of the Trustee will be
indemnified by the Trust Fund and will be held harmless against any loss,
liability or expense (not including expenses, disbursements and advances
incurred or made by the Trustee in the ordinary course of the Trustee's
performance in accordance with the provisions of the Pooling and Servicing
Agreement) the Trustee incurs arising out of or in connection with the
acceptance or administration of its obligations and duties under the Pooling and
Servicing Agreement, other than any loss, liability or expense (i) that
constitutes a specific liability of the Trustee under the Pooling and Servicing
Agreement or (ii) incurred by reason of willful misfeasance, bad faith or
negligence in the performance of the Trustee's duties under the Pooling and
Servicing Agreement or by reason of reckless disregard of the Trustee's
obligations and duties under the Pooling and Servicing Agreement.
Servicing and Other Compensation and Payment of Expenses
The principal compensation (the "Servicing Fee") to be paid to the
Servicer in respect of its servicing activities for the Certificates will be at
the "Servicing Fee Rate" of (i) 0.50% per annum on the Principal Balance of each
Mortgage Loan. As additional servicing compensation, the Servicer is entitled to
retain all service-related fees, including assumption fees, modification fees,
extension fees and late payment charges, to the extent collected from
mortgagors, together with any interest or other income earned on funds held in
the Collection Account and any escrow accounts. The Servicer is obligated to
offset any Prepayment Interest Shortfall on Actuarial Mortgage Loans on any
Distribution Date (payments made by the Servicer in satisfaction of such
obligation, "Compensating Interest") by an amount not in excess of one-half of
its Servicing Fee for such Distribution Date. The Servicer will not offset any
Prepayment Interest Shortfall on Simple Interest Mortgage Loans on any
Distribution Date. The Servicer is obligated to pay certain insurance premiums
and certain ongoing expenses associated with the Mortgage Pool and incurred by
the Servicer in connection with its responsibilities under the Pooling and
Servicing Agreement and is entitled to reimbursement therefor as provided in the
Pooling and Servicing Agreement.
The Servicer, in its capacity as a special servicer, is also entitled
to an additional servicing fee (the "Special Servicing Fee"), in connection with
Mortgage Loans that are 90 or more days Delinquent (other than with respect to
any second lien Mortgage Loans). As more fully described in the Pooling and
Servicing Agreement, the Special Servicing Fee is equal to $150 per Mortgage
Loan that is 90 or more days Delinquent, payable monthly for eighteen
consecutive months commencing in the first month after the Cut-off Date in which
payments on such Mortgage Loan are 90 or more days Delinquent, unless such
Mortgage Loan becomes less than 90 days Delinquent or is liquidated or
repurchased. The Servicer will remain entitled to receive any Special Servicing
Fees owed but not paid from previous Distribution Dates.
The "Determination Date" with respect to any Distribution Date will be
the 10th day of the calendar month in which such Distribution Date occurs or, if
such day is not a Business Day, the Business Day immediately preceding such 10th
day. With respect to any Determination Date and each Mortgage Loan as to which a
principal prepayment in full was applied during the prior calendar month, the
"Prepayment Interest Shortfall" is an amount equal to the interest at the
Mortgage Interest Rate for such Mortgage Loan (net of the Servicing Fee Rate) on
the amount of such principal prepayment for the number of days commencing on the
date on which the principal prepayment is applied and ending on the last day of
the prior calendar month.
Pledge and Assignment of Servicer's Rights
On the Closing Date, the Servicer will pledge and assign all of its
right, title and interest in, to and under the Pooling and Servicing Agreement
to one or more lenders (each, a "Servicing Rights Pledgee") selected by the
Servicer, including First Union National Bank, as the representative of certain
lenders. In the event that an Event of Servicing Termination (as defined below)
occurs, the Trustee and the Depositor have agreed to the appointment of a
Servicing Rights Pledgee or its designee as the successor servicer, provided
that at the time of such appointment the Servicing Rights Pledgee or such
designee meets the requirements of a successor servicer described in the Pooling
and Servicing Agreement (including being acceptable to the Rating Agencies) and
that the Servicing Rights Pledgee or such designee agrees to be subject to the
terms of the Pooling and Servicing Agreement.
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Optional Termination
The majority holder of the Class CE Certificates or the Servicer (or an
affiliate) or the NIMS Insurer, if any, in that order, will have the right to
purchase all of the Mortgage Loans and REO Properties in the Trust Fund and
thereby effect the early retirement of the Certificates, on any Distribution
Date on which the aggregate Principal Balance of such Mortgage Loans and REO
Properties is less than 10% of the aggregate Principal Balance of the Mortgage
Loans as of the Cut-Off Date. The first Distribution Date on which such option
could be exercised is referred to herein as the "Optional Termination Date." In
the event that the option is exercised, the purchase will be made at a price
(the "Termination Price") generally equal to par plus accrued interest for each
Mortgage Loan at the related Mortgage Interest Rate to but not including the
first day of the month in which such purchase price is distributed plus the
amount of any unreimbursed Advances and Servicing Advances made by the Servicer.
Proceeds from such purchase will be included in Available Funds and will be
distributed to the holders of the Certificates in accordance with the Pooling
and Servicing Agreement. Any such purchase of Mortgage Loans and REO Properties
will result in the early retirement of the Certificates.
In connection with the issuance of any net interest margin securities
secured by all or a portion of the Class CE and Class P Certificates, any of the
above parties may agree to refrain from exercising this option while those
securities are outstanding.
Optional Purchase of Defaulted Loans
As to any Mortgage Loan which is Delinquent in payment by 120 days or
more, the Servicer (or its affiliates) may, at its option, purchase such
Mortgage Loan from the Trust Fund at the Purchase Price for such Mortgage Loan,
under the circumstances described in the Pooling and Servicing Agreement.
Events of Servicing Termination
Events of Servicing Termination will consist, among other things, of:
(i) any failure by the Servicer to deposit in the Collection Account or
Distribution Account the required amounts or remit to the Trustee any payment
which continues unremedied for one Business Day; (ii) any failure of the
Servicer to make any Advance with respect to an Actuarial Mortgage Loan or to
cover any Prepayment Interest Shortfalls on Actuarial Mortgage Loans, as
described herein, which failure continues unremedied for one Business Day; (iii)
any failure by the Servicer to observe or perform in any material respect any
other of its covenants or agreements in the Pooling and Servicing Agreement,
which continues unremedied for 30 days after the first date on which (x) the
Servicer has knowledge of such failure or (y) written notice of such failure is
given to the Servicer; (iv) insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings, and certain actions by or on
behalf of the Servicer indicating its insolvency or inability to pay its
obligations; or (v) cumulative Realized Losses as of any Distribution Date
exceed the amount specified in the Pooling and Servicing Agreement.
Rights upon Event of Servicing Termination
So long as an Event of Servicing Termination under the Pooling and
Servicing Agreement remains unremedied, the Trustee may, and at the direction of
the holders of the Certificates evidencing not less than 51% of the Voting
Rights is required to, terminate all of the rights and obligations of the
Servicer in its capacity as servicer with respect to the Mortgage Loans, as
provided in the Pooling and Servicing Agreement, whereupon the Trustee will
either appoint a Servicing Rights Pledgee or its designee as the successor
servicer, subject to the conditions set forth above under "--Pledge and
Assignment of Servicer's Rights" or succeed to (or appoint a successor servicer
to assume ) all of the responsibilities and duties of the Servicer under the
Pooling and Servicing Agreement, including the obligation to make any required
Advances. No assurance can be given that termination of the rights and
obligations of the Servicer under the Pooling and Servicing Agreement would not
adversely affect the servicing of the related Mortgage Loans, including the
delinquency experience of such Mortgage Loans.
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No holder of an Offered Certificate, solely by virtue of such holder's
status as a holder of an Offered Certificate, 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 default and unless the holders of Certificates having not less than 51% of
the Voting Rights evidenced by the Certificates so agree and have offered
indemnity satisfactory to the Trustee.
Voting Rights
With respect to any date of determination, the percentage of all the
Voting Rights allocated among holders of the Certificates (other than the Class
CE, Class P and Class R Certificates) will be 98% and will be allocated among
the classes of such Certificates in the proportion that the aggregate
Certificate Principal Balance of all the Certificates of such class then
outstanding bear to the aggregate Certificate Principal Balance of all
Certificates then outstanding. With respect to any date of determination, 1% of
all the Voting Rights will be allocated to the holders of each of the Class CE
and Class P Certificates. The Voting Rights allocated to a class of Certificates
will be allocated among all holders of each such class in proportion to the
outstanding certificate balances (or Percentage Interest) of such Certificates.
The Class A-IO and Class R Certificates will not have any Voting Rights.
Amendment
The Pooling and Servicing Agreement may be amended by the Depositor,
the Servicer and the Trustee, without the consent of the holders of the
Certificates, for any of the purposes set forth under "Description of the
Agreements--Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements--Amendment" in the Prospectus or to provide for
the rights of a NIMS Insurer, as described under "-- Rights of the NIMS Insurer
under the Pooling and Servicing Agreement." In addition, the Pooling and
Servicing Agreement may be amended by the Depositor, the Servicer and the
Trustee and the holders of a majority in interest of any 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 holders of any class
of Certificates; provided, however, that no such amendment may (i) reduce in any
manner the amount of, or delay the timing of, distributions required to be made
on any class of Certificates without the consent of the holders of such
Certificates; (ii) 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 (i) above, without the consent of the holders of such class evidencing
percentage interests aggregating at least 66%; or (iii) reduce the aforesaid
percentage of aggregate outstanding principal amounts of Certificates, the
holders of which are required to consent to any such amendment, without the
consent of the holders of all such Certificates.
Rights of the NIMS Insurer under the Pooling and Servicing Agreement
After the Closing Date, a separate trust may be established to issue
net interest margin securities secured by all or a portion of the Class CE and
Class P Certificates. Those net interest margin securities may or may not have
the benefit of a financial guaranty insurance policy. If a policy is obtained,
the NIMS Insurer that issues that policy will be a third party beneficiary of
the Pooling and Servicing Agreement and will have a number of rights under the
Pooling and Servicing Agreement, including the following:
o the right to consent to the Servicer's exercise of its
discretion to waive assumption fees, late payment or other
charges in connection with a Mortgage Loan or to arrange for
the extension of Due Dates for payments due on a mortgage note
for no more than 125 days, if the waivers or extensions relate
to more than 5% of the mortgage loans as of the Cut-off Date;
o the right to consent to the Servicer's entering into any
sub-servicing agreement with any servicing entity with respect
to any of the Mortgage Loans;
o the right to direct the Trustee to terminate all of the rights
and obligations of the Servicer under the Pooling and
Servicing Agreement relating to the Trust Fund and the assets
of the Trust Fund following the occurrence of an event of
default under the pooling and servicing agreement;
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o the right to approve or reject the appointment of any
successor Servicer other than the Trustee, if the Servicer is
required to be replaced and the Trustee is unwilling or unable
to act as successor Servicer;
o the right to consent to any amendment to the Pooling and
Servicing Agreement; and
o each of the other rights described under "Risk Factors--Rights
of the NIMS Insurer."
DESCRIPTION OF THE CERTIFICATES
General
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement. Set forth below are summaries of the specific terms and provisions
pursuant to which the Offered Certificates will be issued. The following
summaries do not purport to be complete and 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 referenced, the actual provisions (including definitions of terms)
are incorporated by reference.
The Trust will issue the Class AI-1, Class AI-2, Class AI-3, Class
AI-4, Class AII-1 and Class A-IO Certificates (the "Class A Certificates" or the
"Senior Certificates"), the Class M-1, Class M-2 and Class M-3 Certificates
(collectively, the "Class M Certificates" ), the Class B Certificates (the
"Class B Certificates" ), the Class CE and Class P Certificates (collectively
with the Class M and Class B Certificates, the "Subordinated Certificates") and
the Class R Certificates (the "Residual Certificates"). The Senior Certificates,
the Subordinated Certificates and the Residual Certificates are collectively
referred to herein as the "Certificates." Only the Class A and Class M
Certificates are offered hereby (the "Offered Certificates").
The Offered Certificates will have the respective original Certificate
Principal Balances or Notional Amount specified on the cover hereof, subject to
a permitted variance of plus or minus five percent.
The Offered Certificates will be issued in book-entry form as described
below. The Offered Certificates will be issued in minimum dollar denominations
of $25,000 and integral multiples of $1 in excess thereof.
Distributions on the Offered Certificates will be made by the Trustee
on the 25th day of each month, or if such day is not a Business Day, on the
first Business Day thereafter, commencing in May 2002 (each, a "Distribution
Date"), to the persons in whose names such Certificates are registered at the
close of business on the Record Date. With respect to the Offered Certificates
(other than the Class AII-1 Certificates), the "Record Date" is the last
Business Day of the month immediately preceding the month in which the related
Distribution Date occurs or the Closing Date, in the case of the first
Distribution Date. With respect to the Class AII-1 Certificates, the "Record
Date" is the Business Day immediately preceding such Distribution Date;
provided, however, that if the Class AII-1 Certificates become Definitive
Certificates (as defined herein), the Record Date for such Certificates will be
the last Business Day of the month immediately preceding the month in which the
related Distribution Date occurs.
Book-Entry Certificates
The Offered Certificates will be book-entry Certificates (the
"Book-Entry Certificates"). Persons acquiring beneficial ownership interests in
the Offered Certificates ("Certificate Owners") will hold such Certificates
through DTC in the United States, or Clearstream or Euroclear (in Europe) if
they are participants of such systems (the "Participants"), or indirectly
through organizations which are participants in such systems (the "Indirect
Participants"). The Book-Entry Certificates will be issued in one or more
certificates which equal the aggregate Certificate Principal Balance or Notional
Amount of such Certificates and will initially be registered in the name of Cede
& Co., the nominee of DTC. Clearstream and Euroclear will hold omnibus positions
on behalf of their participants through customers' securities accounts in
Clearstream's and Euroclear's names on the books of their respective
depositaries which in turn will hold such positions in customers' securities
accounts in the depositaries' names on the books of DTC. Citibank, N.A. will act
as depositary for Clearstream and JPMorgan Chase Bank will act as depositary for
Euroclear (in such capacities, individually the "Relevant Depositary" and
collectively the "European Depositaries"). Investors may hold such beneficial
interests in the Book-Entry Certificates in minimum denominations of $25,000.
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 Offered Certificates will be Cede & Co., as nominee
of DTC. Certificate Owners will not be Certificateholders as that term is used
in the Pooling and Servicing Agreement. Certificate Owners are only permitted to
exercise their rights indirectly through Participants and DTC.
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The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC Participant and on
the records of Clearstream or Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of and
interest on the Book-Entry Certificates from the Trustee through DTC and DTC
Participants. While the Book-Entry Certificates are outstanding (except under
the circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to the Book-Entry Certificates and is required to receive and transmit
distributions of principal of, and interest on, the Book-Entry Certificates.
Participants and Indirect Participants with whom Certificate Owners have
accounts with respect to Book-Entry Certificates are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Certificate Owners. Accordingly, although Certificate Owners
will not possess certificates representing their respective interests in the
Book-Entry Certificates, the Rules provide a mechanism by which Certificate
Owners will receive distributions and will be able to transfer their interest.
Certificateholders will not receive or be entitled to receive
certificates representing their respective interests in the Book-Entry
Certificates, except under the limited circumstances described below. Unless and
until Definitive Certificates are issued, Certificateholders who are not
Participants may transfer ownership of Book-Entry Certificates only through
Participants and Indirect Participants by instructing such Participants and
Indirect Participants to transfer Book-Entry Certificates, by book-entry
transfer, through DTC for the account of the purchasers of such Book-Entry
Certificates, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of Book-Entry Certificates will be executed through DTC and the
accounts of the respective Participants at DTC will be debited and credited.
Similarly, the Participants and Indirect Participants will make debits or
credits, as the case may be, on their records on behalf of the selling and
purchasing Certificateholders.
Because of time zone differences, credits of securities received in
Clearstream or Euroclear as a result of a transaction with a Participant will be
made during subsequent securities settlement processing and dated the Business
Day following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or Clearstream Participants on such Business Day. Cash received in
Clearstream or Euroclear as a result of sales of securities by or through a
Clearstream Participant or Euroclear Participant to a DTC Participant will be
received with value on the DTC settlement date but will be available in the
relevant Clearstream or Euroclear cash account only as of the Business Day
following settlement in DTC. For information with respect to tax documentation
procedures relating to the Certificates, see "Federal Income Tax
Consequences--Partnership Trust Funds--Tax Consequences to Foreign
Securityholders" and "--Backup Withholding" in the Prospectus and "Global
Clearance, Settlement and Tax Documentation Procedures--Certain U.S. Federal
Income Tax Documentation Requirements" in Annex I to this Prospectus Supplement.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Clearstream Participants and Euroclear Participants will occur
in accordance with their respective rules and operating procedures.
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Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream
Participants or Euroclear Participants, on the other, will be effected in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Clearstream Participants and Euroclear Participants may not deliver
instructions directly to the European Depositaries.
DTC which is a New York-chartered limited purpose trust company,
performs services for its Participants, some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC Participant in the Book-Entry
Certificates, whether held for its own account or as a nominee for another
person. In general, beneficial ownership of Book-Entry Certificates will be
subject to the Rules, as in effect from time to time.
Clearstream, 67 Bd Grande-Duchesse Charlotte, L-1331 Luxembourg, was
incorporated in 1970 as a limited company under Luxembourg law. Clearstream is
owned by banks, securities dealers and financial institutions, and currently has
about 100 shareholders, including U.S. financial institutions or their
subsidiaries. No single entity may own more than five percent of Clearstream's
stock.
Clearstream is registered as a bank in Luxembourg, and as such is
subject to regulation by the Institute Monetaire Luxembourgeois, the Luxembourg
Monetary Authority, which supervises Luxembourg banks.
Clearstream holds securities for its customers ("Clearstream
Participants") and facilitates the clearance and settlement of securities
transactions by electronic book-entry transfers between their accounts.
Clearstream provides various services, including safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Clearstream also deals with domestic securities markets
in several countries through established depository and custodial relationships.
Clearstream has established an electronic bridge with Euroclear Bank S.A./N.V.
as the Euroclear Operator in Brussels to facilitate settlement of trades between
systems. Clearstream currently accepts over 70,000 securities issues on its
books.
Clearstream's customers are world-wide financial institutions including
underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations. Clearstream's United States customers are limited to
securities brokers and dealers and banks. Currently, Clearstream has
approximately 3,000 customers located in over 60 countries, including all major
European countries, Canada, and the United States. Indirect access to
Clearstream is available to other institutions which clear through or maintain a
custodial relationship with an account holder of Clearstream.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in a variety of currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by Euroclear Bank S.A./N.V. (the
"Euroclear Operator"), under contract with Euroclear Clearance Systems S.C., a
Belgian cooperative corporation (the "Cooperative"). All operations are
conducted by the Euroclear Operator, and all Euroclear securities clearance
accounts and Euroclear cash accounts are accounts with the Euroclear Operator,
not the Cooperative. The Cooperative establishes policy for Euroclear on behalf
of Euroclear Participants. Euroclear Participants include banks (including
central banks), securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
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.
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Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to Cede & Co., as nominee of DTC. DTC will be
responsible for crediting the amount of such payments to the accounts of the
applicable DTC Participants in accordance with DTC's normal procedures. Each DTC
Participant will be responsible for disbursing such payments to the beneficial
owners of the Book-Entry Certificates that it represents and to each Financial
Intermediary for which it acts as agent. Each such Financial Intermediary will
be responsible for disbursing funds to the beneficial owners of the Book-Entry
Certificates that it represents.
Under a book-entry format, beneficial owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede & Co. Distributions with
respect to Certificates held through Clearstream or Euroclear will be credited
to the cash accounts of Clearstream Participants or Euroclear Participants in
accordance with the relevant system's rules and procedures, to the extent
received by the Relevant Depositary. Such distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
See "Federal Income Tax Consequences--Partnership Trust Funds--Tax Consequences
to Foreign Securityholders" and "--Backup Withholding" in the Prospectus.
Because DTC can only act on behalf of DTC Participants, the ability of a
beneficial owner to pledge Book-Entry Certificates to persons or entities that
do not participate in the Depository system, or otherwise take actions in
respect of such Book-Entry Certificates, may be limited due to the lack of
physical certificates for such Book-Entry Certificates. In addition, issuance of
the Book-Entry Certificates in book-entry form may reduce the liquidity of such
Certificates in the secondary market since certain potential investors may be
unwilling to purchase Certificates for which they cannot obtain physical
certificates.
Monthly and annual reports on the Trust Fund will be provided to Cede &
Co., as nominee of DTC, and may be made available by Cede & Co. to beneficial
owners upon request, in accordance with the rules, regulations and procedures
creating and affecting the DTC Participants to whose DTC accounts the Book-Entry
Certificates of such beneficial owners are credited.
DTC has advised the Trustee that, unless and until Definitive
Certificates are issued, DTC will take any action the holders of the Book-Entry
Certificates are permitted to take under the Pooling and Servicing Agreement
only at the direction of one or more Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates are credited, to the extent that such
actions are taken on behalf of Financial Intermediaries whose holdings include
such Book-Entry Certificates. Clearstream or the Euroclear Operator, as the case
may be, will take any other action permitted to be taken by a Certificateholder
under the Agreement on behalf of a Clearstream Participant or Euroclear
Participant only in accordance with its relevant rules and procedures and
subject to the ability of the Relevant Depositary to effect such actions on its
behalf through DTC. DTC may take actions, at the direction of the related
Participants, with respect to some Book-Entry Certificates which conflict with
actions taken with respect to other Book-Entry Certificates.
Definitive Certificates will be issued to beneficial owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Depositor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as nominee and
depository with respect to the Book-Entry Certificates and the Depositor or the
Trustee is unable to locate a qualified successor, (b) the Depositor, at its
sole option, with the consent of the Trustee, elects to terminate a book-entry
system through DTC or (c) after the occurrence of an Event of Default,
beneficial owners having Percentage Interests aggregating not less than 51% of
the Book-Entry Certificates advise the Trustee and DTC through the Financial
Intermediaries and the DTC Participants in writing that the continuation of a
book-entry system through DTC (or a successor thereto) is no longer in the best
interests of beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as
Certificateholders under the Agreement.
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Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Book-Entry Certificates among
participants of DTC, Clearstream and Euroclear, they are under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time.
None of the Depositor, the Servicer or the Trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Certificates held by
Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
Allocation of Available Funds
Distributions to holders of each class of Offered Certificates will be
made on each Distribution Date from Available Funds. "Available Funds" will be
equal to the sum of the following amounts with respect to the Mortgage Loans,
net of amounts reimbursable or payable to the Servicer, including amounts in
respect of indemnification of the Servicer, the Servicing Fee and any accrued
and unpaid Servicing Fee and amounts payable to the Trustee in respect of
certain expenses and indemnification: (i) the aggregate amount of Monthly
Payments on the Mortgage Loans due during the related Collection Period and
received by the Trustee one business day prior to the related Distribution Date,
(ii) certain unscheduled payments in respect of the Mortgage Loans, including
prepayments (but excluding any prepayment penalties), insurance proceeds and
liquidation proceeds net of certain expenses received during the related
Prepayment Period, (iii) payments from the Servicer in connection with Advances
and Prepayment Interest Shortfalls for such Distribution Date, (iv) the Purchase
Price for any repurchased Mortgage Loan deposited to the Collection Account
during the related Prepayment Period, (v) any Substitution Adjustments deposited
in the Collection Account during the related Prepayment Period, and (vi) on the
Distribution Date on which the Trust is to be terminated in accordance with the
Pooling and Servicing Agreement, the Termination Price.
The "Collection Period" with respect to any Distribution Date means the
period from the second day of the calendar month preceding the month in which
such Distribution Date occurs through the first day of the month in which such
Distribution Date occurs.
The "Prepayment Period" with respect to any Distribution Date means the
calendar month preceding the month in which such Distribution Date occurs.
Interest Distributions
On each Distribution Date, based upon the information provided to it in
a remittance report prepared by the Servicer, the Trustee will distribute the
Interest Remittance Amount in the following order of priority to the extent
available:
first, to the Trustee, the Trustee Fee;
second, concurrently, to the Class A Certificates, pro rata, the
applicable Accrued Certificate Interest for such Distribution Date;
third, concurrently, to the Class A Certificates, pro rata, the
applicable Interest Carry Forward Amount for such Distribution Date;
fourth, to the Class M-1 Certificates, the Accrued Certificate Interest
thereon for such Distribution Date;
fifth, to the Class M-2 Certificates, the Accrued Certificate Interest
thereon for such Distribution Date;
sixth, to the Class M-3 Certificates, the Accrued Certificate Interest
thereon for such Distribution Date;
seventh, to the Class B Certificates, the Accrued Certificate Interest
thereon for such Distribution Date;
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eighth, the amount, if any, of the Interest Remittance Amount remaining
after application with respect to the priorities set forth above which is
defined below as the "Monthly Excess Interest Amount" for such Distribution
Date, will be applied as described below under "--Application of Monthly Excess
Cashflow Amounts."
"Accrued Certificate Interest" for each Class of Offered Certificates
and each Distribution Date means an amount equal to the interest accrued during
the related Interest Accrual Period on the Certificate Principal Balance or
Notional Amount of such class of Certificates, minus each class's Interest
Percentage of shortfalls caused by the Relief Act or similar state laws for such
Distribution Date.
The "Interest Accrual Period" for any Distribution Date and each class
of Offered Certificates, other than the Class AII-1 Certificates, will be from
and including the first day of each month, commencing April 1, 2002, to and
including the last day of such month, and calculations of interest will be made
on the basis of a 360-day year assumed to consist of twelve 30-day months. With
respect to the Class AII-1 Certificates, the "Interest Accrual Period" for any
Distribution Date will be the period from and including the preceding
Distribution Date, or in the case of the first Distribution Date, from the
Closing Date, through and including the day prior to the current Distribution
Date, and calculations of interest will be made on the basis of the actual
number of days in the Interest Accrual Period and on a 360-day year.
"Interest Carry Forward Amount" means for any class of Certificates and
any Distribution Date the sum of (a) the excess, if any, of the Accrued
Certificate Interest and any Interest Carry Forward Amount for the prior
Distribution Date, over the amount in respect of interest actually distributed
on each class on such prior Distribution Date and (b) interest on such excess at
the applicable Pass-Through Rate (x) with respect to the Offered Certificates
(other than the AII-1 Certificates) on the basis of a 360-day year consisting of
twelve 30-day months and (y) with respect to the Class AII-1 Certificates, on
the basis of the actual number of days elapsed since the prior Distribution
Date.
"Interest Remittance Amount" means, as of any Determination Date, the
sum, without duplication, of (i) all interest collected or advanced with respect
to the related Collection Period on the Mortgage Loans (less the Servicing Fee,
certain amounts available for reimbursement of Advances and Servicing Advances
as described above under "The Pooling and Servicing Agreement--Advances" and
certain other reimbursable expenses pursuant to the Pooling and Servicing
Agreement), (ii) all Compensating Interest paid by the Servicer on such
Determination Date with respect to the Mortgage Loans and (iii) the portion of
any payment in connection with any principal prepayment, substitution, Purchase
Price, Termination Price, liquidation proceeds (net of certain expenses) or
insurance proceeds relating to interest with respect to the Mortgage Loans
received during the related Collection Period.
The "Interest Percentage" is, with respect to any class of Certificates
and any Distribution Date, the ratio (expressed as a decimal carried to six
places) of the Accrued Certificate Interest for such class to the Accrued
Certificate Interest for all classes, in each case with respect to such
Distribution Date and without regard to shortfalls caused by the Relief Act or
similar state laws.
If the Interest Remittance Amount and the Monthly Excess Cashflow
Amount are insufficient on any Distribution Date to distribute the aggregate
Accrued Certificate Interest on the Class A Certificates entitled to
distributions of interest, any shortfall in available amounts will be allocated
to the Class A Certificates pro rata in accordance with their Interest
Percentages.
Principal Distributions
With respect to each Distribution Date (a) before the Stepdown Date or
(b) as to which a Trigger Event is in effect, the Principal Distribution Amount
will be allocated among and distributed in reduction of the Certificate
Principal Balances of the Certificates in the following order of priority:
first, the Senior Fixed-Rate Principal Distribution Amount,
sequentially, to the Class AI-1, Class AI-2, Class AI-3 and Class AI-4
Certificates, in that order, until the Certificate Principal Balances thereof
have been reduced to zero;
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second, the Senior Principal Distribution Amount remaining after
priority first above, to the Class AII-1 Certificates, until the Certificate
Principal Balance thereof has been reduced to zero;
third, to the Class M-1 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero;
fourth, to the Class M-2 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero;
fifth, to the Class M-3 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero;
sixth, to the Class B Certificates, until the Certificate Principal
Balance thereof has been reduced to zero; and
seventh, any remaining Principal Distribution Amount will be
distributed as part of the Monthly Excess Cashflow Amount as described below
under "--Application of Monthly Excess Cashflow Amounts."
With respect to each Distribution Date (a) on or after the Stepdown
Date and (b) as long as a Trigger Event is not in effect, the Principal
Distribution Amount will be allocated among and distributed in reduction of the
Certificate Principal Balances of the Certificates in the following order of
priority:
first, the Senior Fixed-Rate Principal Distribution Amount,
sequentially, to the Class AI-1, Class AI-2, Class AI-3 and Class AI-4
Certificates, in that order, until the Certificate Principal Balances thereof
have been reduced to zero;
second, the Senior Principal Distribution Amount remaining after
priority first above, to the Class AII-1 Certificates, until the Certificate
Principal Balance thereof has been reduced to zero;
third, to the Class M-1 Certificates, up to the Class M-1 Principal
Distribution Amount, until the Certificate Principal Balance thereof has been
reduced to zero;
fourth, to the Class M-2 Certificates, up to the Class M-2 Principal
Distribution Amount, until the Certificate Principal Balance thereof has been
reduced to zero;
fifth, to the Class M-3 Certificates, up to the Class M-3 Principal
Distribution Amount, until the Certificate Principal Balance thereof has been
reduced to zero;
sixth, to the Class B Certificates, up to the Class B Principal
Distribution Amount, until the Certificate Principal Balance thereof has been
reduced to zero; and
seventh, any remaining Principal Distribution Amount will be
distributed as part of the Monthly Excess Cashflow Amount as described below
under "--Application of Monthly Excess Cashflow Amounts."
For purposes of the foregoing, the following terms will have the
respective meanings set forth below.
The "Certificate Principal Balance" with respect to any class of
Certificates and any Distribution Date, will equal the principal balance of such
class on the date of the initial issuance of the Certificates as reduced, but
not below zero, by:
o all amounts distributed on previous Distribution Dates on such
class on account of principal; and
o such class's pro rata share of any Applied Realized Loss
Amount for previous Distribution Dates.
"Class M-1 Principal Distribution Amount" means as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the excess of (x) the sum of (i) the sum of the Certificate Principal
Balances of the Class A Certificates (after taking into account the payment of
the Senior Principal Distribution Amount on such Distribution Date) and (ii) the
Certificate Principal Balance of the Class M-1 Certificates immediately prior to
such Distribution Date over (y) the lesser of (A) the product of (i)
approximately 77.50% and (ii) the Pool Balance as of the last day of the related
Collection Period and (B) the Pool Balance as of the last day of the related
Collection Period minus the product of (i) 0.50% and (ii) the Pool Balance on
the Cut-off Date.
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"Class M-2 Principal Distribution Amount" means as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the excess of (x) the sum of (i) the sum of the Certificate Principal
Balances of the Class A Certificates (after taking into account the payment of
the Senior Principal Distribution Amount on such Distribution Date), (ii) the
Certificate Principal Balance of the Class M-1 Certificates (after taking into
account the payment of the Class M-1 Principal Distribution Amount on such
Distribution Date) and (iii) the Certificate Principal Balance of the Class M-2
Certificates immediately prior to such Distribution Date over (y) the lesser of
(A) the product of (i) approximately 86.50% and (ii) the Pool Balance as of the
last day of the related Collection Period and (B) the Pool Balance as of the
last day of the related Collection Period minus the product of (i) 0.50% and
(ii) the Pool Balance on the Cut-off Date.
"Class M-3 Principal Distribution Amount" means as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the excess of (x) the sum of (i) the sum of the Certificate Principal
Balances of the Class A Certificates (after taking into account the payment of
the Senior Principal Distribution Amount on such Distribution Date), (ii) the
Certificate Principal Balance of the Class M-1 Certificates (after taking into
account the payment of the Class M-1 Principal Distribution Amount on such
Distribution Date), (iii) the Certificate Principal Balance of the Class M-2
Certificates (after taking into account the payment of the Class M-2 Principal
Distribution Amount on such Distribution Date) and (iv) the Certificate
Principal Balance of the Class M-3 Certificates immediately prior to such
Distribution Date over (y) the lesser of (A) the product of (i) approximately
93.00% and (ii) the Pool Balance as of the last day of the related Collection
Period and (B) the Pool Balance as of the last day of the related Collection
Period minus the product of (i) 0.50% and (ii) the Pool Balance on the Cut-off
Date.
"Class B Principal Distribution Amount" means as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the excess of (x) the sum of (i) the sum of the Certificate Principal
Balances of the Class A Certificates (after taking into account the payment of
the Senior Principal Distribution Amount on such Distribution Date), (ii) the
Certificate Principal Balance of the Class M-1 Certificates (after taking into
account the payment of the Class M-1 Principal Distribution Amount on such
Distribution Date), (iii) the Certificate Principal Balance of the Class M-2
Certificates (after taking into account the payment of the Class M-2 Principal
Distribution Amount on such Distribution Date), (iv) the Certificate Principal
Balance of the Class M-3 Certificates (after taking into account the payment of
the Class M-3 Principal Distribution Amount on such Distribution Date), and (v)
the Certificate Principal Balance of the Class B Certificates immediately prior
to such Distribution Date over (y) the lesser of (A) the product of (i)
approximately 97.00% and (ii) the Pool Balance as of the last day of the related
Collection Period and (B) the Pool Balance as of the last day of the related
Collection Period minus the product of (i) 0.50% and (ii) the Pool Balance on
the Cut-off Date.
"Extra Principal Distribution Amount" means, as of any Distribution
Date, the lesser of (x) the Monthly Excess Interest Amount for such Distribution
Date and (y) the Overcollateralization Deficiency for such Distribution Date.
The "Notional Amount" with respect to the Class A-IO Certificates and
any Distribution Date (through the October 2004 Distribution Date) will be equal
to the lesser of (i) $16,786,000 and (ii) the aggregate Principal Balance of the
Fixed-Rate Mortgage Loans as of the first day of the related collection period.
The Notional Amount after the October 2004 Distribution Date will be zero.
"Overcollateralization Amount" means, as of any Distribution Date the
excess, if any, of (x) the Pool Balance as of the last day of the related
Collection Period over (y) the aggregate Certificate Principal Balance of all
classes of Certificates (after taking into account all distributions of
principal on such Distribution Date).
"Overcollateralization Deficiency" means, as of any Distribution Date,
the excess, if any, of (x) the Targeted Overcollateralization Amount for such
Distribution Date over (y) the Overcollateralization Amount for such
Distribution Date, calculated for this purpose after taking into account the
reduction on such Distribution Date of the Certificate Principal Balances of all
classes of Certificates resulting from the distribution of the Principal
Distribution Amount (but not the Extra Principal Distribution Amount) on such
Distribution Date, but prior to taking into account any Applied Realized Loss
Amounts on such Distribution Date.
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"Overcollateralization Release Amount" means, with respect to any
Distribution Date on or after the Stepdown Date on which a Trigger Event is not
in effect, the excess, if any, of (i) the Overcollateralization Amount for such
Distribution Date, assuming that 100% of the Principal Remittance Amount is
applied as a principal payment on the Certificates on such Distribution Date,
over (ii) the Targeted Overcollateralization Amount for such Distribution Date.
With respect to any Distribution Date on which a Trigger Event is in effect, the
Overcollateralization Release Amount will be zero.
"Principal Distribution Amount" means as of any Distribution Date, the
sum of (i) the Principal Remittance Amount (minus the Overcollateralization
Release Amount, if any) and (ii) the Extra Principal Distribution Amount, if
any.
"Principal Remittance Amount" means, with respect to any Distribution
Date, to the extent of funds available therefor as described herein, the amount
equal to the sum (less certain amounts available for reimbursement of Advances
and Servicing Advances as described above under "The Pooling and Servicing
Agreement--Advances" and certain other reimbursable expenses pursuant to the
Pooling and Servicing Agreement) of the following amounts (without duplication)
with respect to the Mortgage Loans and the immediately preceding Collection
Period: (i) each payment of principal on a Mortgage Loan due during such
Collection Period and received by the Servicer on or prior to the related
Determination Date, including any Advances with respect thereto, (ii) all full
and partial principal prepayments received by the Servicer during the related
Prepayment Period, (iii) the liquidation proceeds (net of certain expenses)
allocable to principal actually collected by the Servicer during the related
Prepayment Period, (iv) the portion of the Purchase Price allocable to principal
of all repurchased Defective Mortgage Loans with respect to such Prepayment
Period, (v) any Substitution Adjustments received on or prior to the previous
Determination Date and not yet distributed, and (vi) on the Distribution Date on
which the Trust is to be terminated in accordance with the Pooling and Servicing
Agreement, that portion of the Termination Price in respect of principal.
"Senior Adjustable-Rate Principal Distribution Amount" means as of any
Distribution Date, the least of (i) the Certificate Principal Balance of the
Class AII-1 Certificates immediately prior to such Distribution Date, (ii) the
Senior Principal Distribution Amount and (iii) the greater of (x) the product of
(A) the Senior Principal Distribution Amount and (B) a fraction, the numerator
of which is aggregate Principal Balance of the Adjustable-Rate Mortgage Loans as
of the last day of the related Collection Period and the denominator of which is
the Pool Balance as of the last day of the related Collection Period and (y) the
excess of (A) the Certificate Principal Balance of the Class AII-1 Certificates
immediately prior to such Distribution Date over (B) the aggregate Principal
Balance of the Adjustable-Rate Mortgage Loans as of the last day of the related
Collection Period.
"Senior Enhancement Percentage" for any Distribution Date is the
percentage obtained by dividing (x) the sum of (i) the aggregate Certificate
Principal Balance of the Subordinated Certificates and (ii) the
Overcollateralization Amount, in each case before taking into account the
distribution of the Principal Distribution Amount on such Distribution Date by
(y) the Pool Balance as of the last day of the related Collection Period.
"Senior Fixed-Rate Principal Distribution Amount" means as of any
Distribution Date, the excess, if any, of (x) the Senior Principal Distribution
Amount over (y) the Senior Adjustable-Rate Principal Distribution Amount for
such Distribution Date.
"Senior Principal Distribution Amount" means as of any Distribution
Date (i) before the Stepdown Date or as to which a Trigger Event is in effect,
the lesser of (x) the Principal Distribution Amount and (y) the sum of the
Certificate Principal Balances of the Class A Certificates immediately prior to
such Distribution Date and (ii) on or after the Stepdown Date and as long as a
Trigger Event is not in effect, the excess of (x) the sum of the Certificate
Principal Balances of the Class A Certificates immediately prior to such
Distribution Date over (y) the lesser of (A) the product of (i) approximately
64.00% and (ii) the Pool Balance as of the last day of the related Collection
Period and (B) the Pool Balance as of the last day of the related Collection
Period minus the product of (i) 0.50% and (ii) the Pool Balance on the Cut-off
Date.
"Senior Specified Enhancement Percentage" means approximately 36.0%.
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"60+ Day Delinquent Loan" means each Mortgage Loan (including each
Mortgage Loan in foreclosure and each Mortgage Loan for which the mortgagor has
filed for bankruptcy after the Closing Date) with respect to which any portion
of a Monthly Payment is, as of the last day of the prior Collection Period, two
months or more past due and each Mortgage Loan relating to an REO Property. Any
Mortgage Loan which, on a 3-month rolling average basis, has made its scheduled
principal and interest payments will not be considered to be a 60+ Day
Delinquent Loan.
"Stepdown Date" means the earlier to occur of (i) the Distribution Date
on which the aggregate Certificate Principal Balance of the Class A Certificates
is reduced to zero and (ii) the later to occur of (x) the Distribution Date in
May 2005 and (y) the Distribution Date on which the Senior Enhancement
Percentage is greater than or equal to the Senior Specified Enhancement
Percentage.
"Targeted Overcollateralization Amount" means as of any Distribution
Date, (x) prior to the Stepdown Date, approximately 1.50% of the initial Pool
Balance and (y) on and after the Stepdown Date, (i) if a Trigger Event has not
occurred, the greater of (A) approximately 3.00% of the Pool Balance as of the
last day of the related Collection Period and (B) 0.50% of the initial Pool
Balance and (ii) if a Trigger Event has occurred, the Targeted
Overcollateralization Amount for the immediately preceding Distribution Date.
A "Trigger Event" has occurred on a Distribution Date if the six-month
rolling average of 60+ Day Delinquent Loans equals or exceeds 50% of the Senior
Enhancement Percentage.
Allocation of Losses
A "Realized Loss" is:
o as to any Liquidated Mortgage Loan, the unpaid Principal
Balance thereof less the net proceeds from the liquidation of,
and any insurance proceeds from, such Mortgage Loan and the
related Mortgaged Property which are applied to the Principal
Balance of such Mortgage Loan.
o as to any Mortgage Loan, a Deficient Valuation.
o as to any Mortgage Loan, a reduction in the Principal Balance
thereof resulting from a Servicer Modification.
A "Liquidated Mortgage Loan" is any defaulted Mortgage Loan as to which
the Servicer has determined that all amounts which it expects to recover from or
on account of such Mortgage Loan have been recovered.
A Realized Loss may result from the personal bankruptcy of a mortgagor
if the bankruptcy court establishes the value of the Mortgaged Property at an
amount less than the then outstanding Principal Balance of the Mortgage Loan
secured by such Mortgaged Property and reduces the secured debt to such value.
In such case, the Trust, as the holder of such Mortgage Loan, would become an
unsecured creditor to the extent of the difference between the outstanding
Principal Balance of such mortgage loan and such reduced secured debt (such
difference, a "Deficient Valuation").
If a Mortgage Loan is in default, or if default is reasonably
foreseeable, the Servicer may permit a modification of such Mortgage Loan to
reduce its Principal Balance and/or extend its term to a term not longer than
the latest maturity date of any other Mortgage Loan (any such modification, a
"Servicer Modification"). Any such principal reduction will constitute a
Realized Loss at the time of such reduction. An extension of the term will not
result in a Realized Loss unless coupled with a principal reduction.
Realized Losses will, in effect, be absorbed first by the Class CE
Certificates, through the application of the Monthly Excess Interest Amount to
fund such deficiency, as well as through a reduction in the
Overcollateralization Amount.
If, after giving effect to the distribution of the Principal
Distribution Amount on any Distribution Date the aggregate Certificate Principal
Balance of the Certificates exceeds the Pool Balance as of the end of the
related Collection Period, such excess will be allocated to the Class B, Class
M-3, Class M-2 and Class M-1 Certificates, in that order, until their respective
Certificate Principal Balances thereof are reduced to zero. The Pooling and
Servicing Agreement does not permit the allocation of such excess to the Class A
Certificates; however, under certain loss scenarios, there will not be enough
interest and principal on the Mortgage Loans to pay the Class A Certificates all
interest and principal amounts to which they are entitled. Any allocation of
such excess in reduction of a Certificate Principal Balance is referred to as an
"Applied Realized Loss Amount." Any such reduction of a Certificate Principal
Balance will not be reversed or reinstated. However, on future Distribution
Dates, Certificateholders of the related class may receive amounts in respect of
prior reductions in the related Certificate Principal Balances as described
below. Such subsequent payments will be applied in the reverse of the order set
forth above.
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Application of Monthly Excess Cashflow Amounts
The weighted average Net Mortgage Interest Rate for the Mortgage Loans
is generally expected to be higher than the weighted average of the interest
rates on the Certificates, thus generating certain excess interest collections
which, in the absence of losses, will not be necessary to fund interest
distributions on the Certificates. This excess interest for a Collection Period,
together with interest on the Overcollateralization Amount itself, is the
"Monthly Excess Interest Amount."
The "Net Mortgage Interest Rate" for each Mortgage Loan is the
applicable Mortgage Interest Rate less the sum of (i) the Servicing Fee Rate and
(ii) the rate at which the Trustee Fee accrues.
The required level of overcollateralization for any Distribution Date
is the Targeted Overcollateralization Amount. The Targeted Overcollateralization
Amount is initially $4,736,856.18.
If Realized Losses occur that are not covered by the Monthly Excess
Cashflow Amount, such Realized Losses will result in an Overcollateralization
Deficiency (since they will reduce the Pool Balance without giving rise to a
corresponding reduction of the aggregate Certificate Principal Balance of the
Certificates). The cashflow priorities of the Trust Fund in this situation
increase the Extra Principal Distribution Amount (subject to the availability of
any Monthly Excess Cashflow Amount in subsequent months) for the purpose of
re-establishing the Overcollateralization Amount at the then-required Targeted
Overcollateralization Amount.
On and after the Stepdown Date and assuming that a Trigger Event is not
in effect, the Targeted Overcollateralization Amount may be permitted to
decrease or stepdown. If the Targeted Overcollateralization Amount is permitted
to stepdown on a Distribution Date, the Pooling and Servicing Agreement permits
a portion of the Principal Remittance Amount for such Distribution Date not to
be passed through as a distribution of principal on the Certificates on such
Distribution Date. This has the effect of decelerating the amortization of the
Certificates relative to the Pool Balance, thereby reducing the actual level of
the Overcollateralization Amount to the new, lower Targeted
Overcollateralization Amount. This portion of the Principal Remittance Amount
not distributed as principal on the Certificates therefore releases
overcollateralization from the Trust Fund.
On any Distribution Date, the sum of the Monthly Excess Interest
Amount, the Overcollateralization Release Amount and any portion of the
Principal Distribution Amount (without duplication) remaining after principal
distributions on the Certificates is the "Monthly Excess Cashflow Amount," which
is required to be applied in the following order of priority (the "Monthly
Excess Cashflow Allocation") on such Distribution Date:
(i) to the Class A Certificates, pro rata, any remaining Accrued
Certificate Interest for such Distribution Date;
(ii) to the Class A Certificates, pro rata, any Interest Carry
Forward Amounts for such classes for such Distribution Date;
(iii) to the Class M-1 Certificates, any remaining Accrued
Certificate Interest for such Distribution Date;
(iv) to the Class M-1 Certificates, any Interest Carry Forward
Amount for such class for such Distribution Date;
(v) to the Class M-1 Certificates, any Class M-1 Realized Loss
Amortization Amount for such Distribution Date;
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(vi) to the Class M-2 Certificates, any remaining Accrued
Certificate Interest for such Distribution Date;
(vii) to the Class M-2 Certificates, any Interest Carry Forward
Amount for such class for such Distribution Date;
(viii) to the Class M-2 Certificates, any Class M-2 Realized Loss
Amortization Amount for such Distribution Date;
(ix) to the Class M-3 Certificates, any remaining Accrued
Certificate Interest for such Distribution Date;
(x) to the Class M-3 Certificates, any Interest Carry Forward
Amount for such class for such Distribution Date;
(xi) to the Class M-3 Certificates, any Class M-3 Realized Loss
Amortization Amount for such Distribution Date;
(xii) to the Class B Certificates, any remaining Accrued Certificate
Interest for such Distribution Date;
(xiii) to the Class B Certificates, any Interest Carry Forward Amount
for such class for such Distribution Date;
(xiv) to the Class B Certificates, any Class B Realized Loss
Amortization Amount for such Distribution Date;
(xv) first, to the Class A Certificates, pro rata, and then
sequentially, to the Class M-1, Class M-2, Class M-3 and Class
B Certificates, in that order, any Cap Carryover Amount for
each such class;
(xvi) to pay any Special Servicing Fees for such Distribution Date
or which remain unpaid from any previous Distribution Date;
and
(xvii) to fund distributions to the Holders of the Class CE and Class
R Certificates in the amounts specified in the Pooling and
Servicing Agreement.
For purposes of the foregoing, the following terms will have the
respective meanings set forth below.
"Class M-1 Applied Realized Loss Amount" means, as to the Class M-1
Certificates and as of any Distribution Date, the lesser of (x) the Certificate
Principal Balance thereof (after taking into account the distribution of the
Principal Distribution Amount on such Distribution Date, but prior to the
application of the Class M-1 Applied Realized Loss Amount, if any, on such
Distribution Date) and (y) the excess of (i) the Applied Realized Loss Amount as
of such Distribution Date over (ii) the sum of the Class M-2 Applied Realized
Loss Amount, the Class M-3 Applied Realized Loss Amount and the Class B Applied
Realized Loss Amount, in each case as of such Distribution Date.
"Class M-1 Realized Loss Amortization Amount" means, as to the Class
M-1 Certificates and as of any Distribution Date, the lesser of (x) the Unpaid
Realized Loss Amount for the Class M-1 Certificates as of such Distribution Date
and (y) the excess of (i) the Monthly Excess Cashflow Amount over (ii) the sum
of the amounts described in clauses (i) through (iv) of the Monthly Excess
Cashflow Allocation for such Distribution Date.
"Class M-2 Applied Realized Loss Amount" means, as to the Class M-2
Certificates and as of any Distribution Date, the lesser of (x) the Certificate
Principal Balance thereof (after taking into account the distribution of the
Principal Distribution Amount on such Distribution Date, but prior to the
application of the Class M-2 Applied Realized Loss Amount, if any, on such
Distribution Date) and (y) the excess of (i) the Applied Realized Loss Amount as
of such Distribution Date over (ii) the sum of the Class M-3 Applied Realized
Loss Amount and the Class B Applied Realized Loss Amount, in each case as of
such Distribution Date.
S-60
"Class M-2 Realized Loss Amortization Amount" means, as to the Class
M-2 Certificates and as of any Distribution Date, the lesser of (x) the Unpaid
Realized Loss Amount for the Class M-2 Certificates as of such Distribution Date
and (y) the excess of (i) the Monthly Excess Cashflow Amount over (ii) the sum
of the amounts described in clauses (i) through (vii) of the Monthly Excess
Cashflow Allocation for such Distribution Date.
"Class M-3 Applied Realized Loss Amount" means, as to the Class M-3
Certificates and as of any Distribution Date, the lesser of (x) the Certificate
Principal Balance thereof (after taking into account the distribution of the
Principal Distribution Amount on such Distribution Date, but prior to the
application of the Class M-3 Applied Realized Loss Amount, if any, on such
Distribution Date) and (y) the excess of (i) the related Applied Realized Loss
Amount as of such Distribution Date over (ii) the Class B Applied Realized Loss
Amount as of such Distribution Date.
"Class M-3 Realized Loss Amortization Amount" means, as to the Class
M-3 Certificates and as of any Distribution Date, the lesser of (x) the Unpaid
Realized Loss Amount for the Class M-3 Certificates as of such Distribution Date
and (y) the excess of (i) the Monthly Excess Cashflow Amount over (ii) the sum
of the amounts described in clauses (i) through (x) of the Monthly Excess
Cashflow Allocation for such Distribution Date.
"Class B Applied Realized Loss Amount" means, as to the Class B
Certificates and as of any Distribution Date, the lesser of (x) the Certificate
Principal Balance thereof (after taking into account the distribution of the
Principal Distribution Amount on such Distribution Date, but prior to the
application of the Class B Applied Realized Loss Amount, if any, on such
Distribution Date) and (y) the Applied Realized Loss Amount as of such
Distribution Date.
"Class B Realized Loss Amortization Amount" means, as to the Class B
Certificates and as of any Distribution Date, the lesser of (x) the Unpaid
Realized Loss Amount for the Class B Certificates as of such Distribution Date
and (y) the excess of (i) the Monthly Excess Cashflow Amount over (ii) the sum
of the amounts described in clauses (i) through (xiii) of the Monthly Excess
Cashflow Allocation for such Distribution Date.
"Realized Loss Amortization Amount" means each of the Class M-1
Realized Loss Amortization Amount, the Class M-2 Realized Loss Amortization
Amount, the Class M-3 Realized Loss Amortization Amount and the Class B Realized
Loss Amortization Amount.
"Unpaid Realized Loss Amount" means for any class of Subordinated
Certificates and as to any Distribution Date, the excess of (x) the cumulative
amount of related Applied Realized Loss Amounts with respect to such class for
all prior Distribution Dates over (y) the cumulative amount of related Realized
Loss Amortization Amounts with respect to such class for all prior Distribution
Dates.
Pass-Through Rates
Interest for each Distribution Date will accrue on the Class AI-1,
Class AI-2, Class AI-3 and Class AI-4 Certificates during the related Interest
Accrual Period at a rate equal to the lesser of (i) the applicable per annum
rate for each such class as set forth on the cover page of this Prospectus
Supplement, plus, on each Distribution Date following the Optional Termination
Date in the case of the Class AI-4 Certificates, 0.50% per annum (each such
rate, a "Pass-Through Rate") and (ii) the Fixed-Rate Net Funds Cap for such
Distribution Date.
Interest for each Distribution Date will accrue on the Class AII-1
Certificates during the related Interest Accrual Period at a rate equal to the
least of (i) the sum of LIBOR as of the related LIBOR Determination Date plus
the Class AII-1 Certificate Margin, (ii) the Maximum Cap Rate (the lesser of (i)
and (ii), the "Pass-Through Rate") and (iii) the Adjustable-Rate Net Funds Cap
for such Distribution Date. The "Class AII-1 Certificate Margin" on each
Distribution Date on or prior to the Optional Termination Date will equal 0.43%
per annum and on each Distribution Date following the Optional Termination Date,
will equal 0.86% per annum.
The "Pass-Through Rate" with respect to the Class A-IO Certificates and
each related Interest Accrual Period will be equal to (i) 5.75% per annum during
the first through the tenth Distribution Date, (ii) 4.75% per annum during the
eleventh through the twentieth Distribution Date, (iii) 3.75% per annum during
the twenty-first through the thirtieth Distribution Date and (iv) zero
thereafter.
S-61
Interest for each Distribution Date will accrue on the Class M
Certificates during the related Interest Accrual Period at a rate equal to the
lesser of (i) the applicable per annum rate for such class as set forth on the
cover page of this Prospectus Supplement, plus on each Distribution Date
following the Optional Termination Date, 0.50% per annum (each such rate, a
"Pass-Through Rate") and (ii) the Pool Cap for such Distribution Date.
Interest for each Distribution Date will accrue on the Class B
Certificates during the related Interest Accrual Period at a rate equal to the
lesser of (i) 8.75% (such rate, the "Pass-Through Rate") and (ii) the Pool Cap
for such Distribution Date.
With respect to the Offered Certificates, other than the Class AII-1
Certificates, interest in respect of any Distribution Date will accrue during
the related Interest Accrual Period on the basis of a 360-day year consisting of
twelve 30-day months. With respect to the Class AII-1 Certificates, interest in
respect of any Distribution Date will accrue during the related Interest Accrual
Period on the basis of a 360-day year and the actual number of days elapsed.
The "Adjustable-Rate Net Funds Cap" for any Distribution Date will
equal the fraction, expressed as a percentage, (i) the numerator of which is the
product of (A) 360 and (B) the product of (a) 1/12, (b) the average of the Net
Mortgage Interest Rates for the Adjustable-Rate Mortgage Loans, weighted on the
basis of the aggregate Principal Balance of the Adjustable-Rate Mortgage Loans
as of the first day of the related Collection Period and (c) the aggregate
Principal Balance of the Adjustable-Rate Mortgage Loans as of the first day of
the related Collection Period and (ii) the denominator of which is the product
of (x) the aggregate Principal Balance of the Adjustable-Rate Mortgage Loans as
of the first day of the related Collection Period and (y) the actual number of
days in the related Collection Period.
The "Fixed-Rate Net Funds Cap" for any Distribution Date will equal the
average of the Net Mortgage Interest Rates for the Fixed-Rate Mortgage Loans,
weighted on the basis of the aggregate Principal Balance of the Fixed-Rate
Mortgage Loans as of the first day of the related Collection Period, less a
fraction (expressed as a percentage) the numerator of which is the Accrued
Certificate Interest paid with respect to the Class A-IO Certificates on such
Distribution Date and the denominator of which is the aggregate Principal
Balance of the Fixed-Rate Mortgage Loans as of the first day of the related
Collection Period.
The "Pool Cap" for any Distribution Date will equal the lesser of (A)
the Fixed-Rate Net Funds Cap and (B) the average of the Net Mortgage Interest
Rates, weighted on the basis of the Pool Balance as of the first day of the
related Collection Period, less a fraction (expressed as a percentage) the
numerator of which is the Accrued Certificate Interest paid with respect to the
Class A-IO Certificates on such Distribution Date and the denominator of which
is the Pool Balance as of the first day of the related Collection Period.
The "Maximum Cap Rate" for any Distribution Date will equal the
fraction, expressed as a percentage, (i) the numerator of which is the product
of (A) 360 and (B) the product of (a) 1/12, (b) the average of the Maximum
Mortgage Interest Rates for the Adjustable-Rate Mortgage Loans, weighted on the
basis of the aggregate Principal Balance of the Adjustable-Rate Mortgage Loans
as of the first day of the related Collection Period and (c) the aggregate
Principal Balance of the Adjustable-Rate Mortgage Loans as of the first day of
the related Collection Period and (ii) the denominator of which is the product
of (x) the aggregate Principal Balance of the Adjustable-Rate Mortgage Loans as
of the first day of the related Collection Period and (y) the actual number of
days in the related Collection Period.
If on any Distribution Date, the Accrued Certificate Interest for any
Certificate is based on the related cap, the excess of (i) the amount of
interest such Certificate would have been entitled to receive on such
Distribution Date based on its Pass-Through Rate, over (ii) the amount of
interest such Certificate received on such Distribution Date based on the
related cap, together with the unpaid portion of any such excess from prior
Distribution Dates (and interest accrued thereon at the then applicable
Pass-Through Rate on such Certificate) will be the "Cap Carryover Amount." Any
Cap Carryover Amount will be paid on the same or future Distribution Dates from
amounts that would otherwise be distributed on the Class CE Certificates.
S-62
Calculation of LIBOR
LIBOR for the first Distribution Date will be determined on the second
business day preceding the Closing Date and for each subsequent Distribution
Date will be determined on the second business day prior to the immediately
preceding Distribution Date (each such date, a "LIBOR Determination Date"). With
respect to each Distribution Date, "LIBOR" will equal the interbank offered rate
for one-month United States dollar deposits in the London market as quoted on
Telerate Page 3750 as of 11:00 A.M., London time, on the related LIBOR
Determination Date. "Telerate Page 3750" means the display designated as page
3750 on the Bridge Telerate (or such other page as may replace page 3750 on that
service for the purpose of displaying London interbank offered rates of major
banks). If such rate does not appear on such page (or such other page as may
replace that page on that service, or if such service is no longer offered, such
other service for displaying LIBOR or comparable rates as may be selected by the
Trustee after consultation with the Servicer), the rate will be the Reference
Bank Rate. The "Reference Bank Rate" will be determined on the basis of the
rates at which deposits in U.S. Dollars are offered by the reference banks
(which shall be three major banks that are engaged in transactions in the London
interbank market, selected by the Trustee after consultation with the Servicer)
as of 11:00 A.M., London time, on the related LIBOR Determination Date to prime
banks in the London interbank market for a period of one month in amounts
approximately equal to the Certificate Principal Balance of the Class AII-1
Certificates. The Trustee will request the principal London office of each of
the reference banks to provide a quotation of its rate. If at least two such
quotations are provided, the rate will be the arithmetic mean of the quotations.
If on such date fewer than two quotations are provided as requested, the rate
will be the arithmetic mean of the rates quoted by one or more major banks in
New York City, selected by the Trustee after consultation with the Servicer, as
of 11:00 A.M., New York City time, on such date for loans in U.S. Dollars to
leading European banks for a period of one month in amounts approximately equal
to the Certificate Principal Balance of the Class AII-1 Certificates. If no such
quotations can be obtained, the rate will be LIBOR for the prior Distribution
Date.
The establishment of LIBOR on each LIBOR Determination Date by the
Trustee and the Trustee's calculation of the rate of interest applicable to the
Class AII-1 Certificates for the related Interest Accrual Period shall (in the
absence of manifest error) be final and binding.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
The yields to maturity and weighted average lives of the Offered
Certificates will depend upon, among other things, the price at which such
Offered Certificates are purchased, the amount and timing of principal payments
on the Mortgage Loans, the allocation of Available Funds to various classes of
Offered Certificates, the amount and timing of mortgagor delinquencies and
defaults on the Mortgage Loans, the rate of liquidations and Realized Losses and
the allocation of Realized Losses to various classes of Offered Certificates.
The rate of payment of principal, the aggregate amount of distributions
and the yield to maturity of the Offered Certificates will be affected by the
rate of defaults resulting in Realized Losses, by the severity of these losses
and by the timing thereof. If a purchaser of an Offered Certificate calculates
its anticipated yield based on an assumed rate of default and amount of Realized
Losses that is lower than the default rate and amount of losses actually
incurred, its actual yield to maturity will be lower than that so calculated.
The timing of Realized Losses will also affect an investor's actual yield to
maturity, even if the average rate of defaults and severity of losses are
consistent with an investor's expectations. In general, the earlier a loss
occurs, the greater is the effect on an investor's yield to maturity. There can
be no assurance as to the delinquency, foreclosure or loss experience with
respect to the Mortgage Loans. The Mortgage Loans may have a greater than normal
risk of future defaults and delinquencies, as compared to newly originated, high
quality one- to four-family residential mortgage loans of comparable size and
geographic concentration because the Mortgage Loans are of sub-prime credit
quality. See Risk Factors--Nature of sub-prime mortgage loans may increase risk
of loss" in this Prospectus Supplement.
The rate of principal payments, the aggregate amount of distributions
and the yields to maturity of the Offered Certificates will be related to the
rate and timing of payments of principal on the Mortgage Loans. The rate of
principal payments on the Mortgage Loans will in turn be affected by the
amortization schedules of the Mortgage Loans and by the rate of principal
prepayments (including for this purpose prepayments resulting from refinancing,
liquidations of the Mortgage Loans due to defaults, casualties or condemnations
and repurchases by the Seller or Servicer). Because certain of the Mortgage
Loans contain prepayment penalties, the rate of principal payments may be less
than the rate of principal payments for mortgage loans which did not have
prepayment penalties. The Mortgage Loans are subject to the "due-on-sale"
provisions included therein. See "The Mortgage Pool" in this Prospectus
Supplement.
S-63
Unscheduled payments of principal (whether resulting from prepayments,
repurchases, liquidations, casualties or condemnations) will result in
distributions on the related Offered Certificates of principal amounts which
would otherwise be distributed over the remaining terms of the Mortgage Loans.
Since the rate of payment of principal on the Mortgage Loans will depend on
future events and a variety of other factors, no assurance can be given as to
such rate or the rate of principal prepayments. The extent to which the yield to
maturity of a class of Offered Certificates may vary from the anticipated yield
will depend upon the degree to which such class of Offered Certificates is
purchased at a discount or premium, and the degree to which the timing of
payments thereon is sensitive to prepayments, liquidations and purchases of the
Mortgage Loans. Further, an investor should consider the risk that, in the case
of any Offered Certificate purchased at a discount, a slower than anticipated
rate of principal payments (including prepayments) on the Mortgage Loans could
result in an actual yield to such investor that is lower than the anticipated
yield and, in the case of any Offered Certificate purchased at a premium, a
faster than anticipated rate of principal payments on the Mortgage Loans could
result in an actual yield to such investor that is lower than the anticipated
yield.
The rate of principal payments (including prepayments) on pools of
mortgage loans may vary significantly over time and may be influenced by a
variety of economic, geographic, social and other factors, including changes in
mortgagors' housing needs, job transfers, unemployment, mortgagors' net equity
in the mortgaged properties and servicing decisions. In general, if prevailing
interest rates were to fall significantly below the Mortgage Interest Rates on
the Mortgage Loans, such Mortgage Loans could be subject to higher prepayment
rates than if prevailing interest rates were to remain at or above the Mortgage
Interest Rates on such Mortgage Loans. Conversely, if prevailing interest rates
were to rise significantly, the rate of prepayments on such Mortgage Loans would
generally be expected to decrease. As is the case with the Fixed-Rate Mortgage
Loans, the Adjustable-Rate Mortgage Loans may be subject to a greater rate of
principal prepayments in a low interest rate environment. For example, if
prevailing interest rates were to fall, mortgagors with adjustable-rate mortgage
loans may be inclined to refinance their adjustable-rate mortgage loans with a
fixed-rate loan to "lock in" a lower interest rate. The existence of the
applicable Periodic Rate Cap and Maximum Mortgage Interest Rate also may affect
the likelihood of prepayments resulting from refinancings. No assurances can be
given as to the rate of prepayments on the Mortgage Loans in stable or changing
interest rate environments. In addition, the delinquency and loss experience of
the Adjustable-Rate Mortgage Loans may differ from that on the Fixed-Rate
Mortgage Loans because the amount of the Monthly Payments on the Adjustable-Rate
Mortgage Loans are subject to adjustment on each Adjustment Date. In addition, a
majority of the Adjustable-Rate Mortgage Loans will not have their initial
Adjustment Date for two to three years after the origination thereof. The
Adjustable-Rate Mortgage Loans may be subject to greater rates of prepayments as
they approach their initial Adjustment Dates even if market interest rates are
only slightly higher or lower than the Mortgage Interest Rates on such
Adjustable-Rate Mortgage Loans as borrowers seek to avoid changes in their
Monthly Payments.
The weighted average life and yield to maturity of each class of
Certificates will also be influenced by the amount of Monthly Excess Cashflow
Amounts generated by the Mortgage Loans and applied in reduction of the
Certificate Principal Balances of such Certificates. The level of Monthly Excess
Cashflow Amounts available on any Distribution Date to be applied in reduction
of the Certificate Principal Balance of the Certificates will be influenced by,
among other factors, (i) the overcollateralization level of the Mortgage Loans
at such time (i.e., the extent to which interest on the Mortgage Loans is
accruing on a higher Principal Balance than the aggregate Certificate Principal
Balance of the Certificates); (ii) the delinquency and default experience of the
Mortgage Loans; and (iii) the level of the various indices for the
Adjustable-Rate Mortgage Loans. To the extent that greater amounts of Monthly
Excess Cashflow Amounts are distributed in reduction of the Certificate
Principal Balance of a class of Certificates, the weighted average life thereof
can be expected to shorten. No assurance can be given as to the amount of
Monthly Excess Cashflow Amounts distributed at any time or in the aggregate.
The Subordinated Certificates are not expected to receive any principal
distributions until at least the Distribution Date in May 2005 (unless the
aggregate Certificate Principal Balance of the Senior Certificates are reduced
to zero prior thereto). As a result, the weighted average lives of the
Subordinated Certificates will be longer than would have been the case if
principal distributions were to be made on a pro rata basis. The longer weighted
average lives may increase the risk that an Applied Realized Loss Amount will be
allocated to one or more classes of Subordinated Certificates.
S-64
Sensitivity of the Class A-IO Certificates
The Class A-IO Certificates are interest only certificates and, as
such, will not be entitled to receive distributions of principal in respect of
the Mortgage Loans. The yield to maturity on the Class A-IO Certificates will be
extremely sensitive to the rate and timing of principal payments (including
prepayments) on the Mortgage Loans, if, prior to October 1, 2004, the aggregate
Principal Balance of the Fixed-Rate Mortgage Loans is reduced below
$16,786,000.00. Based on the Structuring Assumptions (as described below) and
the additional assumptions that the Class A-IO Certificates are purchased on May
15, 2002 at an assumed purchase price equal to 10.558% of the original Notional
Amount plus accrued interest from April 1, 2002 to (but not including) May 15,
2002 and the Trust is terminated on the Optional Termination Date, the yield on
the Class A-IO Certificates remains constant at approximately 4.86% if the
constant level of CPR is below approximately 61%. Based on the same assumptions
(other than the level of CPR) and a constant level of CPR of approximately 63%,
the yield to maturity on the Class A-IO Certificates is approximately 0%. The
Class A-IO Certificates will not receive any interest payments after the
Distribution Date in October 2004.
It is not likely that the Mortgage Loans will prepay at a constant rate
until maturity, that all of the Mortgage Loans will prepay at the same rate or
that they will have the characteristics assumed. There can be no assurance that
the Mortgage Loans will prepay at any particular rate. You must make your own
decision as to the appropriate rate of prepayment to be used in deciding whether
to purchase a Class A-IO Certificate.
Additional Information
The Depositor has filed certain yield tables and other computational
materials with respect to certain classes of the Class A Certificates with the
Commission in a report on Form 8-K and may file certain additional yield tables
and other computational materials with respect to one or more classes of Offered
Certificates with the Commission in a report on Form 8-K. Such tables and
materials were prepared by one or more of the Underwriters at the request of
certain prospective investors, based on assumptions provided by, and satisfying
the special requirements of, such prospective investors. Such tables and
assumptions may be based on assumptions that differ from the Structuring
Assumptions. Accordingly, such tables and other materials may not be relevant to
or appropriate for investors other than those specifically requesting them.
Weighted Average Lives
The timing of changes in the rate of principal prepayments on the
Mortgage Loans may significantly affect an investor's actual yield to maturity,
even if the average rate of principal prepayments is consistent with such
investor's expectation. In general, the earlier a principal prepayment on the
Mortgage Loans occurs, the greater the effect of such principal prepayment on an
investor's yield to maturity. The effect on an investor's yield of principal
prepayments occurring at a rate higher (or lower) than the rate anticipated by
the investor during the period immediately following the issuance of the Offered
Certificates may not be offset by a subsequent like decrease (or increase) in
the rate of principal prepayments.
The projected weighted average life of any class of Offered
Certificates is the average amount of time that will elapse from the Closing
Date, until each dollar of principal is scheduled to be repaid to the investors
in such class of Offered Certificates. Because it is expected that there will be
prepayments and defaults on the Mortgage Loans, the actual weighted average
lives of the classes of Offered Certificates are expected to vary substantially
from the weighted average remaining terms to stated maturity of the Mortgage
Loans as set forth in this Prospectus Supplement under "The Mortgage Pool."
Prepayments on mortgage loans are commonly measured relative to a
prepayment model or standard. The prepayment models used in this Prospectus
Supplement ("Prepayment Assumptions") are based on an assumed rate of prepayment
each month of the then unpaid principal balance of a pool of mortgage loans
similar to the Mortgage Loans. The Prepayment Assumption used in this Prospectus
Supplement (the "Constant Prepayment Rate" or "CPR") for the Adjustable-Rate
Mortgage Loans represents a constant assumed rate of principal prepayment each
year relative to the then-outstanding principal balance of a pool of mortgage
loans for the life of such mortgage loans. A prepayment assumption of 5% CPR
assumes constant prepayment rates of 5% per annum of the then-outstanding
principal balance of such mortgage loans. As used in the table below, "0% CPR"
assumes prepayment rates equal to 0% of CPR, i.e., no prepayments.
Correspondingly, "20% CPR" assumes prepayment rates equal to 20% of CPR, and so
forth.
S-65
For the Fixed-Rate Mortgage Loans, the Prepayment Assumption used in
this Prospectus Supplement is the "Home Equity Prepayment Curve" or "HEP." 23%
HEP assumes a prepayment rate of 2.30% CPR per annum of the then-outstanding
principal balance of such mortgage loans in the first month of the life of such
mortgage loans and an additional 2.30% per annum in each month thereafter until
23.0% CPR is reached in the tenth month. Beginning in the tenth month and in
each month thereafter during the life of such mortgage loans, 23% HEP assumes a
constant prepayment rate of 23.0% CPR per annum each month.
No Prepayment Assumption purports to be a historical description of
prepayment experience or a prediction of the anticipated rate of prepayment of
any pool of mortgage loans, including the Mortgage Loans.
The tables on pages S-69 through S-76 were prepared on the basis of the
assumptions in the following paragraph and the tables set forth below. There may
be certain differences between the loan characteristics included in such
assumptions and the characteristics of the actual Mortgage Loans. Any such
discrepancy may have an effect upon the percentages of original Certificate
Principal Balances outstanding and weighted average lives of the Offered
Certificates set forth in the tables on pages S-69 through S-76. In addition,
since the actual Mortgage Loans in the Trust Fund will have characteristics that
differ from those assumed in preparing the tables set forth below, the
distributions of principal of the Offered Certificates may be made earlier or
later than indicated in the tables.
The percentages and weighted average lives in the tables on pages S-69
through S-76 were determined using the following assumptions collectively (the
"Structuring Assumptions"): (i) the Mortgage Loans have the characteristics set
forth in the table below, (ii) the closing date for the Offered Certificates
occurs on May 15, 2002 and the Offered Certificates are sold to investors on
such date, (iii) distributions on the Certificates are made on the 25th day of
each month regardless of the day on which the Distribution Date actually occurs,
commencing in May 2002, in accordance with the allocation of Available Funds set
forth above under "Description of the Certificates," (iv) the Mortgage Loans
prepay in accordance with the Prepayment Assumptions indicated, (v) prepayments
include thirty days' interest thereon, (vi) the Seller is not required to
substitute or repurchase any or all of the Mortgage Loans pursuant to the
Pooling and Servicing Agreement and no optional termination is exercised, except
with respect to the entries identified by the row heading "Weighted Average Life
to Call" in the tables below, (vii) the Targeted Overcollateralization Amount is
set initially as specified herein and thereafter decreases as described in the
definition thereof, (viii) scheduled payments for all Mortgage Loans are
received on the Due Date commencing in May 2002, the principal portion of such
payments is computed prior to giving effect to prepayments received in such
month and there are no losses or delinquencies with respect to such Mortgage
Loans, (ix) there are no Simple Interest Mortgage Loans, (x) such prepayments
are received on the last day of each month commencing in April 2002, (xi) the
aggregate of the annualized rates at which the Servicing Fee and the Trustee Fee
are calculated is 0.51%, (xii) LIBOR is at all times equal to 1.84%, (xiii) the
Pass-Through Rates for the Offered Certificates are as set forth or described
above under "Description of the Certificates--Pass-Through Rates," (xiv) the
Mortgage Interest Rate for each Adjustable-Rate Mortgage Loan is adjusted on its
next Adjustment Date (and on subsequent Adjustment Dates, if necessary) to equal
the sum of (a) the assumed level of the Index and (b) the respective Gross
Margin (such sum being subject to the applicable Periodic Rate Caps, Minimum
Mortgage Interest Rates and Maximum Mortgage Interest Rates) and (xv) with
respect to the Adjustable-Rate Mortgage Loans, One Year CMT is equal to 2.31%
and 6 Month LIBOR is equal to 2.13%. Nothing contained in the foregoing
assumptions should be construed as a representation that the Mortgage Loans will
not experience delinquencies or losses.
Based on the foregoing assumptions and assumed mortgage loan
characteristics, the tables indicate the projected weighted average lives of
each class of Offered Certificates (other than the Class A-IO Certificates) and
set forth the percentages of the original Certificate Principal Balance of each
such class that would be outstanding after each of the dates shown at the
indicated percentages of the applicable Prepayment Assumption.
S-66
Assumed Mortgage Loan Characteristics
Mortgage Original Original
Interest Amortized Original Remaining Prepayment Gross
Principal Rate Term Term Term Term Margin Lifetime
Description Balance ($) (%) (months) (months) (months) (months) (%) Applicable Index Cap (%)
- ----------- ----------- --- -------- -------- -------- -------- --- ---------------- -------
Fixed-Rate 335,204.04 11.1568 119 119 115 0 N/A N/A N/A
Mortgage Loans 4,262,947.62 10.9324 180 180 174 0 N/A N/A N/A
6,271,816.68 11.6128 240 240 234 0 N/A N/A N/A
136,307.83 13.5750 300 300 264 0 N/A N/A N/A
12,088,087.67 10.8728 360 360 356 0 N/A N/A N/A
9,912,235.92 11.3978 360 180 175 0 N/A N/A N/A
145,907.15 9.6852 180 180 177 12 N/A N/A N/A
246,968.67 11.7549 240 240 235 12 N/A N/A N/A
125,563.82 10.1657 360 360 354 12 N/A N/A N/A
1,461,455.91 11.3744 360 180 175 12 N/A N/A N/A
48,572.91 11.2500 180 180 176 24 N/A N/A N/A
62,879.71 9.7000 360 360 356 24 N/A N/A N/A
183,788.89 13.2500 360 180 175 24 N/A N/A N/A
1,057,855.19 9.4567 120 120 116 36 N/A N/A N/A
15,881,430.05 9.6959 180 180 176 36 N/A N/A N/A
14,946,539.48 9.8408 240 240 236 36 N/A N/A N/A
639,943.50 8.3375 300 300 297 36 N/A N/A N/A
50,488,537.76 9.8690 360 360 356 36 N/A N/A N/A
37,064,040.92 9.8098 360 180 176 36 N/A N/A N/A
88,491.16 8.1076 120 120 115 60 N/A N/A N/A
1,122,783.16 10.2010 180 180 175 60 N/A N/A N/A
1,535,442.42 10.1919 240 240 234 60 N/A N/A N/A
166,045.88 13.4368 300 300 269 60 N/A N/A N/A
4,604,295.13 8.9262 360 360 353 60 N/A N/A N/A
4,977,973.04 9.3122 360 180 174 60 N/A N/A N/A
Adjustable-Rate 51,899.16 9.2500 360 360 272 0 2.9500 1 Yr CMT 15.2500
Mortgage Loans 5,378,472.41 10.0386 360 360 353 0 6.9546 6 Month LIBOR 16.0386
27,732,452.99 9.7983 360 360 356 0 7.7395 6 Month LIBOR 15.7983
522,194.26 10.0436 360 360 354 0 6.7648 6 Month LIBOR 16.0436
1,992,917.25 9.7658 360 360 357 0 8.1018 6 Month LIBOR 15.7658
1,735,776.05 10.9046 360 360 353 12 7.8021 6 Month LIBOR 16.9046
4,218,195.90 10.4233 360 360 356 12 8.5456 6 Month LIBOR 16.4233
136,929.92 10.6250 360 360 355 12 8.7500 6 Month LIBOR 16.6250
6,986,020.92 10.2950 360 360 354 24 7.2561 6 Month LIBOR 16.3156
45,251,327.83 10.0802 360 360 356 24 7.9153 6 Month LIBOR 16.0802
Adjustable-Rate 83,558.19 8.8750 360 360 357 24 7.3750 6 Month LIBOR 14.8750
Mortgage Loans 1,098,436.64 10.7442 360 360 354 36 7.5411 6 Month LIBOR 16.7442
5,663,853.23 10.0405 360 360 356 36 7.9802 6 Month LIBOR 16.0405
2,965,705.75 10.5670 360 360 354 36 7.4463 6 Month LIBOR 16.5598
42,917,588.73 9.5726 360 360 356 36 7.6595 6 Month LIBOR 15.5726
277,084.47 11.5115 360 360 353 60 8.4848 6 Month LIBOR 17.5115
424,516.11 9.2903 360 360 356 60 7.6951 6 Month LIBOR 15.2903
290,555.19 10.2193 360 360 353 60 6.6702 6 Month LIBOR 16.2193
164,256.67 9.8007 360 360 355 60 7.7346 6 Month LIBOR 15.8007
Months to
Next Adjustment Initial Periodic
Lifetime Adjustment Frequency Rate Cap Rate Cap
Description Floor (%) Date (months) (%) (%)
- ----------- --------- ---- -------- --- ---
Fixed-Rate N/A N/A N/A N/A N/A
Mortgage Loans N/A N/A N/A N/A N/A
N/A N/A N/A N/A N/A
N/A N/A N/A N/A N/A
N/A N/A N/A N/A N/A
N/A N/A N/A N/A N/A
N/A N/A N/A N/A N/A
N/A N/A N/A N/A N/A
N/A N/A N/A N/A N/A
N/A N/A N/A N/A N/A
N/A N/A N/A N/A N/A
N/A N/A N/A N/A N/A
N/A N/A N/A N/A N/A
N/A N/A N/A N/A N/A
N/A N/A N/A N/A N/A
N/A N/A N/A N/A N/A
N/A N/A N/A N/A N/A
N/A N/A N/A N/A N/A
N/A N/A N/A N/A N/A
N/A N/A N/A N/A N/A
N/A N/A N/A N/A N/A
N/A N/A N/A N/A N/A
N/A N/A N/A N/A N/A
N/A N/A N/A N/A N/A
N/A N/A N/A N/A N/A
Adjustable-Rate 9.2500 8 12 2.0000 2.0000
Mortgage Loans 9.0386 17 6 3.0000 1.0000
8.7983 20 6 3.0000 1.0000
9.0436 30 6 3.0000 1.0000
8.7658 33 6 3.0000 1.0000
9.9046 17 6 3.0000 1.0000
9.4233 20 6 3.0000 1.0000
9.6250 31 6 3.0000 1.0000
9.3114 18 6 3.0000 1.0000
9.0808 20 6 3.0000 1.0000
Adjustable-Rate 7.8750 33 6 3.0000 1.0000
Mortgage Loans 9.7442 18 6 3.0000 1.0000
9.0405 20 6 3.0000 1.0000
9.5598 30 6 3.0000 1.0000
8.5672 32 6 3.0000 1.0000
10.5115 17 6 3.0000 1.0000
8.2903 20 6 3.0000 1.0000
9.2193 29 6 3.0000 1.0000
8.8007 31 6 3.0000 1.0000
S-67
Percentage of Original Principal Balance Outstanding1 at the
Specified Percentages of the Applicable Prepayment Assumption
Class AI-1
Adjustable-Rate: CPR 0% 14% 21% 28% 35% 42% 56%
Fixed-Rate: HEP 0% 11.50% 17.25% 23% 28.75% 34.5% 46%
- -------------------- ------- ------- ------- ------- ------- ------- -------
Distribution Date
- -----------------
Initial Percentage 100 100 100 100 100 100 100
April 25, 2003 98 70 57 43 29 16 0
April 25, 2004 95 40 16 0 0 0 0
April 25, 2005 92 14 0 0 0 0 0
April 25, 2006 89 0 0 0 0 0 0
April 25, 2007 86 0 0 0 0 0 0
April 25, 2008 82 0 0 0 0 0 0
April 25, 2009 78 0 0 0 0 0 0
April 25, 2010 73 0 0 0 0 0 0
April 25, 2011 69 0 0 0 0 0 0
April 25, 2012 63 0 0 0 0 0 0
April 25, 2013 57 0 0 0 0 0 0
April 25, 2014 51 0 0 0 0 0 0
April 25, 2015 44 0 0 0 0 0 0
April 25, 2016 37 0 0 0 0 0 0
April 25, 2017 4 0 0 0 0 0 0
April 25, 2018 0 0 0 0 0 0 0
April 25, 2019 0 0 0 0 0 0 0
April 25, 2020 0 0 0 0 0 0 0
April 25, 2021 0 0 0 0 0 0 0
April 25, 2022 0 0 0 0 0 0 0
April 25, 2023 0 0 0 0 0 0 0
April 25, 2024 0 0 0 0 0 0 0
April 25, 2025 0 0 0 0 0 0 0
April 25, 2026 0 0 0 0 0 0 0
April 25, 2027 0 0 0 0 0 0 0
April 25, 2028 0 0 0 0 0 0 0
April 25, 2029 0 0 0 0 0 0 0
April 25, 2030 0 0 0 0 0 0 0
April 25, 2031 0 0 0 0 0 0 0
April 25, 2032 0 0 0 0 0 0 0
Weighted Avg. Life to
Maturity (in years)(2) 10.70 1.70 1.17 0.89 0.72 0.60 0.45
Weighted Avg. Life to
Call (in years)(2) 10.70 1.70 1.17 0.89 0.72 0.60 0.45
- ------------------
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by
(i) multiplying the assumed net reduction, if any, in the Certificate
Principal Balance on each Distribution Date of such class of
Certificates by the number of years from the date of issuance of the
Certificates to the related Distribution Date, (ii) summing the
results, and (iii) dividing the sum by the aggregate amount of the
assumed net reduction in the Certificate Principal Balance of such
class of Certificates.
S-68
Percentage of Original Principal Balance Outstanding1 at the
Specified Percentages of the Applicable Prepayment Assumption
Class AI-2
Adjustable-Rate: CPR 0% 14% 21% 28% 35% 42% 56%
Fixed-Rate: HEP 0% 11.50% 17.25% 23% 28.75% 34.5% 46%
- -------------------- ------- ------- ------- ------- ------- ------- -------
Distribution Date
- -----------------
Initial Percentage 100 100 100 100 100 100 100
April 25, 2003 100 100 100 100 100 100 21
April 25, 2004 100 100 100 52 0 0 0
April 25, 2005 100 100 0 0 0 0 0
April 25, 2006 100 38 0 0 0 0 0
April 25, 2007 100 0 0 0 0 0 0
April 25, 2008 100 0 0 0 0 0 0
April 25, 2009 100 0 0 0 0 0 0
April 25, 2010 100 0 0 0 0 0 0
April 25, 2011 100 0 0 0 0 0 0
April 25, 2012 100 0 0 0 0 0 0
April 25, 2013 100 0 0 0 0 0 0
April 25, 2014 100 0 0 0 0 0 0
April 25, 2015 100 0 0 0 0 0 0
April 25, 2016 100 0 0 0 0 0 0
April 25, 2017 100 0 0 0 0 0 0
April 25, 2018 97 0 0 0 0 0 0
April 25, 2019 67 0 0 0 0 0 0
April 25, 2020 35 0 0 0 0 0 0
April 25, 2021 10 0 0 0 0 0 0
April 25, 2022 0 0 0 0 0 0 0
April 25, 2023 0 0 0 0 0 0 0
April 25, 2024 0 0 0 0 0 0 0
April 25, 2025 0 0 0 0 0 0 0
April 25, 2026 0 0 0 0 0 0 0
April 25, 2027 0 0 0 0 0 0 0
April 25, 2028 0 0 0 0 0 0 0
April 25, 2029 0 0 0 0 0 0 0
April 25, 2030 0 0 0 0 0 0 0
April 25, 2031 0 0 0 0 0 0 0
April 25, 2032 0 0 0 0 0 0 0
Weighted Avg. Life to
Maturity (in years)(2) 17.55 3.91 2.66 2.00 1.58 1.30 0.94
Weighted Avg. Life to
Call (in years)(2) 17.55 3.91 2.66 2.00 1.58 1.30 0.94
- ------------------
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by
(i) multiplying the assumed net reduction, if any, in the Certificate
Principal Balance on each Distribution Date of such class of
Certificates by the number of years from the date of issuance of the
Certificates to the related Distribution Date, (ii) summing the
results, and (iii) dividing the sum by the aggregate amount of the
assumed net reduction in the Certificate Principal Balance of such
class of Certificates.
S-69
Percentage of Original Principal Balance Outstanding1 at the
Specified Percentages of the Applicable Prepayment Assumption
Class AI-3
Adjustable-Rate: CPR 0% 14% 21% 28% 35% 42% 56%
Fixed-Rate: HEP 0% 11.50% 17.25% 23% 28.75% 34.5% 46%
- -------------------- ------- ------- ------- ------- ------- ------- -------
Distribution Date
- -----------------
Initial Percentage 100 100 100 100 100 100 100
April 25, 2003 100 100 100 100 100 100 100
April 25, 2004 100 100 100 100 63 9 0
April 25, 2005 100 100 92 17 0 0 0
April 25, 2006 100 100 57 17 0 0 0
April 25, 2007 100 67 37 12 0 0 0
April 25, 2008 100 51 19 0 0 0 0
April 25, 2009 100 37 5 0 0 0 0
April 25, 2010 100 24 0 0 0 0 0
April 25, 2011 100 12 0 0 0 0 0
April 25, 2012 100 1 0 0 0 0 0
April 25, 2013 100 0 0 0 0 0 0
April 25, 2014 100 0 0 0 0 0 0
April 25, 2015 100 0 0 0 0 0 0
April 25, 2016 100 0 0 0 0 0 0
April 25, 2017 100 0 0 0 0 0 0
April 25, 2018 100 0 0 0 0 0 0
April 25, 2019 100 0 0 0 0 0 0
April 25, 2020 100 0 0 0 0 0 0
April 25, 2021 100 0 0 0 0 0 0
April 25, 2022 95 0 0 0 0 0 0
April 25, 2023 87 0 0 0 0 0 0
April 25, 2024 79 0 0 0 0 0 0
April 25, 2025 69 0 0 0 0 0 0
April 25, 2026 58 0 0 0 0 0 0
April 25, 2027 46 0 0 0 0 0 0
April 25, 2028 34 0 0 0 0 0 0
April 25, 2029 19 0 0 0 0 0 0
April 25, 2030 3 0 0 0 0 0 0
April 25, 2031 0 0 0 0 0 0 0
April 25, 2032 0 0 0 0 0 0 0
Weighted Avg. Life to
Maturity (in years)(2) 24.40 6.42 4.56 3.01 2.09 1.72 1.23
Weighted Avg. Life to
Call (in years)(2) 24.40 6.42 4.56 3.01 2.09 1.72 1.23
- ------------------
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by
(i) multiplying the assumed net reduction, if any, in the Certificate
Principal Balance on each Distribution Date of such class of
Certificates by the number of years from the date of issuance of the
Certificates to the related Distribution Date, (ii) summing the
results, and (iii) dividing the sum by the aggregate amount of the
assumed net reduction in the Certificate Principal Balance of such
class of Certificates.
S-70
Percentage of Original Principal Balance Outstanding1 at the
Specified Percentages of the Applicable Prepayment Assumption
Class AI-4
Adjustable-Rate: CPR 0% 14% 21% 28% 35% 42% 56%
Fixed-Rate: HEP 0% 11.50% 17.25% 23% 28.75% 34.5% 46%
- -------------------- ------- ------- ------- ------- ------- ------- -------
Distribution Date
- -----------------
Initial Percentage 100 100 100 100 100 100 100
April 25, 2003 100 100 100 100 100 100 100
April 25, 2004 100 100 100 100 100 100 0
April 25, 2005 100 100 100 100 27 0 0
April 25, 2006 100 100 100 100 27 0 0
April 25, 2007 100 100 100 100 27 0 0
April 25, 2008 100 100 100 91 27 0 0
April 25, 2009 100 100 100 71 27 0 0
April 25, 2010 100 100 88 54 27 0 0
April 25, 2011 100 100 72 42 23 0 0
April 25, 2012 100 100 59 32 16 0 0
April 25, 2013 100 88 47 24 11 0 0
April 25, 2014 100 75 38 18 5 0 0
April 25, 2015 100 63 30 13 0 0 0
April 25, 2016 100 53 24 10 0 0 0
April 25, 2017 100 28 12 1 0 0 0
April 25, 2018 100 21 8 0 0 0 0
April 25, 2019 100 14 5 0 0 0 0
April 25, 2020 100 9 2 0 0 0 0
April 25, 2021 100 7 0 0 0 0 0
April 25, 2022 100 5 0 0 0 0 0
April 25, 2023 100 5 0 0 0 0 0
April 25, 2024 100 4 0 0 0 0 0
April 25, 2025 100 3 0 0 0 0 0
April 25, 2026 100 * 0 0 0 0 0
April 25, 2027 100 0 0 0 0 0 0
April 25, 2028 100 0 0 0 0 0 0
April 25, 2029 100 0 0 0 0 0 0
April 25, 2030 100 0 0 0 0 0 0
April 25, 2031 59 0 0 0 0 0 0
April 25, 2032 0 0 0 0 0 0 0
Weighted Avg. Life to
Maturity (in years)(2) 29.05 14.24 11.35 9.05 4.84 2.31 1.65
Weighted Avg. Life to
Call (in years)(2) 28.11 13.29 9.56 7.24 3.61 2.31 1.65
- ------------------
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by
(i) multiplying the assumed net reduction, if any, in the Certificate
Principal Balance on each Distribution Date of such class of
Certificates by the number of years from the date of issuance of the
Certificates to the related Distribution Date, (ii) summing the
results, and (iii) dividing the sum by the aggregate amount of the
assumed net reduction in the Certificate Principal Balance of such
class of Certificates.
* Less than 0.5%, but greater than zero.
S-71
Percentage of Original Principal Balance Outstanding1 at the
Specified Percentages of the Applicable Prepayment Assumption
Class AII-1
Adjustable-Rate: CPR 0% 14% 21% 28% 35% 42% 56%
Fixed-Rate: HEP 0% 11.50% 17.25% 23% 28.75% 34.5% 46%
- -------------------- ------- ------- ------- ------- ------- ------- -------
Distribution Date
- -----------------
Initial Percentage 100 100 100 100 100 100 100
April 25, 2003 99 85 79 72 65 58 44
April 25, 2004 98 73 62 51 42 33 16
April 25, 2005 97 62 48 37 27 13 0
April 25, 2006 96 53 38 29 27 13 0
April 25, 2007 95 45 30 19 17 13 0
April 25, 2008 93 39 23 13 11 8 0
April 25, 2009 92 33 18 9 6 5 0
April 25, 2010 90 28 14 7 3 3 0
April 25, 2011 88 24 11 5 2 2 0
April 25, 2012 85 20 9 3 1 1 0
April 25, 2013 83 17 7 2 1 * 0
April 25, 2014 80 14 5 2 * 0 0
April 25, 2015 77 12 4 1 * 0 0
April 25, 2016 74 10 3 1 0 0 0
April 25, 2017 52 7 2 * 0 0 0
April 25, 2018 49 6 2 0 0 0 0
April 25, 2019 45 5 1 0 0 0 0
April 25, 2020 41 5 1 0 0 0 0
April 25, 2021 38 4 1 0 0 0 0
April 25, 2022 35 3 * 0 0 0 0
April 25, 2023 32 3 0 0 0 0 0
April 25, 2024 29 2 0 0 0 0 0
April 25, 2025 26 2 0 0 0 0 0
April 25, 2026 23 1 0 0 0 0 0
April 25, 2027 19 1 0 0 0 0 0
April 25, 2028 14 * 0 0 0 0 0
April 25, 2029 9 0 0 0 0 0 0
April 25, 2030 4 0 0 0 0 0 0
April 25, 2031 0 0 0 0 0 0 0
April 25, 2032 0 0 0 0 0 0 0
Weighted Avg. Life to
Maturity (in years)(2) 17.15 6.02 4.03 2.98 2.48 1.95 1.00
Weighted Avg. Life to
Call (in years)(2) 17.14 5.63 3.76 2.78 2.28 1.69 1.00
- ------------------
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by
(i) multiplying the assumed net reduction, if any, in the Certificate
Principal Balance on each Distribution Date of such class of
Certificates by the number of years from the date of issuance of the
Certificates to the related Distribution Date, (ii) summing the
results, and (iii) dividing the sum by the aggregate amount of the
assumed net reduction in the Certificate Principal Balance of such
class of Certificates.
* Less than 0.5%, but greater than zero.
S-72
Percentage of Original Principal Balance Outstanding1 at the
Specified Percentages of the Applicable Prepayment Assumption
Class M-1
Adjustable-Rate: CPR 0% 14% 21% 28% 35% 42% 56%
Fixed-Rate: HEP 0% 11.50% 17.25% 23% 28.75% 34.5% 46%
- -------------------- ------- ------- ------- ------- ------- ------- -------
Distribution Date
- -----------------
Initial Percentage 100 100 100 100 100 100 100
April 25, 2003 100 100 100 100 100 100 100
April 25, 2004 100 100 100 100 100 100 100
April 25, 2005 100 100 100 100 100 100 99
April 25, 2006 100 100 84 61 43 81 73
April 25, 2007 100 97 67 45 29 19 37
April 25, 2008 100 83 54 33 20 11 17
April 25, 2009 100 72 43 25 14 7 5
April 25, 2010 100 61 34 18 9 4 0
April 25, 2011 100 52 27 13 6 0 0
April 25, 2012 100 45 21 10 4 0 0
April 25, 2013 100 38 17 7 * 0 0
April 25, 2014 100 32 13 5 0 0 0
April 25, 2015 100 27 10 3 0 0 0
April 25, 2016 100 23 8 0 0 0 0
April 25, 2017 100 15 5 0 0 0 0
April 25, 2018 100 12 2 0 0 0 0
April 25, 2019 100 10 0 0 0 0 0
April 25, 2020 100 8 0 0 0 0 0
April 25, 2021 95 7 0 0 0 0 0
April 25, 2022 89 5 0 0 0 0 0
April 25, 2023 83 4 0 0 0 0 0
April 25, 2024 76 2 0 0 0 0 0
April 25, 2025 69 * 0 0 0 0 0
April 25, 2026 62 0 0 0 0 0 0
April 25, 2027 53 0 0 0 0 0 0
April 25, 2028 44 0 0 0 0 0 0
April 25, 2029 33 0 0 0 0 0 0
April 25, 2030 22 0 0 0 0 0 0
April 25, 2031 9 0 0 0 0 0 0
April 25, 2032 0 0 0 0 0 0 0
Weighted Avg. Life to
Maturity (in years)(2) 24.81 10.44 7.34 5.65 4.85 4.73 4.82
Weighted Avg. Life to
Call (in years)(2) 24.66 9.80 6.74 5.12 4.42 4.39 3.35
- ------------------
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by
(i) multiplying the assumed net reduction, if any, in the Certificate
Principal Balance on each Distribution Date of such class of
Certificates by the number of years from the date of issuance of the
Certificates to the related Distribution Date, (ii) summing the
results, and (iii) dividing the sum by the aggregate amount of the
assumed net reduction in the Certificate Principal Balance of such
class of Certificates.
* Less than 0.5%, but greater than zero.
S-73
Percentage of Original Principal Balance Outstanding1 at the
Specified Percentages of the Applicable Prepayment Assumption
Class M-2
Adjustable-Rate: CPR 0% 14% 21% 28% 35% 42% 56%
Fixed-Rate: HEP 0% 11.50% 17.25% 23% 28.75% 34.5% 46%
- -------------------- ------- ------- ------- ------- ------- ------- -------
Distribution Date
- -----------------
Initial Percentage 100 100 100 100 100 100 100
April 25, 2003 100 100 100 100 100 100 100
April 25, 2004 100 100 100 100 100 100 100
April 25, 2005 100 100 100 100 100 100 95
April 25, 2006 100 100 84 61 43 30 13
April 25, 2007 100 97 67 45 29 19 5
April 25, 2008 100 83 54 33 20 11 0
April 25, 2009 100 72 43 25 14 7 0
April 25, 2010 100 61 34 18 9 0 0
April 25, 2011 100 52 27 13 4 0 0
April 25, 2012 100 45 21 10 0 0 0
April 25, 2013 100 38 17 7 0 0 0
April 25, 2014 100 32 13 2 0 0 0
April 25, 2015 100 27 10 0 0 0 0
April 25, 2016 100 23 8 0 0 0 0
April 25, 2017 100 15 1 0 0 0 0
April 25, 2018 100 12 0 0 0 0 0
April 25, 2019 100 10 0 0 0 0 0
April 25, 2020 100 8 0 0 0 0 0
April 25, 2021 95 6 0 0 0 0 0
April 25, 2022 89 2 0 0 0 0 0
April 25, 2023 83 0 0 0 0 0 0
April 25, 2024 76 0 0 0 0 0 0
April 25, 2025 69 0 0 0 0 0 0
April 25, 2026 62 0 0 0 0 0 0
April 25, 2027 53 0 0 0 0 0 0
April 25, 2028 44 0 0 0 0 0 0
April 25, 2029 33 0 0 0 0 0 0
April 25, 2030 22 0 0 0 0 0 0
April 25, 2031 9 0 0 0 0 0 0
April 25, 2032 0 0 0 0 0 0 0
Weighted Avg. Life to
Maturity (in years)(2) 24.81 10.33 7.28 5.55 4.63 4.20 3.45
Weighted Avg. Life to
Call (in years)(2) 24.66 9.80 6.74 5.09 4.25 3.91 3.23
- ------------------
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by
(i) multiplying the assumed net reduction, if any, in the Certificate
Principal Balance on each Distribution Date of such class of
Certificates by the number of years from the date of issuance of the
Certificates to the related Distribution Date, (ii) summing the
results, and (iii) dividing the sum by the aggregate amount of the
assumed net reduction in the Certificate Principal Balance of such
class of Certificates.
S-74
Percentage of Original Principal Balance Outstanding1 at the
Specified Percentages of the Applicable Prepayment Assumption
Class M-3
Adjustable-Rate: CPR 0% 14% 21% 28% 35% 42% 56%
Fixed-Rate: HEP 0% 11.50% 17.25% 23% 28.75% 34.5% 46%
- -------------------- ------- ------- ------- ------- ------- ------- -------
Distribution Date
- -----------------
Initial Percentage 100 100 100 100 100 100 100
April 25, 2003 100 100 100 100 100 100 100
April 25, 2004 100 100 100 100 100 100 100
April 25, 2005 100 100 100 100 100 100 25
April 25, 2006 100 100 84 61 43 30 11
April 25, 2007 100 97 67 45 29 19 0
April 25, 2008 100 83 54 33 20 8 0
April 25, 2009 100 72 43 25 13 0 0
April 25, 2010 100 61 34 18 4 0 0
April 25, 2011 100 52 27 12 0 0 0
April 25, 2012 100 45 21 5 0 0 0
April 25, 2013 100 38 17 0 0 0 0
April 25, 2014 100 32 12 0 0 0 0
April 25, 2015 100 27 6 0 0 0 0
April 25, 2016 100 23 1 0 0 0 0
April 25, 2017 100 15 0 0 0 0 0
April 25, 2018 100 10 0 0 0 0 0
April 25, 2019 100 6 0 0 0 0 0
April 25, 2020 100 2 0 0 0 0 0
April 25, 2021 95 0 0 0 0 0 0
April 25, 2022 89 0 0 0 0 0 0
April 25, 2023 83 0 0 0 0 0 0
April 25, 2024 76 0 0 0 0 0 0
April 25, 2025 69 0 0 0 0 0 0
April 25, 2026 62 0 0 0 0 0 0
April 25, 2027 53 0 0 0 0 0 0
April 25, 2028 44 0 0 0 0 0 0
April 25, 2029 33 0 0 0 0 0 0
April 25, 2030 22 0 0 0 0 0 0
April 25, 2031 3 0 0 0 0 0 0
April 25, 2032 0 0 0 0 0 0 0
Weighted Avg. Life to
Maturity (in years)(2) 24.78 10.11 7.15 5.39 4.44 3.94 3.09
Weighted Avg. Life
to Call (in years)(2) 24.66 9.80 6.74 5.07 4.18 3.74 2.95
- ------------------
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by
(i) multiplying the assumed net reduction, if any, in the Certificate
Principal Balance on each Distribution Date of such class of
Certificates by the number of years from the date of issuance of the
Certificates to the related Distribution Date, (ii) summing the
results, and (iii) dividing the sum by the aggregate amount of the
assumed net reduction in the Certificate Principal Balance of such
class of Certificates.
S-75
Final Scheduled Distribution Dates
The Final Scheduled Distribution Date of each class of Offered
Certificates (other than the Class A-IO Certificates) is set forth under
"Summary of Prospectus Supplement" in this Prospectus Supplement. The Final
Scheduled Distribution Date for such Certificates has been calculated on the
basis of the Structuring Assumptions and the assumptions that there are no
prepayments and no Monthly Excess Interest Amounts are used to create
overcollateralization. Since the rate of distributions in reduction of the
Certificate Principal Balance of each class of Offered Certificates will depend
on the rate of payment (including prepayments) of the Mortgage Loans, the
Certificate Principal Balance of any such class could be reduced to zero
significantly earlier or later than the Final Scheduled Distribution Date. The
rate of payments on the Mortgage Loans will depend on their particular
characteristics, as well as on prevailing interest rates from time to time and
other economic factors, and no assurance can be given as to the actual payment
experience of the Mortgage Loans.
Use of Proceeds
The Depositor will apply the net proceeds of the sale of the Offered
Certificates to the purchase price of the Mortgage Loans transferred to the
Trust Fund. See "Method of Distribution" in this Prospectus Supplement.
Certain material Federal Income Tax Consequences
General
The Pooling and Servicing Agreement provides that the Trust Fund will
comprise multiple REMICs organized in a tiered REMIC structure consisting of one
or more Lower Tier REMICs and one or more Upper Tier REMICs. Each Lower Tier
REMIC will issue uncertificated regular interests and those interests will be
held entirely by a REMIC above it in the tiered structure. Each of the Lower
Tier REMICs and Upper Tier REMICs will designate a single class of interests as
the residual interest in that REMIC. Elections will be made to treat each Lower
Tier REMIC and Upper Tier REMIC as a REMIC for federal income tax purposes. The
Class A-IO Certificates will be regular interests in the applicable Upper Tier
REMIC. Except to the extent described in the next paragraph, each class of
Offered Certificates, other than the Class A-IO Certificates (the "Offered P&I
Certificates"), will represent beneficial ownership of the corresponding class
of regular interests issued by the applicable Upper Tier REMIC. The Trust Fund
will also include a grantor trust which will hold the uncertificated interests
in the applicable Upper Tier REMIC and the Basis Risk Arrangements, as defined
below.
The Offered P&I Certificates will represent beneficial ownership of the
corresponding class of regular interests issued by the applicable Upper Tier
REMIC and of the right to receive Cap Carryover Amounts from amounts otherwise
distributable to the Class CE Certificates as part of the Monthly Excess
Cashflow Amount. Holders of the Offered P&I Certificates must allocate their
basis between their regular interest and their right to receive such Cap
Carryover Amounts as set forth below under "--Taxation of Basis Risk
Arrangements."
Upon the issuance of the Offered Certificates, Cadwalader, Wickersham &
Taft will deliver its opinion to the effect that, assuming compliance with the
Pooling and Servicing Agreement, for federal income tax purposes, each Lower
Tier REMIC and Upper Tier REMIC will qualify as a REMIC within the meaning of
Section 860D of the Internal Revenue Code of 1986, as amended (the "Code") and
the portion of the Trust Fund exclusive of the REMICs will qualify as a grantor
trust under Subpart E, Part 1 of Subchapter J of the Code.
Taxation of Regular Interests
For federal income tax reporting purposes, the classes of Offered P&I
Certificates may be treated as having been issued with original issue discount
("OID"). The Prepayment Assumption that will be used in determining the rate of
accrual of original issue discount, premium and market discount, if any, for
federal income tax purposes will be based on the assumption that subsequent to
the date of any determination the Mortgage Loans will prepay at a constant rate
of 28% CPR with respect to the Adjustable-Rate Mortgage Loans and 23% HEP with
respect to the Fixed-Rate Mortgage Loans. No representation is made that the
Mortgage Loans will prepay at such rate or at any other rate. See "Federal
Income Tax Consequences--REMICs--Taxation of Owners of Regular
Securities--Original Issue Discount" in the Prospectus.
S-76
Although unclear for federal income tax purposes, it is anticipated
that the Class A-IO Certificates will be considered to be issued with OID in an
amount equal to the excess of all distributions of interest expected to be
received thereon over their issue price (including accrued interest). Any
"negative" amounts of OID on the Class A-IO Certificates attributable to rapid
prepayments with respect to the Fixed-Rate Mortgage Loans will not be deductible
currently, but may be offset against future positive accruals of OID, if any.
Finally, a holder of a Class A-IO Certificate may be entitled to a loss
deduction to the extent it becomes certain that such holder will not recover a
portion of its basis in such Certificate, assuming no further prepayments. In
the alternative, it is possible that rules similar to the "noncontingent bond
method" of the contingent interest rules in the OID Regulations, as amended on
June 21, 1996, may be promulgated with respect to the Class A-IO Certificates.
See "Federal Income Tax Consequences--REMICs--Taxation of Owners of Regular
Securities--Original Issue Discount" in the Prospectus. Investors should consult
their own tax advisors as to the application of the noncontingent bond method.
The IRS has issued regulations (the "OID Regulations") under Sections
1271 to 1275 of the Code generally addressing the treatment of debt instruments
issued with original issue discount. Purchasers of the Offered Certificates
should be aware that the OID Regulations do not adequately address certain
issues relevant to, or are not applicable to, securities such as the Offered
Certificates. Because of the uncertainty concerning the application of Section
1272(a)(6) of the Code to such Certificates, and because the rules of the OID
Regulations are limited in their application in ways that could preclude their
application to such Certificates even in the absence of Section 1272(a)(6) of
the Code, the IRS could assert that the Offered Certificates should be treated
as issued with original issue discount or should be governed by the rules
applicable to debt instruments having contingent payments or by some other
manner not yet set forth in regulations. Prospective purchasers of the Offered
Certificates are advised to consult their tax advisors concerning the tax
treatment of such Certificates.
The Offered Certificates generally will be treated as assets described
in Section 7701(a)(19)(C) of the Code and "real estate assets" under Section
856(c)(4)(A) of the Code, in the same proportion that the assets in the Trust
Fund would be so treated. In addition, interest on the Offered Certificates
generally will be treated as "interest on obligations secured by mortgages on
real property" under Section 856(c)(3)(B) of the Code, to the extent that the
Offered Certificates are treated as "real estate assets" under Section
856(c)(4)(A) of the Code. See "Federal Income Tax
Consequences--REMICs--Characterization of Investments in REMIC Securities" in
the Prospectus. If more than 95% of the regular interests and income qualify for
these treatments, the regular interests generally will qualify for such
treatments in their entirety. However, no portion of an Offered P&I
Certificateholder's basis or income allocable to a Basis Risk Arrangement will
qualify for such treatment. As a result, Offered P&I Certificates are not
suitable investments for inclusion in another REMIC.
Taxation of the Basis Risk Arrangements
General. Each holder of an Offered P&I Certificate will be treated for
federal income tax purposes as having entered into a notional principal contract
pursuant to its rights to receive payment with respect to Cap Carryover Amounts
on the date it purchases its Certificates. The rights to receive such payments
(referred to as the "Basis Risk Arrangements") are beneficially owned by holders
of Offered Certificates in the portion of the Trust Fund, exclusive of the
REMICs, which is treated as a grantor trust for federal income tax purposes. The
Internal Revenue Service (the "IRS") has issued final regulations under Section
446 of the Code relating to notional principal contracts (the "Swap
Regulations").
In general, the holders of the Offered P&I Certificates must allocate
the price they pay for the Offered P&I Certificates between their REMIC regular
interest and the applicable Basis Risk Arrangement based on their relative fair
market values. To the extent rights to receive payments are determined to have a
value on the Closing Date that is greater than zero, a portion of such purchase
price will be allocable to such rights, and such portion will be treated as a
cap premium (the "Cap Premium") paid by the holders of the Offered P&I
Certificates. A holder of an Offered P&I Certificate will be required to
amortize the Cap Premium under a level payment method as if the Cap Premium
represented the present value of a series of equal payments made over the life
of the applicable Basis Risk Arrangement (adjusted to take into account
decreases in notional principal amount), discounted at a rate equal to the rate
used to determine the amount of the Cap Premium (or some other reasonable rate).
Prospective purchasers of Offered P&I Certificates should consult their own tax
advisors regarding the appropriate method of amortizing any Cap Premium. The
Swap Regulations treat a nonperiodic payment made under a cap contract as a loan
for federal income tax purposes if the payment is "significant." It is not known
whether any Cap Premium would be treated in part as a loan under the Swap
Regulations.
S-77
Under the Swap Regulations (i) all taxpayers must recognize periodic
payments with respect to a notional principal contract under the accrual method
of accounting, and (ii) any periodic payments received under the applicable
Basis Risk Arrangement must be netted against payments, if any, deemed made as a
result of the Cap Premiums over the recipient's taxable year, rather than
accounted for on a gross basis. Net income or deduction with respect to net
payments under a notional principal contract for a taxable year should
constitute ordinary income or ordinary deduction. The IRS could contend the
amount is capital gain or loss, but such treatment is unlikely, at least in the
absence of further regulations. Any regulations requiring capital gain or loss
treatment presumably would apply only prospectively. Individuals may be limited
in their ability to deduct any such net deduction and should consult their tax
advisors prior to investing in the Offered P&I Certificates.
Any amount of proceeds from the sale, redemption or retirement of an
Offered P&I Certificate that is considered to be allocated to rights under a
Basis Risk Arrangement would be considered a "termination payment" under the
Swap Regulations. It is anticipated that the Trustee will account for any
termination payments for reporting purposes in accordance with the Swap
Regulations, as described below.
Termination Payments. Any amount of sales proceeds that is considered
to be allocated to the selling beneficial owner's rights under the applicable
Basis Risk Arrangement in connection with the sale or exchange of an Offered
Certificate would be considered a "termination payment" under the Swap
Regulations allocable to that Offered Certificate. A holder of an Offered P&I
Certificate will have gain or loss from such a termination of a Basis Risk
Arrangement equal to (i) any termination payment it received or is deemed to
have received minus (ii) the unamortized portion of any Cap Premium paid (or
deemed paid) by the beneficial owner upon entering into or acquiring its
interest in a Basis Risk Arrangement.
Gain or loss realized upon the termination of a Basis Risk Arrangement
will generally be treated as capital gain or loss. Moreover, in the case of a
bank or thrift institution, Code Section 582(c) would likely not apply to treat
such gain or loss as ordinary.
REMIC Taxes and Reporting
It is not anticipated that the Trust will engage in any transactions
that would subject it to the prohibited transactions tax as defined in Section
860F(a)(2) of the Code, the contributions tax as defined in Section 860G(d) of
the Code or the tax on net income from foreclosure property as defined in
Section 860G(c) of the Code. However, in the event that any such tax is imposed
on the Trust, such tax will be borne (i) by the Trustee, if the Trustee has
breached its obligations with respect to REMIC compliance under the Agreement,
(ii) the Servicer, if the Servicer has breached its obligations with respect to
REMIC compliance under the Agreement, and (iii) otherwise by the Trust Fund,
with a resulting reduction in amounts otherwise distributable to Holders of the
Offered Certificates. See "Description of the Securities--General" and "Federal
Income Tax Consequences--REMICs--Taxes That May Be Imposed on the REMIC
Pool--Prohibited Transactions" in the Prospectus.
The responsibility for filing annual federal information returns and
other reports will be borne by the Trustee. See "Federal Income Tax
Consequences--REMICs--Taxes That May Be Imposed on the REMIC
Pool--Administrative Matters" in the Prospectus.
For further information regarding the federal income tax consequences
of investing in the Offered Certificates, see "Federal Income Tax
Consequences--REMICs" in the Prospectus.
State Taxes
The Depositor makes no representations regarding the tax consequences
of purchase, ownership or disposition of the Offered Certificates under the tax
laws of any state. Investors considering an investment in the Offered
Certificates should consult their own tax advisors regarding such tax
consequences.
S-78
All investors should consult their own tax advisors regarding the
federal, state, local or foreign income tax consequences of the purchase,
ownership and disposition of the Offered Certificates.
ERISA Considerations
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 and/or a plan or other arrangement subject to the
excise tax provisions set forth under Section 4975 of the Code (each of the
foregoing, an "ERISA Plan") from engaging in certain transactions involving such
ERISA 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 plans described under that
Section; ERISA authorizes the imposition of civil penalties for prohibited
transactions involving plans not covered under Section 4975 of the Code. Any
ERISA Plan fiduciary which proposes to cause an ERISA Plan to acquire any of the
Class A Certificates should consult with its counsel with respect to the
potential consequences under ERISA and the Code of the ERISA 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 (collectively with ERISA Plans, "Plans"), are not subject
to ERISA's requirements. However, such plans may be subject to the provisions of
other applicable federal, state or local law ("Similar Law") materially similar
to the foregoing provisions of ERISA and the Code. Any such plan which is
qualified and exempt from taxation under Sections 401(a) and 501(a) of the Code
may nonetheless 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 Class A 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 extended to each of the Underwriters
an administrative exemption (collectively, the "Exemptions" and each, an
"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 certificates
in pass-through trusts that consist of certain receivables, loans and other
obligations that meet the conditions and requirements of the Exemptions. The
Exemptions can apply to certificates in a pass-through trust holding mortgage
loans, and the Exemptions may apply to the Class A Certificates.
Among the conditions that must be satisfied for the Exemptions to apply
are the following:
(1) the acquisition of the certificates by a Plan is on terms
(including the price for the certificates) that are at least
as favorable to the Plan as they would be in an arm's length
transaction with an unrelated party;
(2) the certificates acquired by the Plan have received a rating
at the time of such acquisition that is one of the four
highest generic rating categories from S&P, Moody's Investors
Service, Inc. or Fitch (collectively, the "Exemption Rating
Agencies");
(3) the trustee must not be an affiliate of any other member of
the Restricted Group (as defined below);
(4) the sum of all payments made to and retained by the
underwriters in connection with the distribution of the
certificates represents not more than reasonable compensation
for underwriting the certificates; the sum of all payments
made to and retained by the seller pursuant to the assignment
of the loans to the trust represents not more than the fair
market value of such loans; the sum of all payments made to
and retained by the 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; and
(5) 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 (the "Act").
S-79
The trust must also meet the following requirements:
(i) the corpus of the trust must consist solely of assets of the
type that have been included in other investment pools;
(ii) certificates in such other investment pools must have been
rated in one of the four highest generic rating categories by
an Exemption Rating Agency for at least one year prior to the
Plan's acquisition of certificates; and
(iii) certificates evidencing interests in such other investment
pools must have been purchased by investors other than Plans
for at least one year prior to any Plan's acquisition of the
certificates.
Moreover, the Exemptions provide relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when
the Plan fiduciary causes a Plan to acquire certificates in a trust holding
receivables as to which the fiduciary (or its affiliate) is an obligor provided
that, among other requirements, (i) 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 is acquired by persons
independent of the Restricted Group; (ii) such fiduciary (or its affiliate) is
an obligor with respect to five percent (5%) or less of the fair market value of
the obligations contained in the trust; (iii) a Plan's investment in
certificates of any class does not exceed twenty-five percent (25%) of all of
the certificates of that class outstanding at the time of the acquisition; and
(iv) 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 are
invested in certificates representing an interest in one or more trusts
containing assets sold or serviced by the same entity. The Exemptions do not
apply to Plans sponsored by any Underwriter, the Trustee, the Servicer, any
obligor with respect to Mortgage Loans included in the Trust constituting more
than five percent of the aggregate unamortized principal balance of the assets
in the Trust, or any affiliate of such parties (the "Restricted Group").
Notwithstanding the discussion above, special rules apply regarding the
Exemptions in the case of certificates backed by pools containing residential or
home equity loans with loan-to-value ratios in excess of 100%:
(a) The rights and interests evidenced by such certificates
acquired by Plans cannot be subordinated to the rights and
interests evidenced by other certificates of the same trust;
(b) Such certificates acquired by Plans must have received a
rating from an Exemption Rating Agency at the time of such
acquisition that is in one of the two highest generic rating
categories; and
(c) Any obligation included in the pool must be secured by
collateral whose fair market value on the date of issuance of
the securities is at least equal to 80% of the sum of (I) the
outstanding principal balance due under the obligation which
is included in the pool and (II) the outstanding principal
balance of any other obligation of higher priority secured by
the same collateral.
Because the Mortgage Pool contains Mortgage Loans with loan-to-value
ratios in excess of 100%, the special rules discussed above will apply to the
acquisition of Certificates by Plans. Consequently, the Exemptions will apply to
the acquisition and holding by Plans of the Class A Certificates if all
conditions of the Exemptions are met.
Because the characteristics of the Class M-1, Class M-2, Class M-3 and
Class B Certificates may not meet the requirements of the Exemptions or any
other available exemption, the purchase and holding of the Class M-1, Class M-2,
Class M-3 and Class B Certificates by a Plan may result in prohibited
transactions or the imposition of excise taxes or civil penalties. Consequently,
transfers of the Class M-1, Class M-2, Class M-3 and Class B Certificates will
not be registered by the Trustee unless the Trustee receives: (i) a
representation from the transferee of such Certificate, acceptable to and in
form and substance satisfactory to the Trustee, to the effect that such
transferee is not a Plan, or a person acting on behalf of a Plan or using the
assets of a Plan to effect such transfer; (ii) if the purchaser is an insurance
company, a representation that the purchaser is an insurance company which is
purchasing such Certificates with funds contained in an "insurance company
general account" (as such term is defined in Section V(e) of Prohibited
Transaction Class Exemption 95-60 ("PTCE 95-60")) and that the purchase and
holding of such Certificates are covered under Sections I and III of PTCE 95-60;
or (iii) an opinion of counsel satisfactory to the Trustee that the purchase or
holding of such Certificate by a Plan, any person acting on behalf of a Plan or
using such 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, the Code or Similar Law and will not subject the
Depositor, the Servicer or the Trustee to any obligation in addition to those
undertaken in the Pooling and Servicing Agreement. Such representation as
described above will be deemed to have been made to the Trustee by a beneficial
owner's acceptance of a Class M-1, Class M-2 and Class M-3 Certificate in
book-entry form. In the event that such representation is violated, or any
attempt to transfer to a Plan or person acting on behalf of a Plan or using a
Plan's assets is attempted without the opinion of counsel described above, such
attempted transfer or acquisition will be void and of no effect.
S-80
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA, the Code and Similar Law, the applicability of
PTCE 83-1 described in the Prospectus and the Exemptions, and the potential
consequences in their specific circumstances, prior to making an investment in
the Class A Certificates. Moreover, each Plan fiduciary should determine whether
under the general fiduciary standards of investment prudence and
diversification, an investment in the Class A 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.
RECENT DEVELOPMENTS -- PROPOSED CALIFORNIA LEGISLATION
In April 2002, revised California Assembly Bill No. 1433, a bill to
amend current provisions of the California Military and Veterans Code (the
"Current Law"), was amended (as amended, the "Proposed Bill"). The Proposed Bill
would revise the Current Law to provide protection equivalent to that provided
by the Relief Act to California national guard members called up to active
service by the Governor, California national guard members called up to active
service by the President and reservists called to active duty. Those eligible
under the Proposed Bill must provide a copy of their orders to the servicer of
their mortgage loan to qualify for relief.
The Proposed Bill, if passed, could result in shortfalls in interest
and could affect the ability of the Servicer to foreclose on the affected
Mortgage Loan in a timely fashion. In addition, the Proposed Bill, like the
Relief Act, provides broad discretion for a court to modify a mortgage loan upon
application by the mortgagor. None of the Depositor, the Seller or the Servicer
has undertaken a determination as to which Mortgage Loans, if any, may be
affected. The Depositor does not know whether the Proposed Bill will be passed,
and if passed, whether it will be in its present form. See "Certain Legal
Aspects of the Mortgage Loans -- Soldiers 'and Sailors 'Civil Relief Act of
1940" in the Prospectus.
Legal Investment
The Offered Certificates will not constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984, as amended ("SMMEA").
There may be restrictions on the ability of certain investors,
including depository institutions, either to purchase the Offered Certificates
or to purchase Offered Certificates representing more than a specified
percentage of the investor's assets. Investors should consult their own legal
advisors in determining whether and to what extent the Offered Certificates
constitute legal investments for such investors. See "Legal Investment" in the
Prospectus.
Method of Distribution
Subject to the terms and conditions set forth in the Underwriting
Agreement, between the Depositor and Banc of America Securities LLC ("Banc of
America" ), an affiliate of the Depositor, as representative (in such capacity,
the "Representative") of Banc of America, J.P. Morgan Securities Inc. and
Greenwich Capital Markets, Inc. (together with Banc of America, the
"Underwriters"), the Underwriters have severally agreed to purchase and the
Depositor has agreed to sell to the Underwriters the Offered Certificates.
S-81
Distribution of the Offered Certificates will be made by the
Underwriters from time to time in negotiated transactions or otherwise at
varying prices to be determined at the time of sale. The Underwriters may effect
such transactions by selling Offered Certificates to or through dealers and such
dealers may receive from the Underwriters, for which they act as agent,
compensation in the form of underwriting discounts, concessions or commissions.
The Underwriters and any dealers that participate with the Underwriters in the
distribution of such Offered Certificates may be deemed to be underwriters, and
any discounts, commissions or concessions received by them, and any profits on
resale of the Offered Certificates purchased by them, may be deemed to be
underwriting discounts and commissions under the Act.
The Depositor has been advised by the Underwriters that they intend to
make a market in the Offered Certificates but have no obligation to do so. There
can be no assurance that a secondary market for the Offered Certificates will
develop or, if it does develop, that it will continue.
The Depositor has agreed to indemnify the Underwriters against, or make
contributions to the Underwriters with respect to, certain liabilities,
including liabilities under the Act.
Legal Matters
Certain matters relating to the validity of the Offered Certificates
and certain tax matters will be passed upon for the Depositor and the
Underwriters by Cadwalader, Wickersham & Taft, New York, New York.
Ratings
It is a condition to the issuance of the Offered Certificates that the
Certificates receive the following ratings from S&P and Fitch:
Class S&P Fitch
----- --- -----
AI-1 AAA AAA
AI-2 AAA AAA
AI-3 AAA AAA
AI-4 AAA AAA
AII-1 AAA AAA
A-IO AAA AAA
M-1 AA AA
M-2 A A
M-3 BBB BBB
A securities rating addresses the likelihood of the receipt by a
certificateholder of distributions on the Mortgage Loans. The rating takes into
consideration the characteristics of the Mortgage Loans and the structural,
legal and tax aspects associated with the certificates. The ratings on the
Offered Certificates do not, however, constitute statements regarding the
likelihood of the payment of any Cap Carryover Amount, the frequency of
prepayments on the Mortgage Loans, or the possibility that a holder of an
Offered Certificate might realize a lower than anticipated yield.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating. In the event that the ratings
initially assigned to any of the Offered Certificates by the Rating Agencies are
subsequently lowered for any reason, no person or entity is obligated to provide
any additional support or credit enhancement with respect to such Offered
Certificates.
S-82
Index of Principal Definitions
60+ Day Delinquent Loan.....................................................S-57
Accrued Certificate Interest................................................S-54
Act.........................................................................S-80
Actuarial Mortgage Loans....................................................S-36
Adjustable-Rate Mortgage Loans..............................................S-19
Adjustable-Rate Net Funds Cap...............................................S-62
Adjustment Date.............................................................S-27
Advance.....................................................................S-45
Applied Realized Loss Amount................................................S-59
Available Funds.............................................................S-53
Balloon Loan................................................................S-20
Balloon Payment.............................................................S-20
Banc of America.............................................................S-82
Basis Risk Arrangements.....................................................S-78
beneficial owner............................................................S-50
Book-Entry Certificates.....................................................S-49
Business Day................................................................S-44
Cap Carryover Amount........................................................S-62
Cap Premium.................................................................S-78
Certificate Owners..........................................................S-49
Certificate Principal Balance...............................................S-55
Certificateholder...........................................................S-50
Certificates................................................................S-49
Class A Certificates........................................................S-49
Class AII-1 Certificate Margin..............................................S-61
Class B Applied Realized Loss Amount........................................S-61
Class B Certificates........................................................S-49
Class B Principal Distribution Amount.......................................S-56
Class B Realized Loss Amortization Amount...................................S-61
Class M Certificates........................................................S-49
Class M-1 Applied Realized Loss Amount......................................S-60
Class M-1 Principal Distribution Amount.....................................S-55
Class M-1 Realized Loss Amortization Amount.................................S-60
Class M-2 Applied Realized Loss Amount......................................S-60
Class M-2 Principal Distribution Amount.....................................S-56
Class M-2 Realized Loss Amortization Amount.................................S-61
Class M-3 Applied Realized Loss Amount......................................S-61
Class M-3 Principal Distribution Amount.....................................S-56
Class M-3 Realized Loss Amortization Amount.................................S-61
Clearstream..................................................................S-5
Clearstream Participants....................................................S-51
Closing Date................................................................S-43
Code........................................................................S-77
Collection Account..........................................................S-44
Collection Period...........................................................S-53
Combined Loan-to-Value Ratio................................................S-23
Compensating Interest.......................................................S-46
Constant Prepayment Rate....................................................S-65
Cooperative.................................................................S-51
CPR.........................................................................S-65
Current Law.................................................................S-82
Cut-off Date................................................................S-19
Cut-off Date Principal Balance..............................................S-19
S-83
Defective Mortgage Loans....................................................S-44
Deficient Valuation.........................................................S-58
Definitive Certificate......................................................S-50
Delinquent..................................................................S-20
Determination Date..........................................................S-46
Distribution Account........................................................S-44
Distribution Date...........................................................S-49
DTC..........................................................................S-5
Due Date....................................................................S-20
Eligible Account............................................................S-44
Eligible Substitute Mortgage Loan...........................................S-43
ERISA.......................................................................S-80
ERISA Plan..................................................................S-80
Euroclear....................................................................S-5
Euroclear Operator..........................................................S-51
European Depositaries.......................................................S-50
Exemption...................................................................S-80
Exemption Rating Agencies...................................................S-80
Exemptions..................................................................S-80
Extra Principal Distribution Amount.........................................S-56
FDIC.........................................................................S-5
Financial Intermediary......................................................S-50
First Lien..................................................................S-20
Fitch.......................................................................S-10
Fixed-Rate Mortgage Loans...................................................S-19
Fixed-Rate Net Funds Cap....................................................S-62
Global Securities............................................................A-1
Gross Margin................................................................S-27
HEP.........................................................................S-66
Home Equity Prepayment Curve................................................S-66
Index.......................................................................S-27
Indirect Participants.......................................................S-49
Initial Periodic Rate Cap...................................................S-27
Interest Accrual Period.....................................................S-54
Interest Carry Forward Amount...............................................S-54
Interest Percentage.........................................................S-54
Interest Remittance Amount..................................................S-54
IRS.........................................................................S-78
LIBOR.......................................................................S-63
LIBOR Determination Date....................................................S-63
Liquidated Mortgage Loan....................................................S-58
Maximum Cap Rate............................................................S-62
Maximum Mortgage Interest Rate..............................................S-27
Minimum Mortgage Interest Rate..............................................S-27
Monthly Excess Cashflow Allocation..........................................S-59
Monthly Excess Cashflow Amount..............................................S-59
Monthly Excess Interest Amount..............................................S-59
Monthly Payment.............................................................S-20
Mortgage....................................................................S-20
Mortgage Interest Rate......................................................S-20
Mortgage Loan Purchase Agreement............................................S-19
Mortgage Loan Schedule......................................................S-43
Mortgage Loans..............................................................S-19
Mortgage Pool...............................................................S-19
Mortgaged Property..........................................................S-20
Net Mortgage Interest Rate..................................................S-59
S-84
New Regulations..............................................................A-3
NIMS Insurer.................................................................S-6
Notional Amount.............................................................S-56
Offered Certificates........................................................S-49
Offered P&I Certificates....................................................S-77
OID.........................................................................S-77
OID Regulations.............................................................S-78
Old Superior...........................................................S-5, S-37
One Year CMT................................................................S-35
Optional Termination Date...................................................S-47
Originator.............................................................S-5, S-37
Overcollateralization Amount................................................S-56
Overcollateralization Deficiency............................................S-56
Overcollateralization Release Amount........................................S-57
Participants................................................................S-49
Pass-Through Rate...........................................................S-62
Periodic Rate Cap...........................................................S-27
Plans.......................................................................S-80
Pool Balance................................................................S-19
Pool Cap....................................................................S-62
Pooling and Servicing Agreement.............................................S-42
Prepayment Assumptions......................................................S-65
Prepayment Interest Shortfall...............................................S-46
Prepayment Period...........................................................S-53
Principal Balance...........................................................S-19
Principal Distribution Amount...............................................S-57
Principal Remittance Amount.................................................S-57
Proposed Bill...............................................................S-82
Prospectus...................................................................S-5
Prospectus Supplement........................................................S-5
PTCE 95-60..................................................................S-81
Purchase Price..............................................................S-43
Rating Agencies.............................................................S-44
Realized Loss...............................................................S-58
Realized Loss Amortization Amount...........................................S-61
Record Date.................................................................S-49
Reference Bank Rate.........................................................S-63
Related Documents...........................................................S-43
Relevant Depositary.........................................................S-49
Relief Act..................................................................S-45
REMIC.......................................................................S-10
Representative..............................................................S-82
Residual Certificates.......................................................S-49
Restricted Group............................................................S-81
Rules.......................................................................S-50
S&P.........................................................................S-10
Seller................................................................S-19, S-37
Senior Adjustable-Rate Principal Distribution Amount........................S-57
Senior Certificates.........................................................S-49
Senior Enhancement Percentage...............................................S-57
Senior Fixed-Rate Principal Distribution Amount.............................S-57
Senior Principal Distribution Amount........................................S-57
Senior Specified Enhancement Percentage.....................................S-57
Servicer....................................................................S-41
Servicer Modification.......................................................S-58
Servicing Advance...........................................................S-45
S-85
Servicing Fee...............................................................S-46
Servicing Fee Rate..........................................................S-46
Servicing Rights Pledgee....................................................S-46
Similar Law.................................................................S-80
Simple Interest Mortgage Loans..............................................S-36
Six Month LIBOR.............................................................S-35
SMMEA.......................................................................S-82
Special Servicing Fee.......................................................S-46
Stepdown Date...............................................................S-58
Structuring Assumptions.....................................................S-66
Subordinated Certificates...................................................S-49
Substitution Adjustment.....................................................S-43
Swap Regulations............................................................S-78
Targeted Overcollateralization Amount.......................................S-58
Telerate Page 3750..........................................................S-63
Termination Price...........................................................S-47
Terms and Conditions........................................................S-51
Trigger Event...............................................................S-58
Trust........................................................................S-5
Trust Fund..................................................................S-19
Trustee.....................................................................S-46
Trustee Fee.................................................................S-46
U.S. Person..................................................................A-4
Underwriters................................................................S-82
Unpaid Realized Loss Amount.................................................S-61
S-86
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the Offered Certificates will
be offered globally (the "Global Securities") and will be available only in
book-entry form. Investors in the Global Securities may hold such Global
Securities through any of DTC, Clearstream or Euroclear. The Global Securities
will be tradable as home market instruments in both the European and U.S.
domestic markets. Initial settlement and all secondary trades will settle in
same-day funds.
Secondary market trading between investors holding Global Securities
through Clearstream and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between Clearstream or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Clearstream and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, Clearstream and
Euroclear will hold positions on behalf of their participants through their
respective Depositaries, which in turn will hold such positions in accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to conventional eurobonds, except
that there will be no temporary global security and no "lock-up" or restricted
period. Investor securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Clearstream
or Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no `lock-up' or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset backed certificates issues in same-day funds.
Trading between Clearstream and/or Euroclear Participants. Secondary
market trading between Clearstream Participants or Euroclear Participants will
be settled using the procedures applicable to conventional eurobonds in same-day
funds.
A-1
Trading between DTC seller and Clearstream or Euroclear purchaser. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a Clearstream Participant or a Euroclear Participant, the
purchaser will send instructions to Clearstream or Euroclear through a
Clearstream Participant or Euroclear Participant at least one business day prior
to settlement. Clearstream or Euroclear will instruct the respective Depositary,
as the case may be, to receive the Global Securities against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment date to and excluding the settlement date, on the basis of
either a 360-day year comprised of 30-day months or the actual number of days in
such accrual period and a year assumed to consist of 360 days, as applicable.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. Payment
will then be made by the respective Depositary of the DTC Participant's account
against delivery of the Global Securities. After settlement has been completed,
the Global Securities will be system and by the clearing system, in accordance
with its usual procedures, to the Clearstream Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the Clearstream or Euroclear cash
debt will be valued instead as of the actual settlement date.
Clearstream Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Clearstream or Euroclear. Under
this approach, they may take on credit exposure to Clearstream or Euroclear
until the Global Securities are credited to their accounts one day later.
As an alternative, if Clearstream or Euroclear has extended a line of
credit to them, Clearstream Participants or Euroclear Participants can elect not
to preposition funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, Clearstream Participants or Euroclear
Participants purchasing Global Securities would incur overdraft charges for one
day, assuming they cleared the overdraft when the Global Securities were
credited to their accounts. However, interest on the Global Securities would
accrue from the value date. Therefore, in many cases the investment income on
the Global Securities earned during that one-day period may substantially reduce
or offset the amount of such overdraft charges, although this result will depend
on each Clearstream Participant's or Euroclear Participant's particular cost of
funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for sending Global Securities
to the respective European Depositary for the benefit of Clearstream
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
Trading between Clearstream or Euroclear Seller and DTC Purchaser. Due
to time zone differences in their favor, Clearstream Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to Clearstream or Euroclear through a Clearstream Participant or
Euroclear Participant at least one business day prior to settlement. In these
cases Clearstream or Euroclear will instruct the respective Depositary, as
appropriate, to deliver the Global Securities to the DTC Participant's account
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment to and excluding the settlement date
on the basis of either a 360-day year comprised of 30-day months or the actual
number of days in such accrual period and a year assumed to consist of 360 days,
as applicable. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
The payment will then be reflected in the account of the Clearstream Participant
or Euroclear Participant the following day, and receipt of the cash proceeds in
the Clearstream Participant's or Euroclear Participant's account would be
back-valued to the value date (which would be the preceding day, when settlement
occurred in New York). Should the Clearstream Participant or Euroclear
Participant have a line of credit with its respective clearing system and elect
to be in debt in anticipation of receipt of the sale proceeds in its account,
the back-valuation will extinguish any overdraft incurred over that one-day
period. If settlement is not completed on the intended value date (i.e., the
trade fails), receipt of the cash proceeds in the Clearstream Participant's or
Euroclear Participant's account would instead be valued as of the actual
settlement date.
A-2
Finally, day traders that use Clearstream or Euroclear and that
purchase Global Securities from DTC Participants for delivery to Clearstream
Participants or Euroclear Participants should note that these trades would
automatically fail on the sale side unless affirmative action were taken. At
least three techniques should be readily available to eliminate this potential
problem:
(a) borrowing through Clearstream or Euroclear for one day (until
the purchase side of the day trade is reflected in their
Clearstream or Euroclear accounts) in accordance with the
clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC
Participant no later than one day prior to settlement, which
would give the Global Securities sufficient time to be
reflected in their Clearstream or Euroclear account in order
to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the
trade so that the value date for the purchase from the DTC
Participant is at least one day prior to the value date for
the sale to the Clearstream Participant or Euroclear
Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through
Clearstream or Euroclear (or through DTC if the holder has an address outside
the U.S.) will be subject to the 30% U.S. withholding tax that generally applies
to payments of interest (including original issue discount) on registered debt
issued by U.S. Persons, unless (i) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its trade
or business in the chain of intermediaries between such beneficial owner and the
U.S. entity required to withhold tax complies with applicable certification
requirements and (ii) such beneficial owner takes one of the following steps to
obtain an exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8BEN). Beneficial owners of
Global Securities that are non-U.S. Persons can obtain a complete exemption from
the withholding tax by filing a signed Form W-8BEN (Certificate of Foreign
Status of Beneficial Owner for United States Tax Withholding). If the
information shown on Form W-8BEN changes, a new Form W-8BEN must be filed within
30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
W-8ECI). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form W-8ECI (Certificate of Foreign Person's Claim for
Exemption from Withholding of Tax on Income Effectively Connected with the
Conduct of a Trade or Business in the United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form W-8BEN). Non-U.S. Persons that are Certificate Owners residing
in a country that has a tax treaty with the United States can obtain an
exemption or reduced tax rate (depending on the treaty terms) by filing Form
W-8BEN.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of a
Global Security or, in the case of a Form W-8ECI filer, his agent, files by
submitting the appropriate form to the person through whom it holds (the
clearing agency, in the case of persons holding directly on the books of the
clearing agency). Form W-8BEN and Form W-8ECI are effective until the third
succeeding calendar year from the date the form is signed.
Final withholding regulations (the "New Regulations") effective January
1, 2001 affect the documentation required from non-U.S. Persons. The New
Regulations replace a number of prior tax certification forms (including IRS
Form W-8, 1001 and 4224) with a new series of IRS Form W-8 and generally
standardize the period of time for which withholding agents can rely on such
forms (although certain of the new forms may remain valid indefinitely if the
beneficial owner provides a United States taxpayer identification number and the
information on the form does not change).
A-3
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity treated as a corporation
or partnership for United States federal income tax purposes organized in or
under the laws of the United States or any state thereof or the District of
Columbia (unless, in the case of a partnership, Treasury regulations provide
otherwise) or (iii) an estate the income of which is includible in gross income
for United States tax purposes, regardless of its source, or (iv) a trust if a
court within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have authority
to control all substantial decisions of the trust. Notwithstanding the preceding
sentence, to the extent provided in Treasury regulations, certain trusts in
existence on August 20, 1996, and treated as United States persons prior to such
date, that elect to continue to be treated as United States persons will also be
a U.S. Person. This summary does not deal with all aspects of U.S. Federal
income tax withholding that may be relevant to foreign holders of the Global
Securities. Investors are advised to consult their own tax advisors for specific
tax advice concerning their holding and disposing of the Global Securities.
A-4
$304,695,000
(Approximate)
Asset Backed Funding Corporation
Depositor
Banc of America Mortgage Capital Corporation
Seller
Litton Loan Servicing LP
Servicer
ABFC Asset-Backed Certificates, Series 2002-SB1
----------------------------------
PROSPECTUS SUPPLEMENT
----------------------------------
Banc of America Securities LLC
Greenwich Capital Markets, Inc.
JPMorgan
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 ABFC Asset-Backed Certificates, Series 2002-SB1
in any state where the offer is not permitted.
We do not claim that the information in this Prospectus Supplement and
Prospectus is accurate as of any date other than the dates stated on the
respective covers.
Dealers will deliver a Prospectus Supplement and Prospectus when acting
as underwriters of the ABFC Asset-Backed Certificates, Series 2002-SB1 and with
respect to their unsold allotments or subscriptions. In addition, all dealers
selling the ABFC Asset-Backed Certificates, Series 2002-SB1 will be required to
deliver a Prospectus Supplement and Prospectus for ninety days following the
date of this Prospectus Supplement.
May 13, 2002
PROSPECTUS
ASSET BACKED FUNDING CORPORATION
Depositor
Asset Backed Certificates
Asset Backed Notes
(Issuable in Series)
----------------------
- --------------------------------------------------------------------------------
You should carefully consider the risk factors beginning on page 10 of this
prospectus.
The securities of any series will not be insured or guaranteed by any
governmental agency or instrumentality other than as expressly described in the
prospectus supplement for that series.
The securities of each series will represent interests in, or will represent
debt obligations of, the related trust only and will not represent interests in
or obligations of any other entity.
This prospectus may be used to offer and sell any series of securities only if
accompanied by the prospectus supplement for that series.
The securities of each series are not deposits or other obligations of a bank
and are not insured by the FDIC.
- --------------------------------------------------------------------------------
Each Trust--
o will issue a series of asset-backed certificates or asset-backed notes
that will consist of one or more classes; and
o may own--
o a pool or pools of single family and/or multifamily mortgage
loans, which may include sub-prime mortgage loans, and are
secured by either first or junior liens on one- to four-family
residential properties or primarily residential properties
consisting of five or more residential dwelling units and
which may include limited retail, office or other commercial
space;
o a pool or pools of home improvement installment sales
contracts or installment loans that are unsecured;
o a pool or pools of manufactured housing installment sales
contracts and installment loan agreements secured by a
security interest in a new or used manufactured home, and if
indicated in the accompanying prospectus supplement, by real
property; and
o other assets described in this prospectus and the accompanying
prospectus supplement.
Each Series of Securities--
o will represent ownership interest in the related trust or will
represent debt obligations of the related trust;
o may be entitled to one or more of the other types of credit support
described in this prospectus; and
o will be paid only from the assets of the related trust.
Neither the SEC nor any state securities commission has approved the securities
or determined that this prospectus is accurate or complete. Any representation
to the contrary is a criminal offense.
----------------------
The date of this Prospectus is May 13, 2002.
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT
Information is provided to you about the securities in two separate
documents that progressively provide more detail: (a) this prospectus, which
provides general information, some of which may not apply to a particular series
of securities, including your series, and (b) the accompanying prospectus
supplement, which will describe the specific terms of your series of securities,
including:
o the principal balances and/or interest rates of each class;
o the timing and priority of interest and principal payments;
o statistical and other information about the mortgage loans;
o information about credit enhancement, if any, for each class;
o the ratings for each class; and
o the method for selling the securities.
If the terms of a particular series of securities vary between this
prospectus and the accompanying prospectus supplement, you should rely on the
information in the accompanying prospectus supplement.
You should rely only on the information provided in this prospectus and the
accompanying prospectus supplement including the information incorporated by
reference. No one has been authorized to provide you with different information.
The securities are not being offered in any state where the offer is not
permitted. The Depositor does not claim the accuracy of the information in this
prospectus or the accompanying prospectus supplement as of any date other than
the dates stated on their respective covers.
Cross-references are included in this prospectus and in the accompanying
prospectus supplement to captions in these materials where you can find further
related discussions. The following Table of Contents and the Table of Contents
included in the accompanying prospectus supplement provide the pages on which
these captions are located.
You can find a listing of the pages where capitalized terms used in this
prospectus are defined under the caption "Index of Significant Definitions"
beginning on page 119 in this prospectus.
The Depositor's principal executive office is located at Bank of America
Corporate Center, 100 North Tryon Street, Charlotte, NC 28255-0001 and the
Depositor's telephone number is (704) 386-2400.
2
TABLE OF CONTENTS
Terms Page
- ----- ----
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS AND THE ACCOMPANYING PROSPECTUS
SUPPLEMENT ............................................................ 2
Summary OF PROSPECTUS .................................................... 6
RISK FACTORS ............................................................. 10
Risks Associated with the Securities .................................. 10
Risks Associated with the Assets ...................................... 12
Violations of Federal Laws May Adversely
Affect Ability to Collect on Loans .................................. 15
Market Values of Manufactured Homes May
Increase the Risk of Loss........................................... 16
Risk of Loss May Be Greater on Unsecured
Home Improvement Loans .............................................. 16
Risks of Loss May Increase Due to Defective
Security Interest and Effects of Certain Other
Legal Aspects of the Contracts ...................................... 16
DESCRIPTION OF THE TRUST FUNDS ........................................... 17
Assets ................................................................ 17
Mortgage Loans ........................................................ 18
General ........................................................... 18
Loan-to-Value Ratio ............................................... 18
Mortgage Loan Information in Prospectus Supplements ............... 18
Payment Provisions of the Mortgage Loans .......................... 19
Revolving Credit Line Loans ....................................... 19
Unsecured Home Improvement Loans ...................................... 20
Unsecured Home Improvement Loan Information in
Prospectus Supplements ......................................... 20
Contracts ............................................................. 20
General ........................................................... 20
Contract Information in Prospectus Supplements .................... 20
Payment Provisions of the Contracts ............................... 21
Pre-Funding Account ................................................... 21
Accounts .............................................................. 22
Credit Support ........................................................ 22
Cash Flow Agreements .................................................. 22
USE OF PROCEEDS .......................................................... 22
YIELD CONSIDERATIONS ..................................................... 22
General ............................................................... 22
Pass-Through Rate and Interest Rate ................................... 23
Timing of Payment of Interest ......................................... 23
Payments of Principal; Prepayments .................................... 23
Prepayments--Maturity and Weighted Average Life ....................... 24
Other Factors Affecting Weighted Average Life ......................... 25
Type of Asset ..................................................... 25
Termination ....................................................... 26
Defaults .......................................................... 26
Foreclosures ...................................................... 27
Refinancing ....................................................... 27
Due-on-Sale Clauses ............................................... 27
THE DEPOSITOR ............................................................ 27
DESCRIPTION OF THE SECURITIES ............................................ 28
General ............................................................... 28
Distributions ......................................................... 28
Available Distribution Amount ......................................... 29
Distributions of Interest on the Securities ........................... 30
Distributions of Principal of the Securities .......................... 30
Categories of Classes of Securities ................................... 31
Components ............................................................ 34
Distributions on the Securities of Prepayment Premiums ................ 34
Allocation of Losses and Shortfalls ................................... 34
Advances in Respect of Delinquencies .................................. 34
Reports to Securityholders ............................................ 35
Termination ........................................................... 36
Optional Purchases .................................................... 37
Book-Entry Registration and Definitive Securities ..................... 37
DESCRIPTION OF THE AGREEMENTS ............................................ 41
Agreements Applicable to a Series ..................................... 41
REMIC Securities, FASIT Securities, Grantor
Trust Securities ............................................... 41
Securities That Are Partnership Interests for
Tax Purposes and Notes ......................................... 41
Material Terms of the Pooling and Servicing Agreements
and Underlying Servicing Agreements ................................. 41
3
General ........................................................... 41
Assignment of Assets; Repurchases ................................. 42
Representations and Warranties; Repurchases ....................... 43
Collection Account and Related Accounts ........................... 44
Realization Upon Defaulted Assets ................................. 48
Hazard Insurance Policies ......................................... 49
Contracts ......................................................... 50
Fidelity Bonds and Errors and Omissions Insurance ................. 51
Due-on-Sale Provisions ............................................ 51
Retained Interest; Servicing Compensation and
Payment of Expenses ............................................ 51
Evidence as to Compliance ......................................... 52
Certain Matters Regarding Servicers, the Master
Servicer and the Depositor ..................................... 52
Special Servicers ................................................. 53
Events of Default under the Agreements ............................ 53
Rights Upon Event of Default under the Agreements ................. 53
Amendment ......................................................... 54
The Trustee ....................................................... 55
Duties of the Trustee ............................................. 55
Certain Matters Regarding the Trustee ............................. 55
Resignation and Removal of the Trustee ............................ 55
Material Terms of the Indenture ....................................... 56
General ........................................................... 56
Events of Default ................................................. 56
Discharge Indenture ............................................... 57
Indenture Trustee's Annual Report ................................. 57
The Indenture Trustee ............................................. 58
DESCRIPTION OF CREDIT SUPPORT ............................................ 58
General ............................................................... 58
Subordinate Securities ................................................ 58
Cross-Support Provisions .............................................. 59
Limited Guarantee ..................................................... 59
Financial Guaranty Insurance Policy or Surety Bond .................... 59
Letter of Credit ...................................................... 59
Pool Insurance Policies ............................................... 59
Special Hazard Insurance Policies ..................................... 59
Mortgagor Bankruptcy Bond ............................................. 59
Reserve Funds ......................................................... 60
Overcollateralization ................................................. 60
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS .................................. 60
General ............................................................... 61
Types of Mortgage Instruments ......................................... 61
Interest in Real Property ............................................. 61
Cooperative Loans ..................................................... 62
Land Sale Contracts ................................................... 62
Foreclosure ........................................................... 63
General ........................................................... 63
Judicial Foreclosure .............................................. 63
Equitable Limitations on Enforceability of
Certain Provisions ............................................. 63
Non-Judicial Foreclosure/Power of Sale ............................ 64
Public Sale ....................................................... 64
Rights of Redemption .............................................. 65
Cooperative Loans ................................................. 65
Junior Mortgages ...................................................... 66
Rights of Redemption .................................................. 67
Anti-Deficiency Legislation, the Bankruptcy Code
and Other Limitations on Lenders .................................... 67
Enforceability of Certain Provisions .................................. 69
Environmental Considerations .......................................... 70
Due-on-Sale Clauses ................................................... 72
Prepayment Charges .................................................... 72
Subordinate Financing ................................................. 72
Applicability of Usury Laws ........................................... 72
Alternative Mortgage Instruments ...................................... 73
Homeowners Protection Act of 1998 ..................................... 73
Texas Home Equity Loans ............................................... 74
Soldiers' and Sailors' Civil Relief Act of 1940 ...................... 74
Forfeiture for Drug, RICO and Money Laundering Violations ............. 74
CERTAIN LEGAL ASPECTS OF THE CONTRACTS ................................... 75
General ............................................................... 75
Security Interests in the Manufactured Homes .......................... 75
Enforcement of Security Interests in Manufactured Homes ............... 77
4
Soldiers' and Sailors' Civil Relief Act of 1940 ...................... 77
Consumer Protection Laws .............................................. 77
Transfers of Manufactured Homes; Enforceability
of Due-on-Sale Clauses .............................................. 77
Applicability of Usury Laws ........................................... 78
FEDERAL INCOME TAX CONSEQUENCES .......................................... 79
General ............................................................... 79
Taxable Mortgage Pools ............................................ 79
REMICS ................................................................ 80
Classification of REMICs .......................................... 80
Characterization of Investments in REMIC Securities ............... 81
Tiered REMIC Structures ........................................... 82
Taxation of Owners of Regular Securities .......................... 82
Election to Treat All Interest Under the Constant
Yield Method ................................................... 87
Taxation of Owners of Residual Securities ......................... 89
Taxes That May Be Imposed on the REMIC Pool ....................... 95
Taxation of Certain Foreign Investors ............................. 97
Grantor Trust Funds ................................................... 99
Classification of Grantor Trust Funds ............................. 99
Standard Securities ................................................... 99
General ........................................................... 99
Stripped Securities ................................................... 102
General ........................................................... 102
Status of Stripped Securities ..................................... 103
Taxation of Stripped Securities ................................... 103
Reporting Requirements and Backup Withholding ..................... 105
Taxation of Certain Foreign Investors ............................. 105
Partnership Trust Funds ............................................... 105
Classification of Partnership Trust Funds ......................... 105
Characterization of Investments in Partnership
Securities and Debt Securities ................................. 105
Taxation of Debt Securityholders .................................. 106
Taxation of Owners of Partnership Securities ...................... 106
STATE AND OTHER TAX CONSEQUENCES ......................................... 110
ERISA CONSIDERATIONS ..................................................... 111
LEGAL INVESTMENT ......................................................... 115
METHODS OF DISTRIBUTION .................................................. 116
LEGAL MATTERS ............................................................ 117
FINANCIAL INFORMATION .................................................... 117
RATING ................................................................... 117
WHERE YOU CAN FIND MORE INFORMATION ...................................... 117
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE ........................ 118
INDEX OF SIGNIFICANT DEFINITIONS ......................................... 119
5
SUMMARY OF PROSPECTUS
This summary highlights selected information from this document and does
not contain all of the information that you need to consider in making an
investment decision. Please read this entire prospectus ("Prospectus") and the
accompanying prospectus supplement ("Prospectus Supplement") carefully to
understand all of the terms of a series of certificates.
This summary provides an overview of certain calculations, cash flows and
other information to aid your understanding of the terms of the certificates and
is qualified by the full description of these calculations, cash flows and other
information in the Prospectus and the Prospectus Supplement.
RELEVANT PARTIES FOR EACH SERIES OF SECURITIES
Title of Securities
Asset backed certificates (the "Certificates") and asset backed notes (the
"Notes" and, together with the Certificates, the "Securities"), issuable is
series.
Depositor
Asset Backed Funding Corporation, a wholly-owned indirect subsidiary of Bank of
America Corporation. The Depositor is an affiliate of Banc of America Securities
LLC.
Issuer
With respect to each series (each, a "Series") of Securities, the trust fund
(the "Trust" or the "Trust Fund") to be formed pursuant to either a pooling and
servicing agreement or a deposit trust agreement.
Servicer
The entity or entities named as servicer in the related Prospectus Supplement. A
Servicer may be an affiliate of the Depositor.
Master Servicer
The entity, if any, named as Master Servicer in the related Prospectus
Supplement that will perform certain administration, calculation and reporting
functions with respect to the Trust Fund and will supervise the Servicers. The
Master Servicer may be an affiliate of the Depositor.
Trustee/Indenture Trustee
The entity named as trustee or indenture trustee in the related Prospectus
Supplement.
RELEVANT DATES
Cut-off Date
The date specified in the related Prospectus Supplement.
Closing Date
The date when the Securities of any Series are initially issued as specified in
the related Prospectus Supplement.
Distribution Date
The monthly, quarterly or other periodic date specified in the related
Prospectus Supplement on which distributions will be made to holders of the
Securities.
Statistical Calculation Date
The calendar day, if applicable, specified in the related Prospectus Supplement.
DESCRIPTION OF SECURITIES
Each Series of Certificates will be issued pursuant to a pooling and
servicing agreement and will include one or more classes (each, a "Class")
representing an ownership interest in a segregated pool of mortgage loans,
unsecured home improvement loans and/or manufactured housing installment sales
contracts and other assets of the Trust Fund. If a Series of Securities includes
Notes, such Notes will represent debt obligations of the related Trust Fund
formed pursuant to a deposit trust agreement and will be secured by the assets
of the Trust Fund pursuant to an indenture. A Class of Securities will be
entitled, to the extent of funds available, to one of the following:
o principal and interest distribution;
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o principal distributions, with no interest distributions;
o interest distributions, with no principal distributions; or
o such other distributions as are described in the applicable Prospectus
Supplement.
See "Description of the Securities" in this Prospectus.
Interest Distributions
With respect to each Series of Securities, interest on each Class of
Securities (other than a Class of Securities entitled to receive only principal)
will accrue during each period specified in the Prospectus Supplement and will
be distributed to the holders of the related Classes of Securities on each
Distribution Date in accordance with the particular terms of each such Class of
Securities. The terms of each such Class of Securities will be described in the
related Prospectus Supplement.
See "Description of the Securities--Distributions of Interest on the
Securities" in this Prospectus.
Principal Distributions
With respect to each Series of Securities, principal payments (including
prepayments) on the related mortgage loans, unsecured home improvement loans
and/or manufactured housing installment sales contracts will be distributed to
holders of the related Securities or otherwise applied as described in the
related Prospectus Supplement on each Distribution Date. Distributions in
reduction of principal balance will be allocated among the Classes of Securities
of a Series in the manner specified in the applicable Prospectus Supplement.
See "Description of the Securities--Distribution of Principal on the
Securities" in this Prospectus.
Denominations
Each Class of Securities of a Series will be issued in the minimum
denominations set forth in the related Prospectus Supplement.
Registration of the Securities
The Securities will be issued either:
o in book-entry form initially held through The Depository Trust Company
("DTC") in the United States, or Clearstream Banking ("Clearstream")
or the Euroclear System ("Euroclear"), in Europe; or
o in fully registered, certificated form.
See "Description of the Securities--General" and "--Book-Entry Registration
and Definitive Securities" in this Prospectus.
ASSETS OF THE TRUST
The Trust related to each Series will consist primarily of any of the
following assets:
o a segregated pool of single family and/or multifamily mortgage loans
which may include sub-prime mortgage loans (collectively, the
"Mortgage Loans");
o home improvement installment sales contracts or installment loans that
are unsecured ("Unsecured Home Improvement Loans");
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o manufactured housing installment sales contracts and installment loan
agreements (the "Contracts," and together with the Mortgage Loans and
Unsecured Home Improvement Loans, the "Assets"); and
o certain other property.
You should refer to the applicable Prospectus Supplement for the precise
characteristics or expected characteristics of the Assets and a description of
the other property, if any, included in a particular Trust.
See "Description of the Trust Funds" in this Prospectus.
OPTIONAL TERMINATION OF THE TRUST
The related Prospectus Supplement may provide that the party specified in
the related Prospectus Supplement may (i) repurchase all of the Assets in the
Trust Fund and thereby cause early retirement of the Securities under the
circumstances and in the manner specified in the related Prospectus Supplement
and (ii) repurchase a portion of such Assets to retire specified Class or
Classes of Securities under the circumstances and in the manner specified in the
related Prospectus Supplement.
See "Description of the Securities--Termination" in this Prospectus.
The yield on each Class of Securities of a Series will be affected by,
among other things, the rate of payment of principal (including prepayments) on
the Assets in the related Trust and the timing of receipt of such payments.
See "Yield Considerations" in this Prospectus.
PREFUNDING ACCOUNT
The related Prospectus Supplement may provide that the Depositor deposit a
specified amount in a pre-funding account on the date the Securities are issued.
In this case, the deposited funds may only be used to acquire the additional
Assets for the Trust during a set period after the initial issuance of the
Securities. Any amounts remaining in the account at the end of the period will
be distributed as a prepayment of principal to the holders of the related
Securities.
See "Description of the Trust Funds--Prefunding Account" in this
Prospectus.
CREDIT ENHANCEMENT
If so specified in the applicable Prospectus Supplement, the Securities of
any Series, or any one or more Classes of a Series, may be entitled to the
benefits of other types of credit enhancement, including but not limited to:
o letter of credit o financial guaranty insurance policy
o special hazard insurance policy o mortgage pool insurance policy
o reserve fund o spread account
o cash collateral account o overcollateralization
Credit support may also be provided by subordination. Any credit support
will be described in detail in the applicable Prospectus Supplement.
See "Description of Credit Support" in this Prospectus.
RATING OF SECURITIES
The Securities of any Series will not be offered pursuant to this
Prospectus and a Prospectus Supplement unless each offered Security ("Offered
Security") is rated in one of the four highest rating categories by at least one
nationally recognized statistical rating agency (a "Rating Agency").
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o A security rating is not a recommendation to buy, sell or hold the
Securities on any Series and is subject to revision or withdrawal at
any time by the assigning Rating Agency.
o Ratings do not address credit risk and do not represent any assessment
of the likelihood or rate of principal prepayments.
See "Risk Factors--Risks Associated with the Securities--Ratings Assigned
to the Securities Will Have Limitations" and "Ratings" in this Prospectus.
TAX STATUS OF THE SECURITIES
The Securities of each Series offered will be either:
o regular interests and residual interests in a Trust Fund treated as a
real estate mortgage investment conduit ("REMIC");
o interests in a Trust Fund treated as a grantor trust;
o interests in a Trust Fund treated as a partnership;
o debt obligations secured by assets of a Trust Fund; or
o regular interest or ownership interests in a Trust Fund treated as a
financial asset securitization investment trust ("FASIT")
For additional information see "Federal Income Tax Consequences" in this
Prospectus and "Certain Material Federal Income Tax Consequences" in the
Prospectus Supplement.
ERISA CONSIDERATIONS
If you are a fiduciary of any employee benefit plan or arrangement,
including an individual retirement account (an "IRA"), subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), the Internal
Revenue Code of 1986, as amended (the "Code"), or any federal, state or local
law ("Similar Law") which is similar to ERISA or the Code, you should carefully
review with your legal advisors whether the purchase or holding of Securities
could give rise to a transaction that is prohibited or not otherwise permissible
under ERISA, the Code or Similar Law.
For additional information see "ERISA Considerations" in this Prospectus
and in the Prospectus Supplement.
LEGAL INVESTMENT
The applicable Prospectus Supplement will specify whether the Class or
Classes of Securities offered will constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984, as amended
("SMMEA"). If your investment authority is subject to legal restrictions you
should consult your own legal advisors to determine whether and to what extent
such Securities constitute a legal investment for you.
For additional information see "Legal Investment" in this Prospectus and in
the Prospectus Supplement.
MATERIAL RISKS
You are urged to read "Risk Factors" in this Prospectus and in the
Prospectus Supplement for a discussion of the material risks associated with an
investment in the Securities.
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RISK FACTORS
You should consider, among other things, the following factors in
connection with the purchase of Securities.
Risks Associated with the Securities
Securities May Not be Liquid. The liquidity of your Securities may be
limited. You should consider that:
o a secondary market for the Securities of any Series may not develop,
or if it does, it may not provide you with liquidity of investment, or
it may not continue for the life of the Securities of any Series;
o issuance of any of the Securities of any Series in book-entry form may
reduce the liquidity of such Securities in the secondary trading
market because investors may not be willing to purchase Securities for
which they cannot obtain physical certificates or notes; and
o unless specified in the applicable Prospectus Supplement, the
Securities will not be listed on any securities exchange.
The Depositor, the Master Servicer, the Servicer and the Trustee Will Have
Limited Obligations. No Class of Securities of any Series will be an interest in
or obligation of the Depositor, the Master Servicer, the Servicer, the Trustee
or any of their affiliates. Unless otherwise provided in the related Prospectus
Supplement, the only obligations with respect to any of the Securities or the
related Assets will be:
o the Servicer's and Master Servicer's servicing obligations under the
applicable agreement; and
o the obligation of the Warranting Party, Asset Seller or other entity
specified in the related Prospectus Supplement to purchase, or
substitute a substantially similar Asset for any Asset as to which
there is defective documentation or a breach of certain
representations and warranties made with respect to such Asset.
Unless otherwise provided in the Prospectus Supplement, the Securities and
the underlying Assets will not be guaranteed or insured by any governmental
agency or instrumentality, or by the Depositor, the Master Servicer, the
Servicer, the Trustee or any of their affiliates.
Credit Enhancement is Limited in Amount and Coverage. With respect to each
Series of Securities, credit enhancement may be provided in limited amounts to
cover certain types of losses on the underlying Assets. Credit enhancement will
be provided in one or more of the forms referred to in this Prospectus,
including, but not limited to: subordination of other Classes of Securities of
the same Series; a letter of credit; a financial guaranty insurance policy; a
mortgage pool insurance policy; a special hazard insurance policy; a reserve
fund; a spread account; a cash collateral account; or other type of credit
enhancement. See "Description of Credit Support" in this Prospectus.
Regardless of the form of credit enhancement provided:
o the amount of coverage will be limited in amount and in most cases
will be subject to periodic reduction in accordance with a schedule or
formula;
o may provide only very limited coverage as to certain types of losses,
and may provide no coverage as to certain types of losses; and
o all or a portion of the credit enhancement for any Series of
Securities may be permitted to be reduced, terminated or substituted
for, if each applicable Rating Agency indicates that the then-current
ratings will not be adversely affected.
Rate of Prepayment on Assets May Adversely Affect Average Lives and Yields
on the Securities. The yield on the Securities of each Series will depend in
part on the rate of principal payment on the Assets (including prepayments,
liquidations due to defaults and Asset repurchases). Such yield may be adversely
affected, depending upon whether a particular Security is purchased at a premium
or a discount, by a higher or lower than anticipated rate of prepayments on the
related Assets. In particular:
o the yield on principal-only or interest-only Securities will be
extremely sensitive to the rate of prepayments on the related Assets;
and
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o the yield on certain Classes of Securities may be relatively more
sensitive to the rate of prepayments of specified Assets than other
Classes of Securities.
The rate of prepayments on Assets is influenced by a number of factors,
including:
o the prevailing mortgage market interest rates;
o local and national economic conditions;
o homeowner mobility; and
o the ability of the borrower to obtain financing.
In addition, your yield may be adversely affected by interest shortfalls
which may result from the timing of the receipt of prepayments or liquidations
to the extent that such interest shortfalls are not covered by aggregate
servicing fees or other mechanisms specified in the applicable Prospectus
Supplement. Your yield also will be adversely affected if losses on the Assets
in the related Trust are allocated to your Securities and may be adversely
affected to the extent of unadvanced delinquencies on the Assets in the related
Trust. Classes of Securities identified in the applicable Prospectus Supplement
as subordinated certificates or notes are more likely to be affected by
delinquencies and losses than other Classes of Securities.
See "Yield Considerations" in this Prospectus.
Ratings Assigned to the Securities Will Have Limitations. The ratings
assigned to your Securities will not:
o assess the likelihood that principal prepayments (including those
caused by defaults) on the related Assets will be made, the degree to
which the rate of such prepayments might differ from that originally
anticipated or the likelihood of early optional termination or
redemption of the Series of Securities; and
o address the possibility that prepayments at higher or lower rates than
anticipated by an investor may cause such investor to experience a
lower than anticipated yield or that an investor purchasing a Security
at a significant premium might fail to recoup its initial investment
under certain prepayment scenarios.
In addition, the ratings of any Series of Securities by any applicable
Rating Agency may be lowered following the initial issuance of the Securities.
The lowering of a rating on a Series or Class of Securities may adversely affect
the market value of such Securities and the liquidity of such Securities. The
Depositor or any of its affiliates will not have any obligation to maintain any
rating of any Series of Securities.
Book-Entry Securities May Experience Certain Problems. Since transactions
in the Classes of Securities of a Series issued in book-entry form can be
effected only through DTC, Clearstream, Euroclear, participating organizations,
indirect participants and certain banks:
o you may experience delays in your receipts of payments of interest and
principal; and
o your ability to pledge such Securities to persons or entities that do
not participate in the DTC, Clearstream or Euroclear systems may be
limited due to the lack of a physical certificate.
See "Description of the Securities--Book-Entry Registration and Definitive
Securities" in this Prospectus.
Risk of Loss May Be Greater on Subordinated Securities. The rights of
holders of subordinated Securities will be subordinate:
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o to the rights of the Servicer and any Master Servicer (to the extent
of their servicing fees, including any unpaid servicing fees with
respect to one or more prior due periods, and its reimbursement for
certain unreimbursed advances and unreimbursed liquidation expenses);
and
o the holders of senior Securities to the extent described in the
related Prospectus Supplement.
As a result of the foregoing, investors must be prepared to bear the risk
that they may be subject to delays in payment and may not recover their initial
investments in the subordinated Securities. See "Description of Credit Support"
in this Prospectus.
The yields on the subordinated Securities may be extremely sensitive to the
loss experience of the related Assets and the timing of any such losses. If the
actual rate and amount of losses experienced by the Assets exceed the rate and
amount of such losses assumed by an investor, the yield to maturity on the
subordinated Securities may be lower than anticipated.
Risks Associated with the Assets
Sub-Prime Mortgage Loans May Experience Greater Rates of Delinquency and
Foreclosure. All or a portion of the mortgage loans may consist of mortgage
loans underwritten in accordance with the underwriting for sub-prime mortgage
loans. A "Sub-prime Mortgage Loan" is a mortgage loan that is ineligible for
purchase by Fannie Mae ("FNMA") or the Freddie Mac ("FHLMC") due to borrower
credit characteristics, property characteristics, loan documentation guidelines
or other credit characteristics that do not meet FNMA or FHLMC underwriting
guidelines. As a consequence:
o delinquencies and foreclosures may be expected to be more likely with
respect to Sub-Prime Mortgage Loans than with respect to mortgage
loans originated in accordance with FNMA or FHLMC underwriting
guidelines; and
o changes in the values of the mortgaged properties may have a greater
effect on the loss experience of Sub-Prime Mortgage Loans than on
mortgage loans originated in accordance with FNMA or FHLMC
underwriting guidelines.
Mortgage Loans Secured by Multifamily Properties May Experience Greater
Rates of Delinquency and Foreclosure. The ability of a borrower to repay a loan
secured by an income-producing property typically is dependent primarily upon
the successful operation of such property rather than upon the existence of
independent income or assets of the borrower; thus, the value of an
income-producing property typically is directly related to the net operating
income derived from such property. If the net operating income of the property
is reduced (for example, if rental or occupancy rates decline or real estate tax
rates or other operating expenses increase), the borrower's ability to repay the
loan may be impaired. In addition, the concentration of default, foreclosure and
loss risk for a pool of Mortgage Loans secured by multifamily properties may be
greater than for a pool of Mortgage Loans secured by single family properties of
comparable aggregate unpaid principal balance because the pool of Mortgage Loans
secured by multifamily properties is likely to consist of a smaller number of
higher balance loans.
General Economic Conditions Affect Mortgage Loan Performance. General
economic conditions have an impact on the ability of borrowers to repay Mortgage
Loans. Loss of earnings, illness and other similar factors may lead to an
increase in delinquencies and bankruptcy filings by borrowers. In the event of
personal bankruptcy of a borrower under a Mortgage Loan (a "Mortgagor"), it is
possible that the holders of the related Securities could experience a loss with
respect to such Mortgagor's Mortgage Loan. In conjunction with a Mortgagor's
bankruptcy, a bankruptcy court may suspend or reduce the payments of principal
and interest to be paid with respect to such Mortgage Loan, thus delaying the
amount received by the holders of the related Securities with respect to such
Mortgage Loan. Moreover, if a bankruptcy court prevents the transfer of the
related mortgaged property to the related Trust, any remaining balance on such
Mortgage Loan may not be recoverable.
Real Estate Market Conditions Affect Mortgage Loan Performance. An
investment in the Securities which are secured by or represent interests in
Mortgage Loans may be affected by, among other things, a decline in real estate
values. There is no assurance that the values of the mortgaged properties will
remain at the levels existing on the dates of origination of the related
Mortgage Loans.
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If the residential real estate market should experience an overall decline
in property values such that the outstanding balances of the Mortgage Loans
contained in a particular Trust and any secondary financing on the mortgaged
properties, become equal to or greater than the value of the mortgaged
properties, delinquencies, foreclosures and losses could be higher than those
now generally experienced in the mortgage lending industry.
Geographic Concentration May Increase Rates of Loss and Delinquency.
Certain geographic regions of the United States from time to time will
experience weaker regional economic conditions and housing markets, and,
consequently, will experience higher rates of loss and delinquency on Assets
generally. Any concentration of the Assets relating to any Series of Securities
in such a region may present risk considerations in addition to those generally
present for similar asset-backed securities without such concentration.
See "The Mortgage Pool" in the related Prospectus Supplement for further
information regarding the geographic concentration of the Assets underlying the
Securities of any Series.
Risk of Loss May Be Greater on Junior Mortgage Loans. Certain of the
Mortgage Loans underlying the Securities of a Series may be secured by mortgages
junior or subordinate to one or more other mortgages ("Senior Liens"), and the
related Senior Liens may not be included in the Trust Fund. Although little data
is available, the rate of default of second or more junior Mortgage Loans may be
greater than that of Mortgage Loans secured by senior liens on comparable
properties. A primary risk to holders of Mortgage Loans secured by junior
mortgages is the possibility that adequate funds will not be received in
connection with a foreclosure of the related Senior Lien to satisfy fully both
the Senior Lien and the Mortgage Loan. In such case, holders of the Securities
would bear:
o the risk of delay in distributions while a deficiency judgement
against the borrower is obtained; and
o the risk of loss if the deficiency judgment is not realized upon.
Moreover, deficiency judgments may not be available in certain
jurisdictions. In addition, a junior mortgagee may not foreclose on the property
securing a junior Mortgage unless it forecloses subject to the Senior Lien.
In servicing junior mortgages, it is generally the Servicer's and Master
Servicer's practice to advance funds to keep the Senior Lien current if the
Mortgagor is in default thereunder. The Servicer and Master Servicer intend to
advance such amounts in accordance with their normal servicing procedures, but
only to the extent that it determines such advances will be recoverable from
future payments and collections on that mortgage loan or otherwise. Such
practice may not be followed in servicing loans more junior than second
mortgages or may be modified at any time. The related Trust will have no source
of funds to satisfy any Senior Lien or make payments due to any senior
mortgagee. The junior mortgages securing the Mortgage Loans are subject and
subordinate to any Senior Liens affecting the related mortgaged property,
including limitations and prohibitions which may be contained in such Senior
Liens upon subordinate financing.
Special Risks of Certain Assets. Certain Assets that may be included in the
Trust may involve additional uncertainties not present in other types of assets.
Certain of the Assets may provide for escalating or variable payments that may
be larger than the initial payment amount; however, the borrowers under such
Assets are generally approved on the basis of the initial payment amount and the
borrower's income may not be sufficient to enable them to pay the increased
payment amounts. Therefore, in such cases the likelihood of default may
increase.
Certain of the Assets underlying a Series of Securities may be delinquent
in respect of the payment of principal and interest. In addition, certain of the
Mortgagors under the Mortgage Loans underlying a Series of Securities may be
subject to personal bankruptcy proceedings. Credit enhancement provided with
respect to a particular Series of Securities may not cover all losses related to
such mortgage loans. Prospective investors should consider the risk that the
inclusion in a Trust of delinquent Assets and Mortgage Loans with respect to
which the Mortgagor is the subject of bankruptcy proceedings may cause the rate
of the defaults and prepayments on such Assets to increase and, in turn, may
cause losses to exceed the available credit enhancement for such Series and
affect the yield on the Securities of such Series. See "The Mortgage Pool" in
the related Prospectus Supplement.
13
Defaulted Mortgage Loans May Experience Delays in Liquidation. Even
assuming the mortgaged properties provide adequate security for the Mortgage
Loans underlying a Series of Securities, substantial delays could result in
connection with the liquidation of defaulted mortgage loans. This could result
in corresponding delays in the receipt of the related proceeds by the related
Trust. See "Certain Legal Aspects of the Mortgage Loans--Foreclosure," "--Rights
of Redemption" and "--Anti-Deficiency Legislation, the Bankruptcy Code and Other
Limitations on Lenders" in this Prospectus.
Liquidation Expenses May be Disproportionate. Liquidation expenses with
respect to defaulted Assets do not vary directly with the outstanding principal
balance of the Assets at the time of default. Therefore, assuming that the
Servicer and Master Servicer took the same steps in realizing upon a defaulted
Asset having a small remaining principal balance as they would in the case of a
defaulted Asset having a large remaining principal balance, the amount realized
after expenses of liquidation would be smaller as a percentage of the
outstanding principal balance of the small Asset than would be the case with the
defaulted Asset having a large remaining principal balance. Because the average
outstanding principal balance of the Assets is small relative to the size of the
average outstanding principal balance of the loans in a typical pool consisting
only of conventional purchase-money mortgage loans, net liquidation proceeds on
liquidated Assets may also be smaller as a percentage of the principal balance
of the Assets than would be the case in a typical pool consisting only of
conventional purchase-money mortgage loans.
Defaults May Be More Likely on Newer Assets. Certain of the Assets
underlying a Series of Securities may be recently originated as of the date of
the inclusion in the related Trust Fund. Although little data is available,
defaults on Assets are generally expected to occur with greater frequency in
their early years.
Balloon Payment Assets May Have a Greater Default Risk at Maturity. Certain
of the underlying a Series of Securities may provide for a lump-sum payment of
the unamortized principal balance of the Mortgage Loan at the maturity of the
Asset ("Balloon Payment Assets"). See "The Mortgage Pool" in the related
Prospectus Supplement.
Because borrowers under Balloon Payment Assets are required to make a
relatively large single payment upon maturity, it is possible that the default
risk associated with Balloon Payment Assets is greater than that associated with
fully-amortizing Mortgage Loans. The ability of a Mortgagor on a Balloon Payment
Asset to repay the Mortgage Loan upon maturity frequently depends upon the
Mortgagor's ability:
o to refinance the Asset, which will be affected by a number of factors,
including, without limitation, the level of mortgage rates available
in the primary mortgage market at the time, the Mortgagor's equity in
the related mortgaged property, the financial condition of the
Mortgagor, the condition of the mortgaged property, tax law, general
economic conditions and the general willingness of financial
institutions and primary mortgage bankers to extend credit; or
o to sell the related mortgaged property at a price sufficient to permit
the Mortgagor to make the lump-sum payment.
Texas Home Equity Loans Have Significant Limitations. Certain of the
Mortgage Loans may be home equity loans secured by mortgaged properties located
in Texas ("Texas Home Equity Loans"). The Texas Constitution permits Texas Home
Equity Loans, but significant limitations were imposed on permitted terms,
conditions and practices incident to their creation. For example, Texas Home
Equity Loans must be made without recourse for personal liability against the
homestead owner(s) or their spouse(s) (except in the case of actual fraud on
their part in obtaining the loan) and may be foreclosed upon only by court
order. Further, holders of Texas Home Equity Loans face unique legal risks and
uncertainties that they do not customarily confront with equity take-out
mortgages in other states. For example, if any of the requirements that are
addressed in the amendment to the Texas Constitution (such as limitations on
fees charged to the borrower, disclosures to the borrower or matters to be
provided for in the closing documents) are not met, the lien may be invalid.
There are also similar risks involved in servicing Texas Home Equity Loans (such
as the failure to comply with an obligation to the borrower within a reasonable
time after receiving notification from the borrower) that can result in the
forfeiture of all principal and interest due on the mortgage loan.
Increased Risk of Loss if Assets are Delinquent. A portion of the Assets
may be delinquent upon the issuance of the related Securities. Credit
enhancement provided with respect to a particular Series of Securities may not
cover all losses related thereto. You should consider the risk that the
inclusion of such Assets in the Trust Fund for a Series may cause the rate of
defaults and prepayments on the Assets to increase and, in turn, may cause
losses to exceed the available credit enhancement for such Series and affect the
yield on the Securities of such Series.
14
Violations of Federal Laws May Adversely Affect Ability to Collect on Loans
The Mortgage Loans may also be subject to federal and state laws,
including:
o the Federal Truth in Lending Act and Regulation Z promulgated under
that act, which require certain disclosures to the borrowers regarding
the terms of the residential loans;
o the Equal Credit Opportunity Act and Regulation B promulgated under
that 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 Fair Credit Reporting Act, which regulates the use and reporting
of information related to the borrower's credit experience; and
o for Mortgage Loans that were originated or closed after November 7,
1989, the Home Equity Loan Consumer Protection Act of 1988, which
requires additional disclosures, limits changes that may be made to
the loan documents without the borrower's consent. This act also
restricts a lender's ability to declare a default or to suspend or
reduce a borrower's credit limit to certain enumerated events.
Certain Mortgage Loans are subject to the Riegle Community Development and
Regulatory Improvement Act of 1994 which incorporates the Home Ownership and
Equity Protection Act of 1994. These provisions may:
o 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;
o apply on a mandatory basis to all Mortgage Loans originated on or
after October 1, 1995;
o impose specific statutory liabilities on creditors who fail to comply
with their provisions; and
o 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, without limitation, the right to rescind the Mortgage Loan.
The Home Improvement Contracts are also subject to the Preservation of
Consumers' Claims and Defenses regulations of the Federal Trade Commission and
other similar federal and state statutes and regulations. These laws
o protect the homeowner from defective craftsmanship or incomplete work
by a contractor;
o permit the obligated party to withhold payment if the work does not
meet the quality and durability standards agreed to by the homeowner
and the contractor; and
o subject any person to whom the seller assigns its consumer credit
transaction to all claims and defenses which the obligated party in a
credit sale transaction could assert against the seller of the goods.
Violations of certain provisions of these laws may limit the ability of the
Servicer to collect all or part of the principal of or interest on the Mortgage
Loans, may entitle the mortgagor to a refund of amounts previously paid and may
subject the Depositors, the Servicer, the Master Servicer or the Trust to
damages and administrative enforcement. The Asset Seller will be required to
repurchase any Mortgage Loans which, at the time of origination, did not comply
with such federal and state laws or regulations, however that remedy may not be
adequate to fully compensate the related Trust Fund. See "Certain Legal Aspects
of the Mortgage Loans" in this Prospectus for other limitations on the
enforceability of mortgage loans.
15
Market Values of Manufactured Homes May Increase the Risk of Loss
Manufactured homes generally depreciate in value. Thus investors should
expect that, as a general matter, the market value of any manufactured home will
be lower than the outstanding principal balance of the related installment
contract. As a result, investors must be prepared to bear the risk of loss
resulting from any delinquency or liquidation loss on the Contracts in a Trust
Fund. See "Description of Credit Support" in this Prospectus.
Risk of Loss May Be Greater on Unsecured Home Improvement Loans
The obligations of the borrower under any unsecured home improvement loan
included in a Trust Fund will not be secured by an interest in the related real
estate or any other property. In the event of a default, the Trust Fund will
have recourse only against the borrower's assets generally, along with all other
general unsecured creditors of the borrower. In a bankruptcy or insolvency
proceeding, the obligations of the borrower under an unsecured home improvement
loan may be discharged in their entirety. As a result, the Trust Fund may suffer
losses. In addition, a borrower on an Unsecured Home Improvement Loan may not
demonstrate the same degree of concern over performance of the borrower's
obligations as if such obligations were secured by the real estate or other
assets owned by such borrower.
Risks of Loss May Increase Due to Defective Security Interest and Effects of
Certain Other Legal Aspects of the Contracts
The Asset Seller will represent that a Contract is secured by a security
interest in a manufactured home. Perfection of such security interests and the
right to realize upon the value of the manufactured homes as collateral for the
Contracts are subject to a number of federal and state laws, including the
Uniform Commercial Code. The steps necessary to perfect the security interest in
a manufactured home will vary from state to state. Because of the expense and
administrative inconvenience involved, the Servicer or the Master Servicer will
not amend any certificates of title to change the lienholder specified therein
from the Asset Seller to the Trustee and will not deliver any certificate of
title to the Trustee or note thereon the Trustee's interest. Consequently, in
some states, in the absence of such an amendment, the assignment to the Trustee
of the security interest in the manufactured home may not be effective or such
security interest may not be perfected and, may not be effective against
creditors of the Asset Seller or a trustee in bankruptcy of the Asset Seller.
In addition, numerous federal and state consumer protection laws impose
requirements on lending under installment sales contracts and installment loan
agreements such as the Contracts, and the failure by the lender or seller of
goods to comply with such requirements could give rise to liabilities of
assignees for amounts due under such agreements and claims by such assignees may
be subject to set-off as a result of such lender's or seller's noncompliance.
These laws would apply to the Trustee as assignee of the Contracts. The Asset
Seller of the Contracts will warrant that each Contract complies with all
requirements of law and will make certain warranties relating to the validity,
subsistence, perfection and priority of the security interest in each
manufactured home securing a Contract. A breach of any such warranty that
materially adversely affects any Contract would create an obligation of the
Asset Seller to repurchase, or if permitted by the applicable agreement,
substitute for, such Contract unless such breach is cured. If the credit support
is exhausted and recovery of amounts due on the Contracts is dependent on
repossession and resale of manufactured homes securing Contracts that are in
default, certain other factors may limit the ability to realize upon the
manufactured home or may limit the amount realized by securityholders to less
than the amount due. See "Certain Legal Aspects of the Contracts."
16
DESCRIPTION OF THE TRUST FUNDS
Assets
The primary Assets of each Trust Fund will include (i) Mortgage Loans,
including without limitation, Home Equity Loans, Home Improvement Contracts and
Land Sale Contracts, (ii) Unsecured Home Improvement Loans, (iii) Contracts or
(iv) a combination of Mortgage Loans, Unsecured Home Improvement Loans and/or
Contracts. The Mortgage Loans will not be guaranteed or insured by the Depositor
or any of its affiliates. The Mortgage Loans will be guaranteed or insured by a
governmental agency or instrumentality or other person only if and to the extent
expressly provided in the related Prospectus Supplement. Each Asset will be
selected by the Depositor for inclusion in a Trust Fund from among those
purchased, either directly or indirectly, from a prior holder thereof (an "Asset
Seller"), which may be an affiliate of the Depositor and which prior holder may
or may not be the originator of such Mortgage Loan, Unsecured Home Improvement
Loan or Contract.
The Assets included in the Trust Fund for a Series may be subject to
various types of payment provisions. Such Assets may consist of (1) "Level
Payment Assets," which may provide for the payment of interest and full
repayment of principal in level monthly payments with a fixed rate of interest
computed on their declining principal balances; (2) "Adjustable Rate Assets,"
which may provide for periodic adjustments to their rates of interest to equal
the sum (which may be rounded) of a fixed margin and an index; (3) "Buy Down
Assets," which are Assets for which funds have been provided by someone other
than the related obligors to reduce the obligors' monthly payments during the
early period after origination of such Assets; (4) "Increasing Payment Assets,"
as described below; (5) "Interest Reduction Assets," which provide for the
one-time reduction of the interest rate payable thereon; (6) "GEM Assets," which
provide for (a) monthly payments during the first year after origination that
are at least sufficient to pay interest due thereon, and (b) an increase in such
monthly payments in subsequent years at a predetermined rate resulting in full
repayment over a shorter term than the initial amortization terms of such
Assets; (7) "GPM Assets," which allow for payments during a portion of their
terms which are or may be less than the amount of interest due on the unpaid
principal balances thereof, and which unpaid interest will be added to the
principal balances of such Assets and will be paid, together with interest
thereon, in later years; (8) "Step-up Rate Assets" which provide for interest
rates that increase over time; (9) Balloon Payment Assets; (10) "Convertible
Assets" which are Adjustable Rate Assets subject to provisions pursuant to
which, subject to certain limitations, the related obligors may exercise an
option to convert the adjustable interest rate to a fixed interest rate; and
(11) "Bi-weekly Assets," which provide for obligor payments to be made on a
bi-weekly basis.
An Increasing Payment Asset is an Asset that provides for monthly payments
that are fixed for an initial period to be specified in the related Prospectus
Supplement and which increase thereafter (at a predetermined rate expressed as a
percentage of the monthly payment during the preceding payment period, subject
to any caps on the amount of any single monthly payment increase) for a period
to be specified in the related Prospectus Supplement from the date of
origination, after which the monthly payment is fixed at a level-payment amount
so as to fully amortize the Asset over its remaining term to maturity. The
scheduled monthly payment with respect to an Increasing Payment Asset is the
total amount required to be paid each month in accordance with its terms and
equals the sum of (1) the obligor's monthly payments referred to in the
preceding sentence and (2) in the case of certain Increasing Payment Assets,
payments made by the respective Servicers pursuant to buy-down or subsidy
agreements. The obligor's initial monthly payments for each Increasing Payment
Asset are set at the level-payment amount that would apply to an otherwise
identical Level Payment Asset having an interest rate a certain number of
percentage points below the Asset Rate of such Increasing Payment Asset. The
obligor's monthly payments on each Increasing Payment Asset, together with any
payments made thereon by the related Servicers pursuant to buy-down or subsidy
agreements, will in all cases be sufficient to allow payment of accrued interest
on such Increasing Payment Asset at the related interest rate, without negative
amortization. An obligor's monthly payments on such an Asset may, however, not
be sufficient to result in any reduction of the principal balance of such Asset
until after the period when such payments may be increased.
The Securities will be entitled to payment only from the assets of the
related Trust Fund and will not be entitled to payments in respect of the assets
of any other trust fund established by the Depositor. If specified in the
related Prospectus Supplement, the assets of a Trust Fund will consist of
certificates representing beneficial ownership interests in, or indebtedness of,
another trust fund that contains the Assets.
17
Mortgage Loans
General
Each Mortgage Loan will generally be secured by a lien on (i) a one-to
four-family residential property or a security interest in shares issued by a
cooperative housing corporation (a "Single Family Property" and the related
Mortgage Loan a "Single Family Mortgage Loan") or (ii) a primarily residential
property which consists of five or more residential dwelling units, and which
may include limited retail, office or other commercial space (a "Multifamily
Property" and the related Mortgage Loan a "Multifamily Mortgage Loan"). Single
Family Properties and Multifamily Properties are sometimes referred to herein
collectively as "Mortgaged Properties." To the extent specified in the related
Prospectus Supplement, the Mortgage Loans will be secured by first and/or junior
mortgages or deeds of trust or other similar security instruments creating a
first or junior lien on Mortgaged Property. The Mortgaged Properties may include
apartments owned by cooperative housing corporations ("Cooperatives"). The
Mortgaged Properties may include leasehold interests in properties, the title to
which is held by third party lessors. The term of any such leasehold shall
exceed the term of the related mortgage note by at least five years or such
other time period specified in the related Prospectus Supplement. The Mortgage
Loans may include (i) closed-end and/or revolving home equity loans or certain
balances thereof ("Home Equity Loans") and/or (ii) secured home improvement
installment sales contracts and secured installment loan agreements ("Home
Improvement Contracts"). In addition, the Mortgage Loans may include certain
Mortgage Loans evidenced by contracts ("Land Sale Contracts") for the sale of
properties pursuant to which the mortgagor promises to pay the amount due
thereon to the holder thereof with fee title to the related property held by
such holder until the mortgagor has made all of the payments required pursuant
to such Land Sale Contract, at which time fee title is conveyed to the
mortgagor. The Originator of each Mortgage Loan will have been a person other
than the Depositor. The related Prospectus Supplement will indicate if any
person who originated the Mortgage Loans (each an "Originator") is an affiliate
of the Depositor. The Mortgage Loans will be evidenced by promissory notes (the
"Mortgage Notes") secured by mortgages, deeds of trust or other security
instruments (the "Mortgages") creating a lien on the Mortgaged Properties.
Loan-to-Value Ratio
The "Loan-to-Value Ratio" of a Mortgage Loan at any given time is the ratio
(expressed as a percentage) of the then outstanding principal balance of the
Mortgage Loan to the Value of the related Mortgaged Property. The "Value" of a
Mortgaged Property, other than with respect to Refinance Loans, is generally the
lesser of (a) the appraised value determined in an appraisal obtained by the
originator at origination of such loan and (b) the sales price for such
property. "Refinance Loans" are loans made to refinance existing loans. Unless
otherwise set forth in the related Prospectus Supplement, the Value of the
Mortgaged Property securing a Refinance Loan is the appraised value thereof
determined in an appraisal obtained at the time of origination of the Refinance
Loan. The value of a Mortgaged Property as of the date of initial issuance of
the related Series of Securities may be less than the Value at origination and
will fluctuate from time to time based upon changes in economic conditions and
the real estate market.
Mortgage Loan Information in Prospectus Supplements
Each Prospectus Supplement will contain information, as of the dates
specified in such Prospectus Supplement and to the extent then applicable and
specifically known to the Depositor, with respect to the Mortgage Loans,
including (i) the aggregate outstanding principal balance and the largest,
smallest and average outstanding principal balance of the Mortgage Loans as of
the applicable Cut-off Date, (ii) the type of property securing the Mortgage
Loans, (iii) the weighted average (by principal balance) of the original and
remaining terms to maturity of the Mortgage Loans, (iv) the earliest and latest
origination date and maturity date of the Mortgage Loans, (v) the range of the
Loan-to-Value Ratios at origination of the Mortgage Loans, (vi) the Mortgage
Rates or range of Mortgage Rates and the weighted average Mortgage Rate borne by
the Mortgage Loans, (vii) the state or states in which most of the Mortgaged
Properties are located, (viii) information with respect to the prepayment
provisions, if any, of the Mortgage Loans, (ix) with respect to Mortgage Loans
with adjustable Mortgage Rates ("ARM Loans"), the index, the frequency of the
adjustment dates, the range of margins added to the index, and the maximum
Mortgage Rate or monthly payment variation at the time of any adjustment thereof
and over the life of the ARM Loan, (x) information regarding the payment
characteristics of the Mortgage Loans, including without limitation balloon
payment and other amortization provisions, (xi) the number of Mortgage Loans
that are delinquent and the number of days or ranges of the number of days such
Mortgage Loans are delinquent and (xii) the material underwriting standards used
for the Mortgage Loans. If specific information respecting the Mortgage Loans is
not known to the Depositor at the time Securities are initially offered, more
general information of the nature described above will be provided in the
Prospectus Supplement, and specific information will be set forth in a report
which will be available to purchasers of the related Securities at or before the
initial issuance thereof and will be filed as part of a Current Report on Form
8-K with the Securities and Exchange Commission (the "Commission") within
fifteen days after such initial issuance. Notwithstanding the foregoing, the
characteristics of the Mortgage Loans included in a Trust Fund will not vary by
more than five percent (by aggregate principal balance as of the Cut-off Date)
from the characteristics thereof that are described in the related Prospectus
Supplement.
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The related Prospectus Supplement will specify whether the Mortgage Loans
include (i) Home Equity Loans, which may be secured by Mortgages that are junior
to other liens on the related Mortgaged Property and/or (ii) Home Improvement
Contracts originated by a home improvement contractor and secured by a Mortgage
on the related Mortgaged Property that is junior to other liens on the Mortgaged
Property. The home improvements purchased with the Home Improvement Contracts
typically include replacement windows, house siding, roofs, swimming pools,
satellite dishes, kitchen and bathroom remodeling goods, solar heating panels,
patios, decks, room additions and garages. The related Prospectus Supplement
will specify whether the Home Improvement Contracts are partially insured under
Title I of the National Housing Act of 1934 (the "National Housing Act") and, if
so, the limitations on such insurance. In addition, the related Prospectus
Supplement will specify whether the Mortgage Loans contain certain Mortgage
Loans evidenced by Land Sale Contracts.
Payment Provisions of the Mortgage Loans
All of the Mortgage Loans will provide for payments of principal, interest
or both, on due dates that occur monthly, quarterly or semi-annually or at such
other interval as is specified in the related Prospectus Supplement or for
payments in another manner described in the related Prospectus Supplement. Each
Mortgage Loan may provide for no accrual of interest or for accrual of interest
thereon at an interest rate (a "Mortgage Rate") that is fixed over its term or
that adjusts from time to time, or that may be converted from an adjustable to a
fixed Mortgage Rate or a different adjustable Mortgage Rate, or from a fixed to
an adjustable Mortgage Rate, from time to time pursuant to an election or as
otherwise specified on the related Mortgage Note, in each case as described in
the related Prospectus Supplement. Each Mortgage Loan may provide for scheduled
payments to maturity or payments that adjust from time to time to accommodate
changes in the Mortgage Rate or to reflect the occurrence of certain events or
that adjust on the basis of other methodologies, and may provide for negative
amortization or accelerated amortization, in each case as described in the
related Prospectus Supplement. Each Mortgage Loan may be fully amortizing or
require a balloon payment due on its stated maturity date, in each case as
described in the related Prospectus Supplement. Each Mortgage Loan may contain
prohibitions on prepayment (a "Lock-out Period" and, the date of expiration
thereof, a "Lock-out Date") or require payment of a premium or a yield
maintenance penalty (a "Prepayment Premium") in connection with a prepayment, in
each case as described in the related Prospectus Supplement. In the event that
holders of any Class or Classes of Offered Securities will be entitled to all or
a portion of any Prepayment Premiums collected in respect of Mortgage Loans, the
related Prospectus Supplement will specify the method or methods by which any
such amounts will be allocated. See "--Assets" above.
Revolving Credit Line Loans
As more fully described in the related Prospectus Supplement, the Mortgage
Loans may consist, in whole or in part, of revolving Home Equity Loans or
certain balances thereof ("Revolving Credit Line Loans"). Interest on each
Revolving Credit Line Loan, excluding introductory rates offered from time to
time during promotional periods, may be computed and payable monthly on the
average daily outstanding principal balance of such loan. From time to time
prior to the expiration of the related draw period specified in a Revolving
Credit Line Loan, principal amounts on such Revolving Credit Line Loan may be
drawn down (up to a maximum amount as set forth in the related Prospectus
Supplement) or repaid. If specified in the related Prospectus Supplement, new
draws by borrowers under the Revolving Credit Line Loans will automatically
become part of the Trust Fund described in such Prospectus Supplement. As a
result, the aggregate balance of the Revolving Credit Line Loans will fluctuate
from day to day as new draws by borrowers are added to the Trust Fund and
principal payments are applied to such balances and such amounts will usually
differ each day, as more specifically described in the related Prospectus
Supplement. Under certain circumstances, under a Revolving Credit Line Loan, a
borrower may, during the related draw period, choose an interest only payment
option, during which the borrower is obligated to pay only the amount of
interest which accrues on the loan during the billing cycle, and may also elect
to pay all or a portion of the principal. An interest only payment option may
terminate at the end of the related draw period, after which the borrower must
begin paying at least a minimum monthly portion of the average outstanding
principal balance of the loan.
19
Unsecured Home Improvement Loans
The Unsecured Home Improvement Loans may consist of conventional unsecured
home improvement loans and FHA insured unsecured home improvement loans. Except
as otherwise set forth in the related Prospectus Supplement, the Unsecured Home
Improvement Loans will be fully amortizing and will bear interest at a fixed or
variable annual percentage rate.
Unsecured Home Improvement Loan Information in Prospectus Supplements
Each Prospectus Supplement will contain information, as of the dates
specified in such Prospectus Supplement and to the extent then applicable and
specifically known to the Depositor, with respect to the Unsecured Home
Improvement Loans, including (i) the aggregate outstanding principal balance and
the largest, smallest and average outstanding principal balance of the Unsecured
Home Improvement Loans as of the applicable Cut-Off Date, (ii) the weighted
average (by principal balance) of the original and remaining terms to maturity
of the Unsecured Home Improvement Loans, (iii) the earliest and latest
origination date and maturity date of the Unsecured Home Improvements Loans,
(iv) the interest rates or range of interest rates and the weighted average
interest rates borne by the Unsecured Home Improvement Loans, (v) the state or
states in which most of the Unsecured Home Improvement Loans were originated,
(vi) information with respect to the prepayment provisions, if any, of the
Unsecured Home Improvement Loans, (vii) with respect to the Unsecured Home
Improvement Loans with adjustable interest rates ("ARM Unsecured Home
Improvement Loans"), the index, the frequency of the adjustment dates, the range
of margins added to the index, and the maximum interest rate or monthly payment
variation at the time of any adjustment thereof and over the life of the ARM
Unsecured Home Improvement Loan, (viii) information regarding the payment
characteristics of the Unsecured Home Improvement Loan, (ix) the number of
Unsecured Home Improvement Loans that are delinquent and the number of days or
ranges of the number of days such Unsecured Home Improvement Loans are
delinquent and (x) the material underwriting standards used for the Unsecured
Home Improvement Loans. If specific information respecting the Unsecured Home
Improvement Loans is not known to the Depositor at the time Securities are
initially offered, more general information of the nature described above will
be provided in the Prospectus Supplement, and specific information will be set
forth in a report which will be available to purchasers of the related
Securities at or before the initial issuance thereof and will be filed as part
of a Current Report on Form 8-K with the Securities and Exchange Commission
within fifteen days after such initial issuance. Notwithstanding the foregoing,
the characteristics of the Unsecured Home Improvement Loans included in a Trust
Fund will not vary by more than five percent (by aggregate principal balance as
of the Cut-off Date) from the characteristics thereof that are described in the
related Prospectus Supplement.
Contracts
General
To the extent provided in the related Prospectus Supplement, each Contract
will be secured by a security interest in a new or used manufactured home (each,
a "Manufactured Home"). Such Prospectus Supplement will specify the states or
other jurisdictions in which the Manufactured Homes are located as of the
related Cut-off Date. The method of computing the Loan-to-Value Ratio of a
Contract will be described in the related Prospectus Supplement.
20
Contract Information in Prospectus Supplements
Each Prospectus Supplement will contain certain information, as of the
dates specified in such Prospectus Supplement and to the extent then applicable
and specifically known to the Depositor, with respect to the Contracts,
including (i) the aggregate outstanding principal balance and the largest,
smallest and average outstanding principal balance of the Contracts as of the
applicable Cut-off Date, (ii) whether the Manufactured Homes were new or used as
of the origination of the related Contracts, (iii) the weighted average (by
principal balance) of the original and remaining terms to maturity of the
Contracts, (iv) the earliest and latest origination date and maturity date of
the Contracts, (v) the range of the Loan-to-Value Ratios at origination of the
Contracts, (vi) the Contract Rates or range of Contract Rates and the weighted
average Contract Rate borne by the Contracts, (vii) the state or states in which
most of the Manufactured Homes are located at origination, (viii) information
with respect to the prepayment provisions, if any, of the Contracts, (ix) with
respect to Contracts with adjustable Contract Rates ("ARM Contracts"), the
index, the frequency of the adjustment dates, and the maximum Contract Rate or
monthly payment variation at the time of any adjustment thereof and over the
life of the ARM Contract, (x) the number of Contracts that are delinquent and
the number of days or ranges of the number of days such Contracts are
delinquent, (xi) information regarding the payment characteristics of the
Contracts and (xii) the material underwriting standards used for the Contracts.
If specific information respecting the Contracts is not known to the Depositor
at the time Securities are initially offered, more general information of the
nature described above will be provided in the Prospectus Supplement, and
specific information will be set forth in a report which will be available to
purchasers of the related Securities at or before the initial issuance thereof
and will be filed as part of a Current Report on Form 8-K with the Securities
and Exchange Commission within fifteen days after such initial issuance.
Notwithstanding the foregoing, the characteristics of the Contracts included in
a Trust Fund will not vary by more than five percent (by aggregate principal
balance as of the Cut-off Date) from the characteristics thereof that are
described in the related Prospectus Supplement.
Payment Provisions of the Contracts
All of the Contracts will provide for payments of principal, interest or
both, on due dates that occur monthly or at such other interval as is specified
in the related Prospectus Supplement or for payments in another manner described
in the Prospectus Supplement. Each Contract may provide for no accrual of
interest or for accrual of interest thereon at an annual percentage rate (a
"Contract Rate") that is fixed over its term or that adjusts from time to time,
or as otherwise specified in the related Prospectus Supplement. Each Contract
may provide for scheduled payments to maturity or payments that adjust from time
to time to accommodate changes in the Contract Rate as otherwise described in
the related Prospectus Supplement. See "--Assets" above.
Pre-Funding Account
To the extent provided in a Prospectus Supplement, a portion of the
proceeds of the issuance of Securities may be deposited into an account
maintained with the Trustee (a "Pre-Funding Account"). In such event, the
Depositor will be obligated (subject only to the availability thereof) to sell
at a predetermined price, and the Trust Fund for the related Series of
Securities will be obligated to purchase (subject to the availability thereof),
additional Assets (the "Subsequent Assets") from time to time (as frequently as
daily) within the period (generally not to exceed three months) specified in the
related Prospectus Supplement (the "Pre-Funding Period") after the issuance of
such Series of Securities having an aggregate principal balance approximately
equal to the amount on deposit in the Pre-Funding Account (the "Pre-Funded
Amount") for such Series on the date of such issuance. The Pre-Funded Amount
with respect to a Series is not expected to exceed 25% of the aggregate initial
Security Balance of the related Securities. Any Subsequent Assets will be
required to satisfy certain eligibility criteria more fully set forth in the
applicable Agreement, which eligibility criteria will be consistent with the
eligibility criteria of the Assets initially included in the Trust Fund, subject
to such exceptions as are expressly stated in the Prospectus Supplement. For
example, the Subsequent Assets will be subject to the same underwriting
standards, representations and warranties as the Assets initially included in
the Trust Fund. In addition, certain conditions must be satisfied before the
Subsequent Assets are transferred into the Trust Fund such as the delivery to
the Rating Agencies and the Trustee of certain opinions of counsel (including
bankruptcy, corporate and tax opinions).
Any portion of the Pre-Funded Amount remaining in the Pre-Funding Account
at the end of the Pre-Funding Period will be used to prepay one or more Classes
of Securities in the amounts and in the manner specified in the related
Prospectus Supplement. In addition, if specified in the related Prospectus
Supplement, the Depositor may be required to deposit cash into an account
maintained by the Trustee (the "Capitalized Interest Account") for the purpose
of assuring the availability of funds to pay interest with respect to the
Securities during the Pre-Funding Period. Any amount remaining in the
Capitalized Interest Account at the end of the Pre-Funding Period will be
remitted as specified in the related Prospectus Supplement.
21
Accounts
Each Trust Fund will include one or more accounts, established and
maintained on behalf of the Securityholders into which the person or persons
designated in the related Prospectus Supplement will, to the extent described
herein and in such Prospectus Supplement deposit all payments and collections
received or advanced with respect to the Assets and other assets in the Trust
Fund. Such an account may be maintained as an interest bearing or a non-interest
bearing account, and funds held therein may be held as cash or invested in
certain short-term, investment grade obligations, in each case as described in
the related Prospectus Supplement. See "Description of the Agreements--Material
Terms of the Pooling and Servicing Agreements and Underlying Servicing
Agreements--Collection Account and Related Accounts."
Credit Support
If so provided in the related Prospectus Supplement, partial or full
protection against certain defaults and losses on the Assets in the related
Trust Fund may be provided to one or more Classes of Securities in the related
Series in the form of subordination of one or more other Classes of Securities
in such Series or by one or more other types of credit support, such as a letter
of credit, insurance policy, guarantee, reserve fund or another type of credit
support, or a combination thereof (any such coverage with respect to the
Securities of any Series, "Credit Support"). The amount and types of coverage,
the identification of the entity providing the coverage (if applicable) and
related information with respect to each type of Credit Support, if any, will be
described in the Prospectus Supplement for a Series of Securities. See "Risk
Factors--Risks Associated with the Securities--Credit Enhancement is Limited in
Amount and Coverage" and "Description of Credit Support."
Cash Flow Agreements
If so provided in the related Prospectus Supplement, the Trust Fund may
include guaranteed investment contracts pursuant to which moneys held in the
funds and accounts established for the related Series will be invested at a
specified rate. The Trust Fund may also include certain other agreements, such
as interest rate exchange agreements, interest rate cap or floor agreements,
currency exchange agreements or similar agreements provided to reduce the
effects of interest rate or currency exchange rate fluctuations on the Assets or
on one or more Classes of Securities. (Currency exchange agreements might be
included in the Trust Fund if some or all of the Mortgage Loans were denominated
in a non-United States currency.) The principal terms of any such guaranteed
investment contract or other agreement (any such agreement, a "Cash Flow
Agreement"), including, without limitation, provisions relating to the timing,
manner and amount of payments thereunder and provisions relating to the
termination thereof, will be described in the Prospectus Supplement for the
related Series. In addition, the related Prospectus Supplement will provide
certain information with respect to the obligor under any such Cash Flow
Agreement.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Securities will be
applied by the Depositor to the purchase of Assets, or the repayment of the
financing incurred in such purchase, and to pay for certain expenses incurred in
connection with such purchase of Assets and sale of Securities. The Depositor
expects to sell the Securities from time to time, but the timing and amount of
offerings of Securities will depend on a number of factors, including the volume
of Assets acquired by the Depositor, prevailing interest rates, availability of
funds and general market conditions.
YIELD CONSIDERATIONS
General
The yield on any Offered Security will depend on the price paid by the
holder of the Security (the "Securityholder"), the Pass-Through Rate of the
Security, the receipt and timing of receipt of distributions on the Security and
the weighted average life of the Assets in the related Trust Fund (which may be
affected by prepayments, defaults, liquidations or repurchases). See "Risk
Factors--Risks Associated with the Securities--Rate of Prepayment on Mortgage
Loans May Adversely Affect Average Lives and Yields on the Securities."
22
Pass-Through Rate and Interest Rate
Securities of any Class within a Series may have fixed, variable or
adjustable Pass-Through Rates or interest rates, which may or may not be based
upon the interest rates borne by the Assets in the related Trust Fund. The
Prospectus Supplement with respect to any Series of Securities will specify the
Pass-Through Rate or interest rate for each Class of such Securities or, in the
case of a variable or adjustable Pass-Through Rate or interest rate, the method
of determining the Pass-Through Rate or interest rate; the effect, if any, of
the prepayment of any Asset on the Pass-Through Rate or interest rate of one or
more Classes of Securities; and whether the distributions of interest on the
Securities of any Class will be dependent, in whole or in part, on the
performance of any obligor under a Cash Flow Agreement.
If so specified in the related Prospectus Supplement, the effective yield
to maturity to each holder of Securities entitled to payments of interest will
be below that otherwise produced by the applicable Pass-Through Rate or interest
rate and purchase price of such Security because, while interest may accrue on
each Asset during a certain period (each, an "Accrual Period"), the distribution
of such interest will be made on a day which may be several days, weeks or
months following the period of accrual.
Timing of Payment of Interest
Each payment of interest on the Securities (or addition to the Security
Balance of a Class of Accrual Securities) on a Distribution Date will include
interest accrued during the Accrual Period for such Distribution Date. As
indicated above under "--Pass-Through Rate and Interest Rate," if the Accrual
Period ends on a date other than the day before a Distribution Date for the
related Series, the yield realized by the holders of such Securities may be
lower than the yield that would result if the Accrual Period ended on such day
before the Distribution Date.
Payments of Principal; Prepayments
The yield to maturity on the Securities will be affected by the rate of
principal payments on the Assets (including principal prepayments on Mortgage
Loans and Contracts resulting from both voluntary prepayments by the borrowers
and involuntary liquidations). The rate at which principal prepayments occur on
the Mortgage Loans and Contracts will be affected by a variety of factors,
including, without limitation, the terms of the Mortgage Loans and Contracts,
the level of prevailing interest rates, the availability of mortgage credit and
economic, demographic, geographic, tax, legal and other factors. In general,
however, if prevailing interest rates fall significantly below the Mortgage
Rates on the Mortgage Loans comprising or underlying the Assets in a particular
Trust Fund, such Mortgage Loans are likely to be the subject of higher principal
prepayments than if prevailing rates remain at or above the rates borne by such
Mortgage Loans. In this regard, it should be noted that certain Assets may
consist of Mortgage Loans with different Mortgage Rates. The rate of principal
payments on some or all of the Classes of Securities of a Series will correspond
to the rate of principal payments on the Assets in the related Trust Fund and is
likely to be affected by the existence of Lock-out Periods and Prepayment
Premium provisions of the Mortgage Loans underlying or comprising such Assets,
and by the extent to which the servicer of any such Mortgage Loan is able to
enforce such provisions. Mortgage Loans with a Lock-out Period or a Prepayment
Premium provision, to the extent enforceable, generally would be expected to
experience a lower rate of principal prepayments than otherwise identical
Mortgage Loans without such provisions, with shorter Lock-out Periods or with
lower Prepayment Premiums. Because of the depreciating nature of manufactured
housing, which limits the possibilities for refinancing, and because the terms
and principal amounts of manufactured housing contracts are generally shorter
and smaller than the terms and principal amounts of mortgage loans secured by
site-built homes, changes in interest rates have a correspondingly smaller
effect on the amount of the monthly payments on manufactured housing contracts
than on the amount of the monthly payments on mortgage loans secured by
site-built homes. Consequently, changes in interest rates may play a smaller
role in prepayment behavior of manufactured housing contracts than they do in
the prepayment behavior of loans secured by mortgage on site-built homes.
Conversely, local economic conditions and certain of the other factors mentioned
above may play a larger role in the prepayment behavior of manufactured housing
contracts than they do in the prepayment behavior of loans secured by mortgages
on site-built homes.
23
If the purchaser of a Security offered at a discount calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is faster than that actually experienced on the Assets, the
actual yield to maturity will be lower than that so calculated. Conversely, if
the purchaser of a Security offered at a premium calculates its anticipated
yield to maturity based on an assumed rate of distributions of principal that is
slower than that actually experienced on the Assets, the actual yield to
maturity will be lower than that so calculated. In either case, if so provided
in the Prospectus Supplement for a Series of Securities, the effect on yield on
one or more Classes of the Securities of such Series of prepayments of the
Assets in the related Trust Fund may be mitigated or exacerbated by any
provisions for sequential or selective distribution of principal to such
Classes.
When a full prepayment is made on a Mortgage Loan or a Contract, the
obligor is charged interest on the principal amount of the Mortgage Loan or
Contract so prepaid for the number of days in the month actually elapsed up to
the date of the prepayment or such other period specified in the related
Prospectus Supplement. Generally, the effect of prepayments in full will be to
reduce the amount of interest paid in the following month to holders of
Securities entitled to payments of interest because interest on the principal
amount of any Mortgage Loan or Contract so prepaid will be paid only to the date
of prepayment rather than for a full month. A partial prepayment of principal is
applied so as to reduce the outstanding principal balance of the related
Mortgage Loan or Contract as of the Due Date in the month in which such partial
prepayment is receive or such other date as is specified in the related
Prospectus Supplement.
The timing of changes in the rate of principal payments on the Assets may
significantly affect an investor's actual yield to maturity, even if the average
rate of distributions of principal is consistent with an investor's expectation.
In general, the earlier a principal payment is received on the Mortgage Loans
and distributed on a Security, the greater the effect on such investor's yield
to maturity. The effect on an investor's yield of principal payments occurring
at a rate higher (or lower) than the rate anticipated by the investor during a
given period may not be offset by a subsequent like decrease (or increase) in
the rate of principal payments.
The Securityholder will bear the risk of being able to reinvest principal
received in respect of a Security at a yield at least equal to the yield on such
Security.
Prepayments--Maturity and Weighted Average Life
The rates at which principal payments are received on the Assets included
in or comprising a Trust Fund and the rate at which payments are made from any
Credit Support or Cash Flow Agreement for the related Series of Securities may
affect the ultimate maturity and the weighted average life of each Class of such
Series. Prepayments on the Mortgage Loans or Contracts comprising or underlying
the Assets in a particular Trust Fund will generally accelerate the rate at
which principal is paid on some or all of the Classes of the Securities of the
related Series.
If so provided in the Prospectus Supplement for a Series of Securities, one
or more Classes of Securities may have a final scheduled Distribution Date,
which is the date on or prior to which the stated principal amount (the
"Security Balance") thereof is scheduled to be reduced to zero, calculated on
the basis of the assumptions applicable to such Series set forth therein.
Weighted average life refers to the average amount of time that will elapse from
the date of issue of a security until each dollar of principal of such security
will be repaid to the investor. The weighted average life of a Class of
Securities of a Series will be influenced by the rate at which principal on the
Assets is paid to such Class, which may be in the form of scheduled amortization
or prepayments (for this purpose, the term "prepayment" includes prepayments, in
whole or in part, and liquidations due to default).
In addition, the weighted average life of the Securities may be affected by
the varying maturities of the Assets in a Trust Fund. If any Assets in a
particular Trust Fund have actual terms to maturity less than those assumed in
calculating final scheduled Distribution Dates for the Classes of Securities of
the related Series, one or more Classes of such Securities may be fully paid
prior to their respective final scheduled Distribution Dates, even in the
absence of prepayments. Accordingly, the prepayment experience of the Assets
will, to some extent, be a function of the mix of Mortgage Rates or Contract
Rates and maturities of the Mortgage Loans or Contracts comprising or underlying
such Assets. See "Description of the Trust Funds."
Prepayments on loans are also commonly measured relative to a prepayment
standard or model, such as the Constant Prepayment Rate ("CPR") prepayment model
or the Standard Prepayment Assumption ("SPA") prepayment model, each as
described below. CPR represents a constant assumed rate of prepayment each month
relative to the then outstanding principal balance of a pool of loans for the
life of such loans. SPA represents an assumed rate of prepayment each month
relative to the then outstanding principal balance of a pool of loans. A
prepayment assumption of 100% of SPA assumes prepayment rates of 0.2% per annum
of the then outstanding principal balance of such loans in the first month of
the life of the loans and an additional 0.2% per annum in each month thereafter
until the thirtieth month. Beginning in the thirtieth month and in each month
thereafter during the life of the loans, 100% of SPA assumes a constant
prepayment rate of 6% per annum each month.
24
Neither CPR nor SPA nor any other prepayment model or assumption purports
to be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of loans, including the Mortgage
Loans or Contracts underlying or comprising the Assets.
The Prospectus Supplement with respect to each Series of Securities may
contain tables, if applicable, setting forth the projected weighted average life
of each Class of Offered Securities of such Series and the percentage of the
initial Security Balance of each such Class that would be outstanding on
specified Distribution Dates based on the assumptions stated in such Prospectus
Supplement, including assumptions that prepayments on the Mortgage Loans
comprising or underlying the related Assets are made at rates corresponding to
various percentages of CPR, SPA or such other standard specified in such
Prospectus Supplement. Such tables and assumptions are intended to illustrate
the sensitivity of the weighted average life of the Securities to various
prepayment rates and will not be intended to predict or to provide information
that will enable investors to predict the actual weighted average life of the
Securities. It is unlikely that prepayment of any Mortgage Loans or Contracts
comprising or underlying the Assets for any Series will conform to any
particular level of CPR, SPA or any other rate specified in the related
Prospectus Supplement.
Other Factors Affecting Weighted Average Life
Type of Asset
If so specified in the related Prospectus Supplement, a number of Mortgage
Loans may have balloon payments due at maturity (which, based on the
amortization schedule of such Mortgage Loans, may be a substantial amount), and
because the ability of a mortgagor to make a balloon payment typically will
depend upon its ability either to refinance the loan or to sell the related
Mortgaged Property, there is a risk that a number of Balloon Payment Assets may
default at maturity. The ability to obtain refinancing will depend on a number
of factors prevailing at the time refinancing or sale is required, including,
without limitation, real estate values, the mortgagor's financial situation,
prevailing mortgage loan interest rates, the mortgagor's equity in the related
Mortgaged Property, tax laws and prevailing general economic conditions. Neither
the Depositor, the Servicer, the Master Servicer, nor any of their affiliates
will be obligated to refinance or repurchase any Mortgage Loan or to sell the
Mortgaged Property except to the extent provided in the related Prospectus
Supplement. In the case of defaults, recovery of proceeds may be delayed by,
among other things, bankruptcy of the mortgagor or adverse conditions in the
market where the property is located. In order to minimize losses on defaulted
Mortgage Loans, the Servicer may, to the extent and under the circumstances set
forth in the related Prospectus Supplement, be permitted to modify Mortgage
Loans that are in default or as to which a payment default is reasonably
foreseeable. Any defaulted balloon payment or modification that extends the
maturity of a Mortgage Loan will tend to extend the weighted average life of the
Securities and may thereby lengthen the period of time elapsed from the date of
issuance of a Security until it is retired.
With respect to certain Mortgage Loans, including ARM Loans, the Mortgage
Rate at origination may be below the rate that would result if the index and
margin relating thereto were applied at origination. With respect to certain
Contracts, the Contract Rate may be "stepped up" during its term or may
otherwise vary or be adjusted. Under the applicable underwriting standards, the
mortgagor or obligor under each Mortgage Loan or Contract generally will be
qualified on the basis of the Mortgage Rate or Contract Rate in effect at
origination. The repayment of any such Mortgage Loan or Contract may thus be
dependent on the ability of the mortgagor or obligor to make larger level
monthly payments following the adjustment of the Mortgage Rate or Contract Rate.
In addition, certain Mortgage Loans may be subject to temporary buydown plans
("Buydown Mortgage Loans") pursuant to which the monthly payments made by the
mortgagor during the early years of the Mortgage Loan will be less than the
scheduled monthly payments thereon (the "Buydown Period"). The periodic increase
in the amount paid by the mortgagor of a Buydown Mortgage Loan during or at the
end of the applicable Buydown Period may create a greater financial burden for
the mortgagor, who might not have otherwise qualified for a mortgage, and may
accordingly increase the risk of default with respect to the related Mortgage
Loan.
25
The Mortgage Rates on certain ARM Loans subject to negative amortization
generally adjust monthly and their amortization schedules adjust less
frequently. During a period of rising interest rates as well as immediately
after origination (initial Mortgage Rates are generally lower than the sum of
the applicable index at origination and the related margin over such index at
which interest accrues), the amount of interest accruing on the principal
balance of such Mortgage Loans may exceed the amount of the minimum scheduled
monthly payment thereon. As a result, a portion of the accrued interest on
negatively amortizing Mortgage Loans may be added to the principal balance
thereof and will bear interest at the applicable Mortgage Rate. The addition of
any such deferred interest to the principal balance of any related Class or
Classes of Securities will lengthen the weighted average life thereof and may
adversely affect yield to holders thereof, depending upon the price at which
such Securities were purchased. In addition, with respect to certain ARM Loans
subject to negative amortization, during a period of declining interest rates,
it might be expected that each minimum scheduled monthly payment on such a
Mortgage Loan would exceed the amount of scheduled principal and accrued
interest on the principal balance thereof, and since such excess will be applied
to reduce the principal balance of the related Class or Classes of Securities,
the weighted average life of such Securities will be reduced and may adversely
affect yield to holders thereof, depending upon the price at which such
Securities were purchased.
As may be described in the related Prospectus Supplement, the applicable
Agreement may provide that all or a portion of the principal collected on or
with respect to the related Mortgage Loans may be applied by the related Trustee
to the acquisition of additional Mortgage Loans during a specified period
(rather than used to fund payments of principal to Securityholders during such
period) with the result that the related securities possess an interest-only
period, also commonly referred to as a revolving period, which will be followed
by an amortization period. Any such interest-only or revolving period may, upon
the occurrence of certain events to be described in the related Prospectus
Supplement, terminate prior to the end of the specified period and result in the
earlier than expected amortization of the related Securities.
In addition, and as may be described in the related Prospectus Supplement,
the related Agreement may provide that all or a portion of such collected
principal may be retained by the Trustee (and held in certain temporary
investments, including Mortgage Loans) for a specified period prior to being
used to fund payments of principal to Securityholders.
The result of such retention and temporary investment by the Trustee of
such principal would be to slow the amortization rate of the related Securities
relative to the amortization rate of the related Mortgage Loans, or to attempt
to match the amortization rate of the related Securities to an amortization
schedule established at the time such Securities are issued. Any such feature
applicable to any Securities may terminate upon the occurrence of events to be
described in the related Prospectus Supplement, resulting in the current funding
of principal payments to the related Securityholders and an acceleration of the
amortization of such Securities.
Termination
If so specified in the related Prospectus Supplement, a Series of
Securities may be subject to optional early termination through the repurchase
of the Assets in the related Trust Fund by the party specified therein, on any
date on which the aggregate principal balance of the Assets or the aggregate
Security Balance of the Securities of such Series declines to a percentage
specified in the related Prospectus Supplement (not to exceed 10%) of the
aggregate initial principal balance of such Assets or initial Security Balance
of such Securities, as the case may be, under the circumstances and in the
manner set forth therein. In addition, if so provided in the related Prospectus
Supplement, certain Classes of Securities may be purchased or redeemed in the
manner set forth therein. See "Description of the Securities--Termination."
Defaults
The rate of defaults on the Assets will also affect the rate, timing and
amount of principal payments on the Assets and thus the yield on the Securities.
In general, defaults on mortgage loans or contracts are expected to occur with
greater frequency in their early years. The rate of default on Mortgage Loans
which are refinance or limited documentation mortgage loans, and on Mortgage
Loans with high Loan-to-Value Ratios, may be higher than for other types of
Mortgage Loans. Furthermore, the rate and timing of prepayments, defaults and
liquidations on the Mortgage Loans and Contracts will be affected by the general
economic condition of the region of the country in which the related Mortgage
Properties or Manufactured Homes are located. The risk of delinquencies and loss
is greater and prepayments are less likely in regions where a weak or
deteriorating economy exists, as may be evidenced by, among other factors,
increasing unemployment or falling property values.
26
Foreclosures
The number of foreclosures or repossessions and the principal amount of the
Mortgage Loans or Contracts comprising or underlying the Assets that are
foreclosed or repossessed in relation to the number and principal amount of
Mortgage Loans or Contracts that are repaid in accordance with their terms will
affect the weighted average life of the Mortgage Loans or Contracts comprising
or underlying the Assets and that of the related Series of Securities.
Refinancing
At the request of a mortgagor, the Servicer may allow the refinancing of a
Mortgage Loan or Contract in any Trust Fund by accepting prepayments thereon and
permitting a new loan secured by a mortgage on the same property. In the event
of such a refinancing, the new loan would not be included in the related Trust
Fund and, therefore, such refinancing would have the same effect as a prepayment
in full of the related Mortgage Loan or Contract. A Servicer may, from time to
time, implement programs designed to encourage refinancing. Such programs may
include, without limitation, modifications of existing loans, general or
targeted solicitations, the offering of pre-approved applications, reduced
origination fees or closing costs, or other financial incentives. In addition,
Servicers may encourage the refinancing of Mortgage Loans or Contracts,
including defaulted Mortgage Loans or Contracts, that would permit creditworthy
borrowers to assume the outstanding indebtedness of such Mortgage Loans or
Contracts.
Due-on-Sale Clauses
Acceleration of mortgage payments as a result of certain transfers of
underlying Mortgaged Property is another factor affecting prepayment rates that
may not be reflected in the prepayment standards or models used in the relevant
Prospectus Supplement. A number of the Mortgage Loans comprising or underlying
the Assets may include "due-on-sale clauses" that allow the holder of the
Mortgage Loans to demand payment in full of the remaining principal balance of
the Mortgage Loans upon sale, transfer or conveyance of the related Mortgaged
Property. With respect to any Mortgage Loans, except as set forth in the related
Prospectus Supplement, the Servicer will generally enforce any due-on-sale
clause to the extent it has knowledge of the conveyance or proposed conveyance
of the underlying Mortgaged Property and it is entitled to do so under
applicable law; provided, however, that the Servicer will not take any action in
relation to the enforcement of any due-on-sale provision which would adversely
affect or jeopardize coverage under any applicable insurance policy. See
"Certain Legal Aspects of Mortgage Loans--Due-on-Sale Clauses" and "Description
of the Agreements--Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements--Due-on-Sale Provisions." The Contracts, in
general, prohibit the sale or transfer of the related Manufactured Homes without
the consent of the Servicer and permit the acceleration of the maturity of the
Contracts by the Servicer upon any such sale or transfer that is not consented
to. It is expected that the Servicer will permit most transfers of Manufactured
Homes and not accelerate the maturity of the related Contracts. In certain
cases, the transfer may be made by a delinquent obligor in order to avoid a
repossession of the Manufactured Home. In the case of a transfer of a
Manufactured Home after which the Servicer desires to accelerate the maturity of
the related Contract, the Servicer's ability to do so will depend on the
enforceability under state law of the "due-on-sale clause." See "Certain Legal
Aspects of the Contracts--Transfers of Manufactured Homes; Enforceability of
Due-on-Sale Clauses."
THE DEPOSITOR
The Depositor is a direct wholly-owned subsidiary of Banc of America
Mortgage Capital Corporation and was incorporated in the State of Delaware on
July 23, 1997. The principal executive offices of the Depositor are located at
Bank of America Corporate Center, 100 North Tryon Street, Charlotte, North
Carolina 28255. Its telephone number is (704) 386-2400.
27
The Depositor formerly was an indirect wholly-owned subsidiary of
NationsBank Corporation. On September 30, 1998, BankAmerica Corporation was
merged with and into NationsBank Corporation with the latter entity surviving.
Upon completion of the merger, NationsBank Corporation changed its name first to
BankAmerica Corporation and then to Bank of America Corporation. As a result,
the Depositor is now an indirect wholly-owned subsidiary of Bank of America
Corporation.
The Depositor does not have, nor is it expected in the future to have, any
significant assets.
DESCRIPTION OF THE SECURITIES
General
The Certificates of each Series (including any Class of Certificates not
offered hereby) will represent the entire beneficial ownership interest in the
Trust Fund created pursuant to the applicable Agreement. If a Series of
Securities includes Notes, such Notes will represent indebtedness of the related
Trust Fund and will be issued and secured pursuant to an Indenture. Each Series
of Securities will consist of one or more Classes of Securities that may (i)
provide for the accrual of interest thereon based on fixed, variable or
adjustable rates; (ii) be senior (collectively, "Senior Securities") or
subordinate (collectively, "Subordinate Securities") to one or more other
Classes of Securities in respect of certain distributions on the Securities;
(iii) be entitled either to (A) principal distributions, with disproportionately
low, nominal or no interest distributions or (B) interest distributions, with
disproportionately low, nominal or no principal distributions (collectively,
"Strip Securities"); (iv) provide for distributions of accrued interest thereon
commencing only following the occurrence of certain events, such as the
retirement of one or more other Classes of Securities of such Series
(collectively, "Accrual Securities"); (v) provide for payments of principal as
described in the related Prospectus Supplement, from all or only a portion of
the Assets in such Trust Fund, to the extent of available funds, in each case as
described in the related Prospectus Supplement; and/or (vi) provide for
distributions based on a combination of two or more components thereof with one
or more of the characteristics described in this paragraph including a Strip
Security component. If so specified in the related Prospectus Supplement,
distributions on one or more Classes of a Series of Securities may be limited to
collections from a designated portion of the Assets in the related Trust Fund
(each such portion of Assets, an "Asset Group"). Any such Classes may include
Classes of Offered Securities.
Each Class of Offered Securities of a Series will be issued in minimum
denominations corresponding to the Security Balances or, in the case of certain
Classes of Strip Securities, notional amounts or percentage interests specified
in the related Prospectus Supplement. The transfer of any Offered Securities may
be registered and such Securities may be exchanged without the payment of any
service charge payable in connection with such registration of transfer or
exchange, but the Depositor or the Trustee or any agent thereof may require
payment of a sum sufficient to cover any tax or other governmental charge. One
or more Classes of Securities of a Series may be issued in fully registered,
certificated form ("Definitive Securities") or in book-entry form ("Book-Entry
Securities"), as provided in the related Prospectus Supplement. See "Risk
Factors--Risks Associated with the Securities--Book-Entry Securities May
Experience Certain Problems and "Description of the Securities--Book-Entry
Registration and Definitive Securities." Definitive Securities will be
exchangeable for other Securities of the same Class and Series of a like
aggregate Security Balance, notional amount or percentage interest but of
different authorized denominations. See "Risk Factors--Risks Associated with the
Securities--Securities May Not be Liquid."
Distributions
Distributions on the Securities of each Series will be made by or on behalf
of the Trustee on each Distribution Date as specified in the related Prospectus
Supplement from the Available Distribution Amount for such Series and such
Distribution Date. Distributions (other than the final distribution) will be
made to the persons in whose names the Securities are registered at the close of
business on, unless a different date is specified in the related Prospectus
Supplement, the last business day of the month preceding the month in which the
Distribution Date occurs (the "Record Date"), and the amount of each
distribution will be determined as of the close of business on the date
specified in the related Prospectus Supplement (the "Determination Date"). All
distributions with respect to each Class of Securities on each Distribution Date
will be allocated pro rata among the outstanding Securityholders in such Class
or by random selection or as described in the related Prospectus Supplement.
Payments will be made either by wire transfer in immediately available funds to
the account of a Securityholder at a bank or other entity having appropriate
facilities therefor, if such Securityholder has so notified the Trustee or other
person required to make such payments no later than the date specified in the
related Prospectus Supplement (and, if so provided in the related Prospectus
Supplement, holds Securities in the requisite amount specified therein), or by
check mailed to the address of the person entitled thereto as it appears on the
security register; provided, however, that the final distribution in retirement
of the Securities will be made only upon presentation and surrender of the
Securities at the location specified in the notice to Securityholders of such
final distribution.
28
Available Distribution Amount
All distributions on the Securities of each Series on each Distribution
Date will be made from the Available Distribution Amount described below, in
accordance with the terms described in the related Prospectus Supplement.
Generally, the "Available Distribution Amount" for each Distribution Date equals
the sum of the following amounts:
(i) the total amount of all cash on deposit in the related Collection
Account as of the corresponding Determination Date, exclusive of:
(a) all scheduled payments of principal and interest collected
but due on a date subsequent to the related Due Period (unless a
different period is specified in the related Prospectus Supplement, a
"Due Period" with respect to any Distribution Date will commence on
the second day of the month in which the immediately preceding
Distribution Date occurs, or the day after the Cut-off Date in the
case of the first Due Period, and will end on the first day of the
month of the related Distribution Date),
(b) all prepayments, together with related payments of the
interest thereon and related Prepayment Premiums, all proceeds of any
insurance policies to be maintained in respect of each Asset (to the
extent such proceeds are not applied to the restoration of the Asset
or released in accordance with the normal servicing procedures of a
Servicer, subject to the terms and conditions applicable to the
related Asset) (collectively, "Insurance Proceeds"), all other amounts
received and retained in connection with the liquidation of Assets in
default in the Trust Fund ("Liquidation Proceeds"), and other
unscheduled recoveries received subsequent to the related Due Period,
(c) all amounts in the Collection Account that are due or
reimbursable to the Depositor, the Trustee, an Asset Seller, a
Servicer, the Master Servicer or any other entity as specified in the
related Prospectus Supplement or that are payable in respect of
certain expenses of the related Trust Fund, and (d) all amounts
received for a repurchase of an Asset from the Trust Fund for
defective documentation or a breach of representation or warranty
received subsequent to the related Due Period;
(ii) if the related Prospectus Supplement so provides, interest or
investment income on amounts on deposit in the Collection Account,
including any net amounts paid under any Cash Flow Agreements;
(iii) all advances made by a Servicer or the Master Servicer or any
other entity as specified in the related Prospectus Supplement with respect
to such Distribution Date;
(iv) if and to the extent the related Prospectus Supplement so
provides, amounts paid by a Servicer or any other entity as specified in
the related Prospectus Supplement with respect to interest shortfalls
resulting from prepayments during the related Prepayment Period; and
(v) to the extent not on deposit in the related Collection Account as
of the corresponding Determination Date, any amounts collected under, from
or in respect of any Credit Support with respect to such Distribution Date.
As described below, the entire Available Distribution Amount will be
distributed among the related Securities (including any Securities not offered
hereby) on each Distribution Date, and accordingly will be released from the
Trust Fund and will not be available for any future distributions.
29
The related Prospectus Supplement for a Series of Securities will describe
any variation in the calculation of the Available Distribution Amount for such
Series.
Distributions of Interest on the Securities
Each Class of Securities (other than Classes of Strip Securities that have
no Pass-Through Rate or interest rate) may have a different Pass-Through Rate or
interest rate, which will be a fixed, variable or adjustable rate at which
interest will accrue on such Class or a Component thereof (the "Pass-Through
Rate" in the case of Certificates). The related Prospectus Supplement will
specify the Pass-Through Rate or interest rate for each Class or component or,
in the case of a variable or adjustable Pass-Through Rate or interest rate, the
method for determining the Pass-Through Rate or interest rate. Interest on the
Securities will be calculated on the basis of a 360-day year consisting of
twelve 30-day months unless the related Prospectus Supplement specifies a
different basis.
Distributions of interest in respect of the Securities of any Class will be
made on each Distribution Date (other than any Class of Accrual Securities,
which will be entitled to distributions of accrued interest commencing only on
the Distribution Date, or under the circumstances, specified in the related
Prospectus Supplement, and any Class of Strip Securities that are not entitled
to any distributions of interest) based on the Accrued Security Interest for
such Class and such Distribution Date, subject to the sufficiency of the portion
of the Available Distribution Amount allocable to such Class on such
Distribution Date. Prior to the time interest is distributable on any Class of
Accrual Securities, the amount of Accrued Security Interest otherwise
distributable on such Class will be added to the Security Balance thereof on
each Distribution Date. With respect to each Class of Securities and each
Distribution Date (other than certain Classes of Strip Securities), "Accrued
Security Interest" will be equal to interest accrued during the related Accrual
Period on the outstanding Security Balance thereof immediately prior to the
Distribution Date, at the applicable Pass-Through Rate or interest rate, reduced
as described below. Accrued Security Interest on certain Classes of Strip
Securities will be equal to interest accrued during the related Accrual Period
on the outstanding notional amount thereof immediately prior to each
Distribution Date, at the applicable Pass-Through Rate or interest rate, reduced
as described below, or interest accrual in the manner described in the related
Prospectus Supplement. The method of determining the notional amount for a
certain Class of Strip Securities will be described in the related Prospectus
Supplement. Reference to notional amount is solely for convenience in certain
calculations and does not represent the right to receive any distributions of
principal. Unless otherwise provided in the related Prospectus Supplement, the
Accrued Security Interest on a Series of Securities will be reduced in the event
of prepayment interest shortfalls, which are shortfalls in collections of
interest for a full accrual period resulting from prepayments prior to the due
date in such accrual period on the Mortgage Loans or Contracts comprising or
underlying the Assets in the Trust Fund for such Series. The particular manner
in which such shortfalls are to be allocated among some or all of the Classes of
Securities of that Series will be specified in the related Prospectus
Supplement. The related Prospectus Supplement will also describe the extent to
which the amount of Accrued Security Interest that is otherwise distributable on
(or, in the case of Accrual Securities, that may otherwise be added to the
Security Balance of) a Class of Offered Securities may be reduced as a result of
any other contingencies, including delinquencies, losses and deferred interest
on or in respect of the Mortgage Loans or Contracts comprising or underlying the
Assets in the related Trust Fund. Unless otherwise provided in the related
Prospectus Supplement, any reduction in the amount of Accrued Security Interest
otherwise distributable on a Class of Securities by reason of the allocation to
such Class of a portion of any deferred interest on the Mortgage Loans or
Contracts comprising or underlying the Assets in the related Trust Fund will
result in a corresponding increase in the Security Balance of such Class. See
"Risk Factors--Risk Associated with the Securities--Rate of Prepayment on
Mortgage Loans May Adversely Affect Average Lives and Yields on the Securities"
and "Yield Considerations."
Distributions of Principal of the Securities
The Securities of each series, other than certain Classes of Strip
Securities, will have a Security Balance which, at any time, will equal the then
maximum amount that the holder will be entitled to receive in respect of
principal out of the future cash flow on the Assets and other assets included in
the related Trust Fund. The outstanding Security Balance of a Security will be
reduced to the extent of distributions of principal thereon from time to time
and, if and to the extent so provided in the related Prospectus Supplement, by
the amount of losses incurred in respect of the related Assets, may be increased
in respect of deferred interest on the related Mortgage Loans to the extent
provided in the related Prospectus Supplement and, in the case of Accrual
Securities prior to the Distribution Date on which distributions of interest are
required to commence, will be increased by any related Accrued Security
Interest. If so specified in the related Prospectus Supplement, the initial
aggregate Security Balance of all Classes of Securities of a Series will be
greater than the outstanding aggregate principal balance of the related Assets
as of the applicable Cut-off Date. The initial aggregate Security Balance of a
series and each Class thereof will be specified in the related Prospectus
Supplement. Distributions of principal will be made on each Distribution Date to
the Class or Classes of Securities in the amounts and in accordance with the
priorities specified in the related Prospectus Supplement. Certain Classes of
Strip Securities with no Security Balance are not entitled to any distributions
of principal.
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Categories of Classes of Securities
The Securities of any Series may be comprised of one or more Classes. Such
Classes, in general, fall into different categories. The following chart
identifies and generally defines certain of the more typical categories. The
Prospectus Supplement for a Series of Securities may identify the Classes which
comprise such Series by reference to the following categories or another
category specified in the applicable Prospectus Supplement.
Categories of Classes Definition
- --------------------- ----------
PRINCIPAL TYPES
Accretion Directed Class....................... 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 Assets for the related Series.
Component Class................................ A Class consisting of two or more specified components (each, a
"Component") as described in the applicable Prospectus
Supplement. The Components of a Class may have different
principal and/or interest payment characteristics but together
constitute a single Class and do not represent severable
interests. Each Component may be identified as falling into one
or more of the categories in this chart.
Lockout Class.................................. A senior Class that is designed not to participate in or to
participate to a limited extent in (i.e., to be "locked out"
of), for a specified period, the receipt of (1) principal
prepayments on the Assets that are allocated disproportionately
to the senior Classes of such Series as a group pursuant to a
"shifting interest" structure and/or (2) scheduled principal
payments on the Assets that are allocated to the senior Classes
as a group. A Lockout Class will typically not be entitled to
receive, or will be entitled to receive only a restricted
portion of, distributions or principal prepayments and/or
scheduled principal payments, as applicable, for a period of
several years, during which time all or a portion of such
principal payments that it would otherwise be entitled to
receive in the absence of a "lockout" structure will be
distributed in reduction of the principal balances of other
senior Classes. Lockout Classes are designed to minimize
weighted average life volatility during the lockout period.
Notional Amount Class.......................... 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.
Pass-Through Class............................. A Class of Senior Securities that is entitled to receive all or
a specified percentage of the principal payments that are
distributable to the Senior Certificates or applicable group of
Senior Certificates (other than any Ratio Strip Class) in the
aggregate on a Distribution Date and that is not designated as a
Sequential Pay Class.
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Planned Amortization Class A Class that is designed to receive principal payments using a
(also sometimes referred to predetermined principal balance schedule derived by assuming two
as a "PAC")................................. constant prepayment rates for the underlying Assets. These two
rates are the endpoints for the "structuring range" for the
Planned Amortization Class. The Planned Amortization Classes in
any Series of Securities may be subdivided into different
categories (e.g., Planned Amortization Class I ("PAC I"), Planned
Amortization Class II ("PAC II") and so forth) derived using
different structuring ranges. A PAC is designed to provide
protection against volatility of weighted average life if
prepayments occur at a constant rate within the structuring range.
Ratio Strip Class.............................. A Class that is entitled to receive a constant proportion, or
"ratio strip," of the principal payments on the underlying
Assets.
Scheduled Amortization Class................... A Class that is designed to receive principal payments using a
predetermined principal balance schedule but is not designated
as a Planned Amortization Class or Targeted Amortization Class.
The schedule is derived by assuming either two constant
prepayment rates or a single constant prepayment rate for the
underlying Assets. In the former case, the two rates are the
endpoints for the "structuring range" for the Scheduled
Amortization Class and such range generally is narrower than
that for a Planned Amortization Class. Typically, the Support
Class(es) for the applicable Series of Securities generally will
represent a smaller percentage of the Scheduled Amortization
Class than a Support Class generally would represent in relation
to a Planned Amortization Class or a Targeted Amortization
Class. A Scheduled Amortization Class is generally less
sensitive to weighted average life volatility as a result of
prepayments than a Support Class but more sensitive than a
Planned Amortization Class or a Targeted Amortization Class.
Senior Securities.............................. Classes that are entitled to receive payments of principal and
interest on each Distribution Date prior to the Classes of
Subordinated Securities.
Sequential Pay Class........................... A Class that is entitled to receive principal payments in a
prescribed sequence, that does not have a predetermined
principal balance schedule and that, in most cases, is entitled
to receive payments of principal continuously from the first
Distribution Date on which it receives principal until it is
retired. A single Class is entitled to receive principal
payments before or after other Classes in the same Series of
Securities may be identified as a Sequential Pay Class.
Subordinated Securities........................ Classes that are entitled to receive payments of principal and
interest on each Distribution Date only after the Senior
Securities and certain Classes of Subordinated Securities with
higher priority of distributions have received their full
principal and interest entitlements.
Support Class (also sometimes A Class that is entitled to receive principal payments on any
referred to as a "Companion Distribution Date only if scheduled payments have been made on
Class")..................................... specified Planned Amortization Classes, Targeted Amortization
Classes and/or Scheduled Amortization Classes.
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Targeted Amortization Class A Class that is designed to receive principal payments using a
(also sometimes referred to predetermined principal balance schedule derived by assuming a
as a "TAC")................................. single constant prepayment rate for the underlying Assets. A
TAC is designed to provide some protection against shortening of
weighted average life if prepayments occur at a rate exceeding the
assumed constant prepayment rate used to derive the principal
balances schedule of such Class.
INTEREST TYPES
Accrual Class.................................. 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.
Fixed Rate Class............................... A Class with an interest rate that is fixed throughout the life
of the Class.
Floating Rate Class............................ A Class with an interest rate that resets periodically based
upon a designated index and that varies directly with changes in
such index.
Interest Only Class............................ A Class that is entitled to receive some or all of the interest
payments made on the Assets and little or no principal.
Interest Only Classes have either no principal balance, a
nominal principal balance or a notional amount. A nominal
principal balance represents actual principal that will be paid
on the 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.
Inverse Floating Rate Class.................... A Class with an interest rate that resets periodically based
upon a designated index and that varies inversely with changes
in such index and with changes in the interest rate payable on
the related Floating Rate Class.
Prepayment Premium Class....................... A Class that is only entitled to penalties or premiums, if any,
due in connection with a full or partial prepayment of an Asset.
Principal Only Class........................... A Class that does not bear interest and is entitled to receive
only distributions in respect of principal.
Step Coupon Class.............................. A Class with a fixed interest rate that is reduced to a lower
fixed rate after a specific period of time. The difference
between the initial interest rate and the lower interest rate
will be supported by a reserve fund established on the Closing
Date.
Variable Rate Class............................ A Class with an interest rate that resets periodically and is
calculated by reference to the rate or rates of interest
applicable to the Assets.
33
Components
To the extent specified in the related Prospectus Supplement, distribution
on a Class of Securities may be based on a combination of two or more different
Components as described under "--General" above. To such extent, the
descriptions set forth under "--Distributions of Interest on the Securities" and
"--Distributions of Principal of the Securities" above also relate to Components
of such a Class of Securities. In such case, reference in such sections to
Security Balance and Pass-Through Rate or interest rate refer to the principal
balance, if any, of any such Component and the Pass-Through Rate or interest
rate, if any, on any such Component, respectively.
Distributions on the Securities of Prepayment Premiums
If so provided in the related Prospectus Supplement, Prepayment Premiums
that are collected on the Mortgage Loans in the related Trust Fund will be
distributed on each Distribution Date to the Class or Classes of Securities
entitled thereto in accordance with the provisions described in such Prospectus
Supplement.
Allocation of Losses and Shortfalls
If so provided in the Prospectus Supplement for a Series of Securities
consisting of one or more Classes of Subordinate Securities, on any Distribution
Date in respect of which losses or shortfalls in collections on the Assets have
been incurred, the amount of such losses or shortfalls will be borne first by a
Class of Subordinate Securities in the priority and manner and subject to the
limitations specified in such Prospectus Supplement. See "Description of Credit
Support" for a description of the types of protection that may be included in a
Trust Fund against losses and shortfalls on Assets comprising such Trust Fund.
Advances in Respect of Delinquencies
With respect to any Series of Securities evidencing an interest in a Trust
Fund, if so provided in the related Prospectus Supplement, the Servicer or
another entity described therein will be required as part of its servicing
responsibilities to advance on or before each Distribution Date its own funds or
funds held in the Collection Account that are not included in the Available
Distribution Amount for such Distribution Date, in an amount equal to the
aggregate of payments of principal (other than any balloon payments) and
interest (net of related servicing fees and Retained Interest) that were due on
the Assets in such Trust Fund during the related Due Period and were delinquent
on the related Determination Date, subject to the Servicer's (or another
entity's) good faith determination that such advances will be reimbursable from
Related Proceeds (as defined below). In the case of a Series of Securities that
includes one or more Classes of Subordinate Securities and if so provided in the
related Prospectus Supplement, the Servicer's (or another entity's) advance
obligation may be limited only to the portion of such delinquencies necessary to
make the required distributions on one or more Classes of Senior Securities
and/or may be subject to the Servicer's (or another entity's) good faith
determination that such advances will be reimbursable not only from Related
Proceeds but also from collections on other Assets otherwise distributable on
one or more Classes of such Subordinate Securities. See "Description of Credit
Support."
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to holders of the Class or Classes of Securities entitled
thereto, rather than to guarantee or insure against losses. Advances of the
Servicer's (or another entity's) funds will be reimbursable only out of related
recoveries on the Assets (including amounts received under any form of Credit
Support) respecting which such advances were made (as to any Assets, "Related
Proceeds") and from any other amounts specified in the related Prospectus
Supplement, including out of any amounts otherwise distributable on one or more
Classes of Subordinate Securities of such Series; provided, however, that any
such advance will be reimbursable from any amounts in the Collection Account
prior to any distributions being made on the Securities to the extent that the
Servicer (or such other entity) shall determine in good faith that such advance
(a "Nonrecoverable Advance") is not ultimately recoverable from Related Proceeds
or, if applicable, from collections on other Assets otherwise distributable on
such Subordinate Securities. If advances have been made by the Servicer from
excess funds in the Collection Account, the Servicer is required to replace such
funds in the Collection Account on any future Distribution Date to the extent
that funds in the Collection Account on such Distribution Date are less than
payments required to be made to Securityholders on such date. If so specified in
the related Prospectus Supplement, the obligations of the Servicer (or another
entity) to make advances may be secured by a cash advance reserve fund, a surety
bond, a letter of credit or another form of limited guaranty. If applicable,
information regarding the characteristics of, and the identity of any obligor
on, any such surety bond, will be set forth in the related Prospectus
Supplement.
34
If and to the extent so provided in the related Prospectus Supplement, the
Servicer (or another entity) will be entitled to receive interest at the rate
specified therein on its outstanding advances and will be entitled to pay itself
such interest periodically from general collections on the Assets prior to any
payment to Securityholders or as otherwise provided in the applicable Agreement
and described in such Prospectus Supplement.
If specified in the related Prospectus Supplement, the Master Servicer or
the Trustee will be required to make advances, subject to certain conditions
described in the Prospectus Supplement, in the event of a Servicer default.
Reports to Securityholders
With each distribution to holders of any Class of Securities of a Series,
the Servicer, the Master Servicer or the Trustee, as provided in the related
Prospectus Supplement, will forward or cause to be forwarded to each such
holder, to the Depositor and to such other parties as may be specified in the
applicable Agreement, a statement generally setting forth, in each case to the
extent applicable and available:
(i) the amount of such distribution to holders of Securities of such
Class applied to reduce the Security Balance thereof;
(ii) the amount of such distribution to holders of Securities of such
Class allocable to Accrued Security Interest;
(iii) the amount of such distribution allocable to Prepayment
Premiums;
(iv) the amount of related servicing compensation and such other
customary information as is required to enable Securityholders to prepare
their tax returns;
(v) the aggregate amount of advances included in such distribution,
and the aggregate amount of unreimbursed advances at the close of business
on such Distribution Date;
(vi) the aggregate principal balance of the Assets at the close of
business on such Distribution Date;
(vii) the number and aggregate principal balance of Mortgage Loans or
Contracts in respect of which (a) one scheduled payment is delinquent, (b)
two scheduled payments are delinquent, (c) three or more scheduled payments
are delinquent and (d) foreclosure proceedings have been commenced;
(viii) with respect to any Mortgage Loan or Contract liquidated during
the related Due Period, (a) the portion of such liquidation proceeds
payable or reimbursable to a Servicer (or any other entity) in respect of
such Mortgage Loan and (b) the amount of any loss to Securityholders;
(ix) with respect to collateral acquired by the Trust Fund through
foreclosure or otherwise (a "REO Property") relating to a Mortgage Loan or
Contract and included in the Trust Fund as of the end of the related Due
Period, the date of acquisition;
(x) with respect to each REO Property relating to a Mortgage Loan or
Contract and included in the Trust Fund as of the end of the related Due
Period, (a) the book value, (b) the principal balance of the related
Mortgage Loan or Contract immediately following such Distribution Date
(calculated as if such Mortgage Loan or Contract were still outstanding
taking into account certain limited modifications to the terms thereof
specified in the applicable Agreement), (c) the aggregate amount of
unreimbursed servicing expenses and unreimbursed advances in respect
thereof and (d) if applicable, the aggregate amount of interest accrued and
payable on related servicing expenses and related advances;
(xi) with respect to any such REO Property sold during the related Due
Period (a) the aggregate amount of sale proceeds, (b) the portion of such
sales proceeds payable or reimbursable to the Master Servicer in respect of
such REO Property or the related Mortgage Loan or Contract and (c) the
amount of any loss to Securityholders in respect of the related Mortgage
Loan;
35
(xii)the aggregate Security Balance or notional amount, as the case
may be, of each Class of Securities (including any Class of Securities not
offered hereby) at the close of business on such Distribution Date,
separately identifying any reduction in such Security Balance due to the
allocation of any loss and increase in the Security Balance of a Class of
Accrual Securities in the event that Accrued Security Interest has been
added to such balance;
(xiii) the aggregate amount of principal prepayments made during the
related Due Period;
(xiv) the amount deposited in the reserve fund, if any, on such
Distribution Date;
(xv) the amount remaining in the reserve fund, if any, as of the close
of business on such Distribution Date;
(xvi) the aggregate unpaid Accrued Security Interest, if any, on each
Class of Securities at the close of business on such Distribution Date;
(xvii) in the case of Securities with a variable Pass-Through Rate or
interest rate, the Pass-Through Rate or interest rate applicable to such
Distribution Date, and, if available, the immediately succeeding
Distribution Date, as calculated in accordance with the method specified in
the related Prospectus Supplement;
(xviii) in the case of Securities with an adjustable Pass-Through Rate
or interest rate, for statements to be distributed in any month in which an
adjustment date occurs, the adjustable Pass-Through Rate or interest rate
applicable to such Distribution Date, if available, and the immediately
succeeding Distribution Date as calculated in accordance with the method
specified in the related Prospectus Supplement;
(xix)as to any Series which includes Credit Support, the amount of
coverage of each instrument of Credit Support included therein as of the
close of business on such Distribution Date;
(xx) during the Pre-Funding Period, the remaining Pre-Funded Amount
and the portion of the Pre-Funding Amount used to acquire Subsequent
Mortgage Loans since the preceding Distribution Date;
(xxi) during the Pre-Funding Period, the amount remaining in the
Capitalized Interest Account; and (xxii) the aggregate amount of payments
by the obligors of (a) default interest, (b) late charges and (c)
assumption and modification fees collected during the related Due Period.
Within a reasonable period of time after the end of each calendar year, the
Servicer, the Master Servicer or the Trustee, as provided in the related
Prospectus Supplement, shall furnish to each Securityholder of record at any
time during the calendar year such information required by the Code and
applicable regulations thereunder to enable Securityholders to prepare their tax
returns. See "Description of the Securities--Book-Entry Registration and
Definitive Securities."
Termination
The obligations created by the applicable Agreement for each Series of
Securities will terminate upon the payment to Securityholders of that Series of
all amounts held in the Collection Account or by a Servicer, the Master
Servicer, if any, or the Trustee and required to be paid to them pursuant to
such Agreement following the earlier of (i) the final payment or other
liquidation of the last Asset subject thereto or the disposition of all property
acquired upon foreclosure of any Mortgage Loan or Contract subject thereto and
(ii) the purchase of all of the assets of the Trust Fund by the party entitled
to effect such termination, under the circumstances and in the manner set forth
in the related Prospectus Supplement. In no event, however, will the Trust Fund
continue beyond the date specified in the related Prospectus Supplement. Written
notice of termination of the applicable Agreement will be given to each
Securityholder, and the final distribution will be made only upon presentation
and surrender of the Securities at the location to be specified in the notice of
termination.
If so specified in the related Prospectus Supplement, a Series of
Securities may be subject to optional early termination through the repurchase
of the Assets in the related Trust Fund by the party specified therein, under
the circumstances and in the manner set forth therein. If so provided in the
related Prospectus Supplement, upon the reduction of the Security Balance of a
specified Class or Classes of Securities by a specified percentage, the party
specified therein will solicit bids for the purchase of all assets of the Trust
Fund, or of a sufficient portion of such assets to retire such Class or Classes
or purchase such Class or Classes at a price set forth in the related Prospectus
Supplement, in each case, under the circumstances and in the manner set forth
therein. Such price will at least equal the outstanding Security Balances and
any accrued and unpaid interest thereon (including any unpaid interest
shortfalls for prior Distribution Dates). Any sale of the Assets of the Trust
Fund will be without recourse to the Trust Fund or the Securityholders. Any such
purchase or solicitation of bids may be made only when the aggregate Security
Balance of such class or classes declines to a percentage of the Initial
Security Balance of such Securities (not to exceed 10%) specified in the related
Prospectus Supplement. In addition, if so provided in the related Prospectus
Supplement, certain Classes of Securities may be purchased or redeemed in the
manner set forth therein.
36
Optional Purchases
Subject to the provisions of the applicable Agreement, the Depositor, the
Servicer or such other party specified in the related Prospectus Supplement may,
at such party's option, repurchase (i) any Asset which is in default or as to
which default is reasonably foreseeable if, in the Depositor's, the Servicer's
or such other party's judgment, the related default is not likely to be cured by
the borrower or default is not likely to be averted and (ii) any Asset as to
which the origination of such Asset breached a representation or warranty made
with respect of such Mortgage Loan to the Depositor, the Servicer or such other
party at a price equal to the unpaid principal balance thereof plus accrued
interest thereon and under the conditions set forth in the applicable Prospectus
Supplement.
Book-Entry Registration and Definitive Securities
If so specified in the related Prospectus Supplement, one or more Classes
of Securities of a Series will be issued as Securities and will be transferable
and exchangeable at the office of the registrar identified in the related
Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, no service charge will be made for any such registration or transfer
of such Securities, but the owner may be required to pay a sum sufficient to
cover any tax or other governmental charge.
If so specified in the related Prospectus Supplement, Book-Entry Securities
may be initially represented by one or more Securities registered in the name of
DTC and be available only in the form of book-entries. If specified in the
related Prospectus Supplement, holders of Securities may hold beneficial
interests in Book-Entry Securities through DTC (in the United States) or
Clearstream or Euroclear (in Europe) directly if they are participants of such
systems, or indirectly through organizations which are participants in such
systems.
Clearstream and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in their respective names on
the books of their respective Depositaries which in turn will hold such
positions in customers' securities accounts in the Depositaries' names on the
books of DTC.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Clearstream Participants and Euroclear Participants will occur
in accordance with their applicable rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream or
Euroclear, on the other, will be effected in DTC in accordance with DTC rules on
behalf of the relevant European international clearing system by its Depositary.
However, each such cross-market transaction will require delivery of
instructions to the relevant European international clearing system by the
counterparty in such system in accordance with its rules and procedures and
within its established deadlines. The relevant European international clearing
system will, if the transaction meets its settlement requirements, deliver
instructions to its Depositary to take action to effect final settlement on its
behalf by delivering or receiving securities through DTC, and making or
receiving payment in accordance with normal procedures for same-day funds
settlement applicable to DTC. Clearstream Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
Because of time-zone differences, credits of securities received in
Clearstream or Euroclear as a result of a transaction with a Participant will be
made during subsequent securities settlement processing and dated the business
day following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the Clearstream
Participant or Euroclear Participant on such business day. Cash received in
Clearstream or Euroclear as a result of sales of Securities by or through a
Clearstream Participant or a Euroclear Participant to a Participant will be
received with value on the DTC settlement date but will be available in the
relevant Clearstream or Euroclear cash account only as of the business day
following settlement in DTC.
37
DTC is a limited purpose trust company organized under the laws of the
State of New York, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code ("UCC") and a
"clearing agency" registered pursuant to Section 17A of the Securities Exchange
Act of 1934, as amended ("Exchange Act"). DTC was created to hold securities for
its participating members ("DTC Participants") and to facilitate the clearance
and settlement of securities transactions between Participants through
electronic book-entries, thereby eliminating the need for physical movement of
securities. Participants include securities brokers and dealers, banks, trust
companies and clearing corporations which may include underwriters, agents or
dealers with respect to the Securities of any Class or Series. Indirect access
to the DTC system also is available to others such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a Participant, either directly or indirectly ("Indirect Participants"). The
rules applicable to DTC and Participants are on file with the Commission.
Beneficial owners ("Security Owners") that are not Participants or Indirect
Participants but desire to purchase, sell or otherwise transfer ownership of, or
other interests in, Book-Entry Securities may do so only through Participants
and Indirect Participants. Participants who are Security Owners of Book-Entry
Securities will receive a credit for such Securities on DTC's records. The
ownership interest of such holder will in turn be recorded on respective records
of the Participants and Indirect Participants. Such holders will not receive
written confirmation from DTC of their purchase, but are expected to receive
written confirmations providing details of the transaction, as well as periodic
statements of their holdings, from the Participant or Indirect Participant
through which the Securityholders entered into the transaction. Unless and until
Definitive Securities (as defined below) are issued, it is anticipated that the
only "holder" of Book-Entry Securities of any Series will be Cede & Co. ("Cede"
), as nominee of DTC. Security Owners will only permitted to exercise the rights
of holders indirectly through Participants and DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among Participants
on whose behalf it acts with respect to the Book-Entry Securities and is
required to receive and transmit distributions of principal of and interest on
the Book-Entry Securities. Participants and Indirect Participants with which
Security Owners have accounts with respect to the Book-Entry Securities
similarly are required to make book-entry transfers and receive and transmit
such payments on behalf of their respective Securityholders.
DTC has advised the Servicer and the Depositors that, unless and until
Definitive Securities are issued, DTC will take any action permitted to be taken
by a holder only at the direction of one or more Participants to whose DTC
accounts the Securities are credited. DTC has advised the Servicer and the
Depositors that DTC will take such action with respect to any Percentage
Interests of the Book-Entry Securities of a Series only at the direction of and
on behalf of such Participants with respect to such Percentage Interests of the
Book-Entry Securities. DTC may take actions, at the direction of the related
Participants, with respect to some Book-Entry Securities which conflict with
actions taken with respect to other Book-Entry Securities.
Clearstream (formerly known as Cedel Bank) is incorporated under the laws
of Luxembourg as a professional depository. Clearstream holds securities for its
participating organizations ("Clearstream Participants") and facilitates the
clearance and settlement of securities transactions between Clearstream
Participants through electronic book entry changes in accounts of Clearstream
Participants, thereby eliminating the need for physical movement of Securities.
Transactions may be settled in Clearstream in any of 28 currencies, including
United States dollars. Clearstream provides to Clearstream Participants, among
other things, services for safekeeping, administration, clearance and settlement
of internationally traded securities and securities lending and borrowing.
Clearstream interfaces with domestic markets in several countries. As a
professional depository, Clearstream is subject to regulation by the Luxembourg
Monetary Institute. Clearstream Participants are recognized financial
institutions around the world including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations and may include any underwriters, agents or dealers with respect
to any Class or Series of Securities offered hereby. Indirect access to
Clearstream is also available to others, such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
Clearstream Participant, either directly or indirectly.
38
Euroclear was created in 1968 to hold securities for participants of the
Euroclear System ("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
Securities and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 27 currencies, including United
States dollars. The Euroclear System includes various other services, including
securities lending and borrowing, and interfaces with domestic markets in
several countries generally similar to the arrangements for cross-market
transfers with DTC described above. The Euroclear System is operated by
Euroclear Bank S.A./N.V. (the "Euroclear Operator"), under contract with
Euroclear Clearance System S.C., a Belgian cooperative corporation (the
"Euroclear 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
Euroclear Cooperative establishes policy for the Euroclear System on behalf of
Euroclear Participants. Euroclear Participants include banks (including central
banks), securities brokers and dealers and other professional financial
intermediaries and may include any underwriters, agents or dealers with respect
to any Class or Series of Securities offered hereby. Indirect access to the
Euroclear System is also available to other firms that clear through or maintain
a custodial relationship with a Euroclear Participant, either directly or
indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within the Euroclear System, withdrawals of
securities and cash from the Euroclear System and receipts of payments with
respect to securities in the Euroclear System. All securities in the Euroclear
System are held on a fungible basis without attribution of specific Securities
to specific securities clearance accounts. The Euroclear Operator acts under the
Terms and Conditions only on behalf of Euroclear Participants, and has no record
of or relationship with persons holding through Euroclear Participants.
Payments and distributions with respect to Book-Entry Securities held
through Clearstream or Euroclear will be credited to the cash accounts of
Clearstream Participants or Euroclear Participants in accordance with the
relevant system's rules and procedures, to the extent received by Citibank, N.A.
or The Chase Manhattan Bank, the relevant depositary of Clearstream and
Euroclear (the "Depositaries"), respectively. Such payments and distributions
will be subject to tax withholding in accordance with relevant United States tax
laws and regulations. See "Certain Federal Income Tax Considerations".
Clearstream or the Euroclear Operator, as the case may be, will take any other
action permitted to be taken by a Certificateholder on behalf of a Clearstream
Participant or Euroclear Participant only in accordance with its relevant rules
and procedures and subject to its Depositary's ability to effect such actions on
its behalf through DTC.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Securities among participants of
DTC, Clearstream and Euroclear, they are under no obligation to perform or
continue to perform such procedures and such procedures may be discontinued at
any time.
39
Book-Entry Securities of a Series will be issued in registered form to
Security Owners, or their nominees, rather than to DTC (such Book-Entry
Securities being referred to herein as "Definitive Securities") only under the
circumstances provided in the related Pooling and Servicing Agreement, which
generally will include, except if otherwise provided therein, if (i) DTC or the
Servicer advises the Trustee in writing that DTC is no longer willing or able to
discharge properly its responsibilities as nominee and depository with respect
to the Book-Entry Securities of such Series and the Servicer is unable to locate
a qualified successor, (ii) the Servicer, at its sole option, elects to
terminate the book-entry system through DTC or (iii) after the occurrence of a
Servicer Termination Event, a majority of the aggregate Percentage Interest of
any Class of Securities of such Series advises DTC in writing that the
continuation of a book-entry system through DTC (or a successor thereto) to the
exclusion of any physical Securities being issued to Security Owners is no
longer in the best interests of Security Owners of such Class of Securities.
Upon issuance of Definitive Securities of a Series to Security Owners, such
Book-Entry Securities will be transferable directly (and not exclusively on a
book-entry basis) and registered holders will deal directly with the Trustee
with respect to transfers, notices and distributions.
40
DESCRIPTION OF THE AGREEMENTS
Agreements Applicable to a Series
REMIC Securities, FASIT Securities, Grantor Trust Securities
Securities representing interests in a Trust Fund, or a portion thereof,
that the Trustee will elect to have treated as REMIC Securities, FASIT
Securities or Grantor Trust Securities will be issued, and the related Trust
Fund will be created, pursuant to a pooling and servicing agreement (a "Pooling
and Servicing Agreement") among the Depositor, the Trustee and the sole Servicer
or Master Servicer, as applicable. The Assets of such Trust Fund will be
transferred to the Trust Fund and thereafter serviced in accordance with the
terms of the Pooling and Servicing Agreement. In the event there are multiple
Servicers of the Assets of such Trust Fund, each Servicer will perform its
servicing functions pursuant to a servicing agreement (each, an "Underlying
Servicing Agreement").
Securities That Are Partnership Interests for Tax Purposes and Notes
Partnership Securities that are partnership interests for tax purposes will
be issued, and the related Trust Fund will be created, pursuant to a Pooling and
Servicing Agreement.
A Series of Notes issued by a Trust Fund will be issued pursuant to an
indenture (the "Indenture") between the related Trust Fund and the Indenture
Trustee named in the related Prospectus Supplement. The Trust Fund will be
established pursuant to a deposit trust agreement (each, a "Deposit Trust
Agreement") between the Depositor and an owner trustee specified in the
Prospectus Supplement relating to such Series of Notes. The Assets securing
payment on the Notes will be serviced in accordance with a servicing agreement
(each, an "Indenture Servicing Agreement") between the related Trust Fund as
issuer of the Notes, the Servicer and the Indenture Trustee. The Pooling and
Servicing Agreements, the Indenture Servicing Agreements, the Underlying
Servicing Agreements and the Indenture are referred to each as an "Agreement."
Material Terms of the Pooling and Servicing Agreements and Underlying Servicing
Agreements
General
The following summaries describe the material provisions that may appear in
each Pooling and Servicing Agreement and Underlying Servicing Agreement. The
Prospectus Supplement for a Series of Securities will describe any provision of
the applicable Agreement relating to such Series that materially differs from
the description thereof contained in this Prospectus. The summaries do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all of the provisions of the applicable Agreement for each
Trust Fund and the description of such provisions in the related Prospectus
Supplement. The provisions of each Agreement will vary depending upon the nature
of the Securities to be issued thereunder and the nature of the related Trust
Fund. As used herein with respect to any Series, the term "Security" refers to
all of the Securities of that Series, whether or not offered hereby and by the
related Prospectus Supplement, unless the context otherwise requires. A form of
a Pooling and Servicing Agreement has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part. The Depositor will
provide a copy of the Pooling and Servicing Agreement (without exhibits)
relating to any Series of Securities without charge upon written request of a
Securityholder of such Series addressed to Asset Backed Funding Corp., Bank of
America Corporate Center, 100 North Tryon Street, Charlotte, North Carolina
28255, Attention: Vice President.
The Servicers, any Master Servicer and the Trustee with respect to any
Series of Securities will be named in the related Prospectus Supplement. In the
event there are multiple Servicers for the Assets in a Trust Fund, a Master
Servicer will perform certain administration, calculation and reporting
functions with respect to such Trust Fund and will supervise the related
Servicers pursuant to a Pooling and Servicing Agreement. With respect to Series
involving a Master Servicer, references in this Prospectus to the Servicer will
apply to the Master Servicer where non-servicing obligations are described. If
so specified in the related Prospectus Supplement, a manager or administrator
may be appointed pursuant to the Pooling and Servicing Agreement for any Trust
Fund to administer such Trust Fund.
41
Assignment of Assets; Repurchases
At the time of issuance of any Series of Securities, the Depositor will
assign (or cause to be assigned) to the designated Trustee the Assets to be
included in the related Trust Fund, together with all principal and interest to
be received on or with respect to such Assets after the Cut-off Date, other than
principal and interest due on or before the Cut-off Date and other than any
Retained Interest. The Trustee will, concurrently with such assignment, deliver
the Securities to the Depositor in exchange for the Assets and the other assets
comprising the Trust Fund for such Series. Each Asset will be identified in a
schedule appearing as an exhibit to the applicable Agreement. Such schedule will
include detailed information to the extent available and relevant (i) in respect
of each Mortgage Loan included in the related Trust Fund, including without
limitation, the city and state of the related Mortgaged Property and type of
such property, the Mortgage Rate and, if applicable, the applicable index,
margin, adjustment date and any rate cap information, the original and remaining
term to maturity, the original and outstanding principal balance and balloon
payment, if any, the Loan-to-Value Ratio as of the date indicated and payment
and prepayment provisions, if applicable; and (ii) in respect of each Contract
included in the related Trust Fund, including without limitation the outstanding
principal amount and the Contract Rate.
With respect to each Mortgage Loan, except as otherwise specified in the
related Prospectus Supplement, the Depositor will deliver or cause to be
delivered to the Trustee (or to the custodian hereinafter referred to) certain
loan documents, which will generally include the original Mortgage Note
endorsed, without recourse, in blank or to the order of the Trustee, the
original Mortgage (or a certified copy thereof) with evidence of recording
indicated thereon and an assignment of the Mortgage to the Trustee in recordable
form. Notwithstanding the foregoing, a Trust Fund may include Mortgage Loans
where the original Mortgage Note is not delivered to the Trustee if the
Depositor delivers to the Trustee or the custodian a copy or a duplicate
original of the Mortgage Note, together with an affidavit certifying that the
original thereof has been lost or destroyed. With respect to such Mortgage
Loans, the Trustee (or its nominee) may not be able to enforce the Mortgage Note
against the related borrower. The Asset Seller or other entity specified in the
related Prospectus Supplement will be required to agree to repurchase, or
substitute for, each such Mortgage Loan that is subsequently in default if the
enforcement thereof or of the related Mortgage is materially adversely affected
by the absence of the original Mortgage Note. The applicable Agreement will
generally require the Depositor or another party specified in the related
Prospectus Supplement to promptly cause each such assignment of Mortgage to be
recorded in the appropriate public office for real property records, except in
the State of California or in other states where, in the opinion of counsel
acceptable to the Trustee, such recording is not required to protect the
Trustee's interest in the related Mortgage Loan against the claim of any
subsequent transferee or any successor to or creditor of the Depositor, the
Servicer, the relevant Asset Seller or any other prior holder of the Mortgage
Loan.
The Trustee (or a custodian) will review such Mortgage Loan documents
within a specified period of days after receipt thereof, and the Trustee (or a
custodian) will hold such documents in trust for the benefit of the
Securityholders. If any such document is found to be missing or defective in any
material respect, the Trustee (or such custodian) shall immediately notify the
Servicer and the Depositor, and the Servicer shall immediately notify the
relevant Asset Seller or other entity specified in the related Prospectus
Supplement. If the Asset Seller cannot cure the omission or defect within a
specified number of days after receipt of such notice, then unless otherwise
specified in the related Prospectus Supplement, the Asset Seller or other entity
specified in the related Prospectus Supplement will be obligated, within a
specified number of days of receipt of such notice, to repurchase the related
Mortgage Loan from the Trustee at a price equal to the sum of the unpaid
principal balance thereof, plus unpaid accrued interest at the interest rate for
such Asset from the date as to which interest was last paid to the due date in
the Due Period in which the relevant purchase is to occur, plus certain
servicing expenses that are payable to the Servicer or such other price as
specified in the related Prospectus Supplement (the "Purchase Price") or
substitute for such Mortgage Loan. There can be no assurance that an Asset
Seller or other named entity will fulfill this repurchase or substitution
obligation, and neither the Servicer nor the Depositor will be obligated to
repurchase or substitute for such Mortgage Loan if the Asset Seller or other
named entity defaults on its obligation. This repurchase or substitution
obligation constitutes the sole remedy available to the Securityholders or the
Trustee for omission of, or a material defect in, a constituent document. To the
extent specified in the related Prospectus Supplement, in lieu of curing any
omission or defect in the Asset or repurchasing or substituting for such Asset,
the Asset Seller or other named entity may agree to cover any losses suffered by
the Trust Fund as a result of such breach or defect.
42
Notwithstanding the preceding two paragraphs, the documents with respect to
Home Equity Loans, Home Improvement Contracts and Unsecured Home Improvement
Loans will be delivered to the Trustee (or a custodian) only to the extent
specified in the related Prospectus Supplement. Generally such documents will be
retained by the Servicer, which may also be the Asset Seller. In addition,
assignments of the related Mortgages to the Trustee will be recorded only to the
extent specified in the related Prospectus Supplement.
With respect to each Contract, the Servicer (which may also be the Asset
Seller) generally will maintain custody of the original Contract and copies of
documents and instruments related to each Contract and the security interest in
the Manufactured Home securing each Contract. In order to give notice of the
right, title and interest of the Trustee in the Contracts, the Depositor will
cause UCC-1 financing statements to be executed by the related Asset Seller
identifying the Depositor as secured party and by the Depositor identifying the
Trustee as the secured party and, in each case, identifying all Contracts as
collateral. The Contracts will be stamped or otherwise marked to reflect their
assignment from the Company to the Trust Fund only to the extent specified in
the related Prospectus Supplement. Therefore, if, through negligence, fraud or
otherwise, a subsequent purchaser were able to take physical possession of the
Contracts without notice of such assignment, the interest of the Trustee in the
Contracts could be defeated. See "Certain Legal Aspects of the Contracts."
While the Contract documents will not be reviewed by the Trustee or the
Servicer, if the Servicer finds that any such document is missing or defective
in any material respect, the Servicer will be required to immediately notify the
Depositor and the relevant Asset Seller or other entity specified in the related
Prospectus Supplement. If the Asset Seller or such other entity cannot cure the
omission or defect within a specified number of days after receipt of such
notice, then the Asset Seller or such other entity will be obligated, within a
specified number of days of receipt of such notice, to repurchase the related
Contract from the Trustee at the Purchase Price or substitute for such Contract.
There can be no assurance that an Asset Seller or such other entity will fulfill
this repurchase or substitution obligation, and neither the Servicer nor the
Depositor will be obligated to repurchase or substitute for such Contract if the
Asset Seller or such other entity defaults on its obligation. This repurchase or
substitution obligation constitutes the sole remedy available to the
Securityholders or the Trustee for omission of, or a material defect in, a
constituent document. To the extent specified in the related Prospectus
Supplement, in lieu of curing any omission or defect in the Asset or
repurchasing or substituting for such Asset, the Asset Seller may agree to cover
any losses suffered by the Trust Fund as a result of such breach or defect.
Representations and Warranties; Repurchases
To the extent provided in the related Prospectus Supplement the Depositor
will, with respect to each Asset, make or assign certain representations and
warranties, as of a specified date (the person making such representations and
warranties including the Depositor, the "Warranting Party") covering, by way of
example, the following types of matters: (i) the accuracy of the information set
forth for such Asset on the schedule of Assets appearing as an exhibit to the
applicable Agreement; (ii) in the case of a Mortgage Loan, the existence of
title insurance insuring the lien priority of the Mortgage Loan and, in the case
of a Contract, that the Contract creates a valid first security interest in or
lien on the related Manufactured Home; (iii) the authority of the Warranting
Party to sell the Asset; (iv) the payment status of the Asset; (v) in the case
of a Mortgage Loan, the existence of customary provisions in the related
Mortgage Note and Mortgage to permit realization against the Mortgaged Property
of the benefit of the security of the Mortgage; and (vi) the existence of hazard
and extended perils insurance coverage on the Mortgaged Property or Manufactured
Home.
Any Warranting Party shall be an Asset Seller or an affiliate thereof or
such other person acceptable to the Depositor and shall be identified in the
related Prospectus Supplement.
Representations and warranties made in respect of an Asset may have been
made as of a date prior to the applicable Cut-off Date. A substantial period of
time may have elapsed between such date and the date of initial issuance of the
related Series of Securities evidencing an interest in such Asset. In the event
of a breach of any such representation or warranty, the Warranting Party will be
obligated to reimburse the Trust Fund for losses caused by any such breach or
either cure such breach or repurchase or replace the affected Asset as described
below. Since the representations and warranties may not address events that may
occur following the date as of which they were made, the Warranting Party will
have a reimbursement, cure, repurchase or substitution obligation in connection
with a breach of such a representation and warranty only if the relevant event
that causes such breach occurs prior to such date. Such party would have no such
obligations if the relevant event that causes such breach occurs after such
date.
43
Each Agreement will provide that the Servicer and/or Trustee or such other
entity identified in the related Prospectus Supplement will be required to
notify promptly the relevant Warranting Party of any breach of any
representation or warranty made by it in respect of an Asset that materially and
adversely affects the value of such Asset or the interests therein of the
Securityholders. If such Warranting Party cannot cure such breach within a
specified period following the date on which such party was notified of such
breach, then such Warranting Party will be obligated to repurchase such Asset
from the Trustee within a specified period from the date on which the Warranting
Party was notified of such breach, at the Purchase Price therefor. If so
provided in the Prospectus Supplement for a Series, a Warranting Party, rather
than repurchase an Asset as to which a breach has occurred, will have the
option, within a specified period after initial issuance of such Series of
Securities, to cause the removal of such Asset from the Trust Fund and
substitute in its place one or more other Assets, as applicable, in accordance
with the standards described in the related Prospectus Supplement. If so
provided in the Prospectus Supplement for a Series, a Warranting Party, rather
than repurchase or substitute an Asset as to which a breach has occurred, will
have the option to reimburse the Trust Fund or the Securityholders for any
losses caused by such breach. This reimbursement, repurchase or substitution
obligation will constitute the sole remedy available to Securityholders or the
Trustee for a breach of representation by a Warranting Party.
Neither the Depositor (except to the extent that it is the Warranting
Party) nor the Servicer will be obligated to purchase or substitute for an Asset
if a Warranting Party defaults on its obligation to do so, and no assurance can
be given that Warranting Parties will carry out such obligations with respect to
the Assets.
A Servicer will make certain representations and warranties regarding its
authority to enter into, and its ability to perform its obligations under, the
applicable Agreement. A breach of any such representation of the Servicer which
materially and adversely affects the interests of the Securityholders and which
continues unremedied for the number of days specified in the applicable
Agreement after the giving of written notice of such breach to the Servicer by
the Trustee or the Depositor, or to the Servicer, the Depositor and the Trustee
by the holders of Securities evidencing not less than 25% of the Voting Rights
or such other percentage specified in the related Prospectus Supplement, will
constitute an Event of Default under such Agreement. See "--Events of Default
under the Agreements" and "--Rights Upon Event of Default under the Agreements."
Collection Account and Related Accounts
General. The Servicer and/or the Trustee will, as to each Trust Fund,
establish and maintain or cause to be established and maintained one or more
separate accounts for the collection of payments on the related Assets
(collectively, the "Collection Account"), which must be either (i) an account or
accounts the deposits in which are insured by the Bank Insurance Fund or the
Savings Association Insurance Fund of the Federal Deposit Insurance Corporation
("FDIC") (to the limits established by the FDIC) and the uninsured deposits in
which are otherwise secured such that the Securityholders have a claim with
respect to the funds in the Collection Account or a perfected first priority
security interest against any collateral securing such funds that is superior to
the claims of any other depositors or general creditors of the institution with
which the Collection Account is maintained or (ii) otherwise maintained with a
bank or trust company, and in a manner, satisfactory to the Rating Agency or
Agencies rating any Class of Securities of such Series. The collateral eligible
to secure amounts in the Collection Account is limited to United States
government securities and other investment grade obligations specified in the
applicable Agreement ("Permitted Investments"). A Collection Account may be
maintained as an interest bearing or a non-interest bearing account and the
funds held therein may be invested pending each succeeding Distribution Date in
certain short-term Permitted Investments. Any interest or other income earned on
funds in the Collection Account will be paid to the Servicer or its designee as
additional servicing compensation. The Collection Account may be maintained with
an institution that is an affiliate of the Servicer, if applicable, provided
that such institution meets the standards imposed by the Rating Agency or
Agencies. If permitted by the Rating Agency or Agencies, a Collection Account
may contain funds relating to more than one Series of mortgage pass-through
certificates and may contain other funds respecting payments on mortgage loans
belonging to the Servicer or serviced or master serviced by it on behalf of
others.
44
Deposits. A Servicer or the Trustee will deposit or cause to be deposited
in the Collection Account for one or more Trust Funds on a daily basis, or such
other period provided in the applicable Agreement, the following payments and
collections received, or advances made, by the Servicer or the Trustee or on its
behalf subsequent to the Cut-off Date (other than payments due on or before the
Cut-off Date, and exclusive of any amounts representing a Retained Interest):
(i) all payments on account of principal, including principal
prepayments, on the Assets;
(ii) all payments on account of interest on the Assets, including any
default interest collected, in each case net of any portion thereof
retained by a Servicer as its servicing compensation and net of any
Retained Interest;
(iii)Liquidation Proceeds and Insurance Proceeds, together with the
net proceeds on a monthly basis with respect to any Assets acquired for the
benefit of Securityholders;
(iv) any amounts paid under any instrument or drawn from any fund that
constitutes Credit Support for the related Series of Securities as
described under "Description of Credit Support";
(v) any advances made as described under "Description of the
Securities--Advances in Respect of Delinquencies";
(vi) any amounts paid under any Cash Flow Agreement, as described
under "Description of the Trust Funds--Cash Flow Agreements";
(vii)all proceeds of any Asset or, with respect to a Mortgage Loan,
property acquired in respect thereof purchased by the Depositor, any Asset
Seller or any other specified person as described under "--Assignment of
Assets; Repurchases" and "--Representations and Warranties; Repurchases,"
all proceeds of any defaulted Mortgage Loan purchased as described under
"--Realization Upon Defaulted Assets," and all proceeds of any Asset
purchased as described under "Description of the Securities--Termination";
(viii) any amounts paid by a Servicer to cover certain interest
shortfalls arising out of the prepayment of Assets in the Trust Fund as
described under "Description of the Agreements--Retained Interest;
Servicing Compensation and Payment of Expenses";
(ix) to the extent that any such item does not constitute additional
servicing compensation to a Servicer, any payments on account of
modification or assumption fees, late payment charges or Prepayment
Premiums on the Assets;
(x) all payments required to be deposited in the Collection Account
with respect to any deductible clause in any blanket insurance policy
described under "--Hazard Insurance Policies";
(xi) any amount required to be deposited by a Servicer or the Trustee
in connection with losses realized on investments for the benefit of the
Servicer or the Trustee, as the case may be, of funds held in the
Collection Account; and
(xii)any other amounts required to be deposited in the Collection
Account as provided in the applicable Agreement and described in the
related Prospectus Supplement.
Withdrawals. A Servicer or the Trustee may, from time to time, make
withdrawals from the Collection Account for each Trust Fund for any of the
following purposes:
to make distributions to the Securityholders on each Distribution Date;
(i) to reimburse a Servicer for unreimbursed amounts advanced as
described under "Description of the Securities--Advances in Respect of
Delinquencies," such reimbursement to be made out of amounts received which
were identified and applied by the Servicer as late collections of interest
(net of related servicing fees and Retained Interest) on and principal of
the particular Assets with respect to which the advances were made or out
of amounts drawn under any form of Credit Support with respect to such
Assets;
45
(ii) to reimburse a Servicer for unpaid servicing fees earned and
certain unreimbursed servicing expenses incurred with respect to Assets and
properties acquired in respect thereof, such reimbursement to be made out
of amounts that represent Liquidation Proceeds and Insurance Proceeds
collected on the particular Assets and properties, and net income collected
on the particular properties, with respect to which such fees were earned
or such expenses were incurred or out of amounts drawn under any form of
Credit Support with respect to such Assets and properties;
(iii) to reimburse a Servicer for any advances described in clause
(ii) above and any servicing expenses described in clause (iii) above
which, in the Servicer's good faith judgment, will not be recoverable from
the amounts described in clauses (ii) and (iii), respectively, such
reimbursement to be made from amounts collected on other Assets or, if and
to the extent so provided by the applicable Agreement and described in the
related Prospectus Supplement, just from that portion of amounts collected
on other Assets that is otherwise distributable on one or more Classes of
Subordinate Securities, if any, remain outstanding, and otherwise any
outstanding Class of Securities, of the related Series;
(iv) if and to the extent described in the related Prospectus
Supplement, to pay a Servicer interest accrued on the advances described in
clause (ii) above and the servicing expenses described in clause (iii)
above while such advances and servicing expenses remain outstanding and
unreimbursed;
(v) to reimburse a Servicer, the Depositor, or any of their respective
directors, officers, employees and agents, as the case may be, for certain
expenses, costs and liabilities incurred thereby, as and to the extent
described under "--Certain Matters Regarding Servicers, the Master Servicer
and the Depositor";
(vi) if and to the extent described in the related Prospectus
Supplement, to pay (or to transfer to a separate account for purposes of
escrowing for the payment of) the Trustee's fees;
(vii) to reimburse the Trustee or any of its directors, officers,
employees and agents, as the case may be, for certain expenses, costs and
liabilities incurred thereby, as and to the extent described under
"--Certain Matters Regarding the Trustee";
(viii) to pay a Servicer, as additional servicing compensation,
interest and investment income earned in respect of amounts held in the
Collection Account;
(ix) to pay the person entitled thereto any amounts deposited in the
Collection Account that were identified and applied by the Servicer as
recoveries of Retained Interest;
(x) to pay for costs reasonably incurred in connection with the proper
management and maintenance of any Mortgaged Property acquired for the
benefit of Securityholders by foreclosure or by deed in lieu of foreclosure
or otherwise, such payments to be made out of income received on such
property;
(xi) if one or more elections have been made to treat the Trust Fund
or designated portions thereof as a REMIC or a FASIT, to pay any federal,
state or local taxes imposed on the Trust Fund or its assets or
transactions, as and to the extent described under "Federal Income Tax
Consequences--REMICs--Taxes That May Be Imposed on the REMIC Pool" or in
the applicable Prospectus Supplement, respectively;
(xii) to pay for the cost of an independent appraiser or other expert
in real estate matters retained to determine a fair sale price for a
defaulted Mortgage Loan or a property acquired in respect thereof in
connection with the liquidation of such Mortgage Loan or property;
(xiii) to pay for the cost of various opinions of counsel obtained
pursuant to the applicable Agreement for the benefit of Securityholders;
(xiv) to pay for the costs of recording the applicable Agreement if
such recordation materially and beneficially affects the interests of
Securityholders, provided that such payment shall not constitute a waiver
with respect to the obligation of the Warranting Party to remedy any breach
of representation or warranty under the applicable Agreement;
46
(xv) to pay the person entitled thereto any amounts deposited in the
Collection Account in error, including amounts received on any Asset after
its removal from the Trust Fund whether by reason of purchase or
substitution as contemplated by "--Assignment of Assets; Repurchase" and
"--Representations and Warranties; Repurchases" or otherwise;
(xvi) to make any other withdrawals permitted by the applicable
Agreement; and
(xvii) to clear and terminate the Collection Account at the
termination of the Trust Fund.
Other Collection Accounts. Notwithstanding the foregoing, if so specified
in the related Prospectus Supplement, the applicable Agreement for any Series of
Securities may provide for the establishment and maintenance of a separate
collection account into which the Servicer will deposit on a daily basis the
amounts described under "--Deposits" above for one or more Series of Securities.
Any amounts on deposit in any such collection account will be withdrawn
therefrom and deposited into the appropriate Collection Account by a time
specified in the related Prospectus Supplement. To the extent specified in the
related Prospectus Supplement, any amounts which could be withdrawn from the
Collection Account as described under "--Withdrawals" above, may also be
withdrawn from any such collection account. The Prospectus Supplement will set
forth any restrictions with respect to any such collection account, including
investment restrictions and any restrictions with respect to financial
institutions with which any such collection account may be maintained.
Collection and Other Servicing Procedures. The Servicer is required to make
reasonable efforts to collect all scheduled payments under the Assets and will
follow or cause to be followed such collection procedures as it would follow
with respect to assets that are comparable to the Assets and held for its own
account, provided such procedures are consistent with (i) the terms of the
applicable Agreement and any related hazard insurance policy or instrument of
Credit Support, if any, included in the related Trust Fund described herein or
under "Description of Credit Support," (ii) applicable law and (iii) the general
servicing standard specified in the related Prospectus Supplement or, if no such
standard is so specified, its normal servicing practices (in either case, the
"Servicing Standard"). In connection therewith, the Servicer will be permitted
in its discretion to waive any late payment charge or penalty interest in
respect of a late payment on an Asset.
Each Servicer will also be required to perform other customary functions of
a servicer of comparable assets, including maintaining hazard insurance policies
as described herein and in any related Prospectus Supplement, and filing and
settling claims thereunder; maintaining, to the extent required by the
applicable Agreement, escrow or impoundment accounts of obligors for payment of
taxes, insurance and other items required to be paid by any obligor pursuant to
the terms of the Assets; processing assumptions or substitutions in those cases
where the Servicer has determined not to enforce any applicable due-on-sale
clause; attempting to cure delinquencies; supervising foreclosures or
repossessions; inspecting and managing Mortgaged Properties or Manufactured
Homes under certain circumstances; and maintaining accounting records relating
to the Assets. The Servicer or such other entity specified in the related
Prospectus Supplement will be responsible for filing and settling claims in
respect of particular Assets under any applicable instrument of Credit Support.
See "Description of Credit Support."
The Servicer may agree to modify, waive or amend any term of any Asset in a
manner consistent with the Servicing Standard so long as the modification,
waiver or amendment will not (i) affect the amount or timing of any scheduled
payments of principal or interest on the Asset or (ii) in its judgment,
materially impair the security for the Asset or reduce the likelihood of timely
payment of amounts due thereon. The Servicer also may agree to any modification,
waiver or amendment that would so affect or impair the payments on, or the
security for, an Asset if, unless otherwise provided in the related Prospectus
Supplement, (i) in its judgment, a material default on the Asset has occurred or
a payment default is reasonably foreseeable and (ii) in its judgment, such
modification, waiver or amendment is reasonably likely to produce a greater
recovery with respect to the Asset on a present value basis than would
liquidation. The Servicer is required to notify the Trustee in the event of any
modification, waiver or amendment of any Asset.
In the case of Multifamily Loans, a mortgagor's failure to make required
Mortgage Loan payments may mean that operating income is insufficient to service
the Mortgage Loan debt, or may reflect the diversion of that income from the
servicing of the Mortgage Loan debt. In addition, a mortgagor under a
Multifamily Loan that is unable to make Mortgage Loan payments may also be
unable to make timely payment of all required taxes and otherwise to maintain
and insure the related Mortgaged Property. In general, the Servicer will be
required to monitor any Multifamily Loan that is in default, evaluate whether
the causes of the default can be corrected over a reasonable period without
significant impairment of the value of the related Mortgaged Property, initiate
corrective action in cooperation with the mortgagor if cure is likely, inspect
the related Multifamily Property and take such other actions as are consistent
with the applicable Agreement. A significant period of time may elapse before
the Servicer is able to assess the success of any such corrective action or the
need for additional initiatives. The time within which the Servicer can make the
initial determination of appropriate action, evaluate the success of corrective
action, develop additional initiatives, institute foreclosure proceedings and
actually foreclose may vary considerably depending on the particular Multifamily
Loan, the Multifamily Property, the mortgagor, the presence of an acceptable
party to assume the Multifamily Loan and the laws of the jurisdiction in which
the Multifamily Property is located.
47
Realization Upon Defaulted Assets
Generally, the Servicer is required to monitor any Assets which is in
default, initiate corrective action in cooperation with the mortgagor or obligor
if cure is likely, inspect the Asset and take such other actions as are
consistent with the Servicing Standard. A significant period of time may elapse
before the Servicer is able to assess the success of such corrective action or
the need for additional initiatives.
Any Agreement relating to a Trust Fund that includes Mortgage Loans or
Contracts may grant to the Servicer and/or the holder or holders of certain
Classes of Securities a right of first refusal to purchase from the Trust Fund
at a predetermined purchase price any such Mortgage Loan or Contract as to which
a specified number of scheduled payments thereunder are delinquent. Any such
right granted to the holder of an Offered Security will be described in the
related Prospectus Supplement. The related Prospectus Supplement will also
describe any such right granted to any person if the predetermined purchase
price is less than the Purchase Price described under "--Representations and
Warranties; Repurchases."
If so specified in the related Prospectus Supplement, the Servicer may
offer to sell any defaulted Mortgage Loan or Contract described in the preceding
paragraph and not otherwise purchased by any person having a right of first
refusal with respect thereto, if and when the Servicer determines, consistent
with the Servicing Standard, that such a sale would produce a greater recovery
on a present value basis than would liquidation through foreclosure,
repossession or similar proceedings. The applicable Agreement will provide that
any such offering be made in a commercially reasonable manner for a specified
period and that the Servicer accept the highest cash bid received from any
person (including itself, an affiliate of the Servicer or any Securityholder)
that constitutes a fair price for such defaulted Mortgage Loan or Contract. In
the absence of any bid determined in accordance with the applicable Agreement to
be fair, the Servicer shall proceed with respect to such defaulted Mortgage Loan
or Contract as described below. Any bid in an amount at least equal to the
Purchase Price described under "--Representations and Warranties; Repurchases"
will in all cases be deemed fair.
The Servicer, on behalf of the Trustee, may at any time institute
foreclosure proceedings, exercise any power of sale contained in any mortgage,
obtain a deed in lieu of foreclosure, or otherwise acquire title to a Mortgaged
Property securing a Mortgage Loan by operation of law or otherwise and may at
any time repossess and realize upon any Manufactured Home, if such action is
consistent with the Servicing Standard and a default on such Mortgage Loan or
Contract has occurred or, in the Servicer's judgment, is imminent.
If title to any Mortgaged Property is acquired by a Trust Fund as to which
a REMIC election has been made, the Servicer, on behalf of the Trust Fund, will
be required to sell the Mortgaged Property by the close of the third calendar
year after the year of acquisition, unless (i) the Internal Revenue Service (the
"IRS") grants an extension of time to sell such property or (ii) the Trustee
receives an opinion of independent counsel to the effect that the holding of the
property by the Trust Fund subsequent to two years after its acquisition will
not result in the imposition of a tax on the Trust Fund or cause the Trust Fund
to fail to qualify as a REMIC under the Code at any time that any Securities are
outstanding. Subject to the foregoing, the Servicer will be required to (i)
solicit bids for any Mortgaged Property so acquired in such a manner as will be
reasonably likely to realize a fair price for such property and (ii) accept the
first (and, if multiple bids are contemporaneously received, the highest) cash
bid received from any person that constitutes a fair price. The applicability of
these limitations if a FASIT election is made with respect to all or a part of
the Trust Fund will be described in the applicable Prospectus Supplement.
The limitations imposed by the applicable Agreement and the REMIC
provisions or the FASIT provisions of the Code (if a REMIC election or a FASIT
election, respectively, has been made with respect to the related Trust Fund) on
the ownership and management of any Mortgaged Property acquired on behalf of the
Trust Fund may result in the recovery of an amount less than the amount that
would otherwise be recovered. See "Certain Legal Aspects of Mortgage
Loans--Foreclosure."
48
If recovery on a defaulted Asset under any related instrument of Credit
Support is not available, the Servicer nevertheless will be obligated to follow
or cause to be followed such normal practices and procedures as it deems
necessary or advisable to realize upon the defaulted Asset. If the proceeds of
any liquidation of the property securing the defaulted Asset are less than the
outstanding principal balance of the defaulted Asset plus interest accrued
thereon at the applicable interest rate, plus the aggregate amount of expenses
incurred by the Servicer in connection with such proceedings and which are
reimbursable under the applicable Agreement, the Trust Fund will realize a loss
in the amount of such difference. The Servicer will be entitled to withdraw or
cause to be withdrawn from the Collection Account out of the Liquidation
Proceeds recovered on any defaulted Asset, prior to the distribution of such
Liquidation Proceeds to Securityholders, amounts representing its normal
servicing compensation on the Security, unreimbursed servicing expenses incurred
with respect to the Asset and any unreimbursed advances of delinquent payments
made with respect to the Asset.
If any property securing a defaulted Asset is damaged the Servicer is not
required to expend its own funds to restore the damaged property unless it
determines (i) that such restoration will increase the proceeds to
Securityholders on liquidation of the Asset after reimbursement of the Servicer
for its expenses and (ii) that such expenses will be recoverable by it from
related Insurance Proceeds or Liquidation Proceeds.
As servicer of the Assets, a Servicer, on behalf of itself, the Trustee and
the Securityholders, will present claims to the obligor under each instrument of
Credit Support, and will take such reasonable steps as are necessary to receive
payment or to permit recovery thereunder with respect to defaulted Assets.
If a Servicer or its designee recovers payments under any instrument of
Credit Support with respect to any defaulted Assets, the Servicer will be
entitled to withdraw or cause to be withdrawn from the Collection Account out of
such proceeds, prior to distribution thereof to Securityholders, amounts
representing its normal servicing compensation on such Asset, unreimbursed
servicing expenses incurred with respect to the Asset and any unreimbursed
advances of delinquent payments made with respect to the Asset. See "--Hazard
Insurance Policies" and "Description of Credit Support."
Hazard Insurance Policies
Mortgage Loans. Generally, each Agreement for a Trust Fund comprised of
Mortgage Loans will require the Servicer to cause the mortgagor on each Mortgage
Loan to maintain a hazard insurance policy providing for such coverage as is
required under the related Mortgage or, if any Mortgage permits the holder
thereof to dictate to the mortgagor the insurance coverage to be maintained on
the related Mortgaged Property, then such coverage as is consistent with the
Servicing Standard. Such coverage will be in general in an amount equal to the
lesser of the principal balance owing on such Mortgage Loan (but not less than
the amount necessary to avoid the application of any co-insurance clause
contained in the hazard insurance policy) and the amount necessary to fully
compensate for any damage or loss to the improvements on the Mortgaged Property
on a replacement cost basis or such other amount specified in the related
Prospectus Supplement. The ability of the Servicer to assure that hazard
insurance proceeds are appropriately applied may be dependent upon its being
named as an additional insured under any hazard insurance policy and under any
other insurance policy referred to below, or upon the extent to which
information in this regard is furnished by mortgagors. All amounts collected by
the Servicer under any such policy (except for amounts to be applied to the
restoration or repair of the Mortgaged Property or released to the mortgagor in
accordance with the Servicer's normal servicing procedures, subject to the terms
and conditions of the related Mortgage and Mortgage Note) will be deposited in
the Collection Account. The applicable Agreement may provide that the Servicer
may satisfy its obligation to cause each mortgagor to maintain such a hazard
insurance policy by the Servicer's maintaining a blanket policy insuring against
hazard losses on the Mortgage Loans. If such blanket policy contains a
deductible clause, the Servicer will be required to deposit in the Collection
Account all sums that would have been deposited therein but for such clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements of the property by fire,
lightning, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the Mortgage Loans will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms, and therefore will not contain identical terms and
conditions, the basic terms thereof are dictated by respective state laws, and
most such policies typically do not cover any physical damage resulting from
war, revolution, governmental actions, floods and other water-related causes,
earth movement (including earthquakes, landslides and mudflows), wet or dry rot,
vermin, domestic animals and certain other kinds of uninsured risks.
49
The hazard insurance policies covering the Mortgaged Properties securing
the Mortgage Loans will typically contain a coinsurance clause that in effect
requires the insured at all times to carry insurance of a specified percentage
(generally 80% to 90%) of the full replacement value of the improvements on the
property in order to recover the full amount of any partial loss. If the
insured's coverage falls below this specified percentage, such clause generally
provides that the insurer's liability in the event of partial loss does not
exceed the lesser of (i) the replacement cost of the improvements less physical
depreciation and (ii) such proportion of the loss as the amount of insurance
carried bears to the specified percentage of the full replacement cost of such
improvements.
Each Agreement for a Trust Fund comprised of Mortgage Loans will require
the Servicer to cause the mortgagor on each Mortgage Loan to maintain all such
other insurance coverage with respect to the related Mortgaged Property as is
consistent with the terms of the related Mortgage and the Servicing Standard,
which insurance may typically include flood insurance (if the related Mortgaged
Property was located at the time of origination in a federally designated flood
area).
Any cost incurred by the Servicer in maintaining any such insurance policy
will be added to the amount owing under the Mortgage Loan where the terms of the
Mortgage Loan so permit; provided, however, that the addition of such cost will
not be taken into account for purposes of calculating the distribution to be
made to Securityholders. Such costs may be recovered by the Servicer from the
Collection Account, with interest thereon, as provided by the applicable
Agreement.
Under the terms of the Mortgage Loans, mortgagors will generally be
required to present claims to insurers under hazard insurance policies
maintained on the related Mortgaged Properties. The Servicer, on behalf of the
Trustee and Securityholders, is obligated to present or cause to be presented
claims under any blanket insurance policy insuring against hazard losses on
Mortgaged Properties securing the Mortgage Loans. However, the ability of the
Servicer to present or cause to be presented such claims is dependent upon the
extent to which information in this regard is furnished to the Servicer by
mortgagors.
Contracts
Generally, the terms of the applicable Agreement for a Trust Fund comprised
of Contracts will require the Servicer to cause to be maintained with respect to
each Contract one or more hazard insurance policies which provide, at a minimum,
the same coverage as a standard form fire and extended coverage insurance policy
that is customary for manufactured housing, issued by a company authorized to
issue such policies in the state in which the Manufactured Home is located, and
in an amount which is not less than the maximum insurable value of such
Manufactured Home or the principal balance due from the obligor on the related
Contract, whichever is less; provided, however, that the amount of coverage
provided by each such hazard insurance policy shall be sufficient to avoid the
application of any co-insurance clause contained therein. When a Manufactured
Home's location was, at the time of origination of the related Contract, within
a federally designated special flood hazard area, the Servicer shall cause such
flood insurance to be maintained, which coverage shall be at least equal to the
minimum amount specified in the preceding sentence or such lesser amount as may
be available under the federal flood insurance program. Each hazard insurance
policy caused to be maintained by the Servicer shall contain a standard loss
payee clause in favor of the Servicer and its successors and assigns. If any
obligor is in default in the payment of premiums on its hazard insurance policy
or policies, the Servicer shall pay such premiums out of its own funds, and may
add separately such premium to the obligor's obligation as provided by the
Contract, but may not add such premium to the remaining principal balance of the
Contract.
The Servicer may maintain, in lieu of causing individual hazard insurance
policies to be maintained with respect to each Manufactured Home, and shall
maintain, to the extent that the related Contract does not require the obligor
to maintain a hazard insurance policy with respect to the related Manufactured
Home, one or more blanket insurance policies covering losses on the obligor's
interest in the Contracts resulting from the absence or insufficiency of
individual hazard insurance policies. The Servicer shall pay the premium for
such blanket policy on the basis described therein and shall pay any deductible
amount with respect to claims under such policy relating to the Contracts.
50
Fidelity Bonds and Errors and Omissions Insurance
Each Agreement will require that the Servicer obtain and maintain in effect
a fidelity bond or similar form of insurance coverage (which may provide blanket
coverage) or any combination thereof insuring against loss occasioned by fraud,
theft or other intentional misconduct of the officers, employees and agents of
the Servicer. The applicable Agreement will allow the Servicer to self-insure
against loss occasioned by the errors and omissions of the officers, employees
and agents of the Servicer so long as certain criteria set forth in such
Agreement are met.
Due-on-Sale Provisions
The Mortgage Loans may contain clauses requiring the consent of the
mortgagee to any sale or other transfer of the related Mortgaged Property, or
due-on-sale clauses entitling the mortgagee to accelerate payment of the
Mortgage Loan upon any sale, transfer or conveyance of the related Mortgaged
Property. The Servicer will generally enforce any due-on-sale clause to the
extent it has knowledge of the conveyance or proposed conveyance of the
underlying Mortgaged Property and it is entitled to do so under applicable law;
provided, however, that the Servicer will not take any action in relation to the
enforcement of any due-on-sale provision which would adversely affect or
jeopardize coverage under any applicable insurance policy. Any fee collected by
or on behalf of the Servicer for entering into an assumption agreement will be
retained by or on behalf of the Servicer as additional servicing compensation.
See "Certain Legal Aspects of Mortgage Loans--Due-on-Sale Clauses." The
Contracts may also contain such clauses. The Servicer will generally permit such
transfer so long as the transferee satisfies the Servicer's then applicable
underwriting standards. The purpose of such transfers is often to avoid a
default by the transferring obligor. See "Certain Legal Aspects of the
Contracts--Transfers of Manufactured Homes; Enforceability of "Due-on-Sale"
Clauses."
Retained Interest; Servicing Compensation and Payment of Expenses
The Prospectus Supplement for a Series of Securities will specify whether
there will be any Retained Interest in the Assets, and, if so, the initial owner
thereof. If so, the Retained Interest will be established on a loan-by-loan
basis and will be specified on an exhibit to the applicable Agreement. A
"Retained Interest" in an Asset represents a specified portion of the interest
payable thereon. The Retained Interest will be deducted from mortgagor payments
as received and will not be part of the related Trust Fund.
The Servicer's primary servicing compensation with respect to a Series of
Securities will come from the periodic payment to it of a portion of the
interest payment on each Asset or such other amount specified in the related
Prospectus Supplement. Since any Retained Interest and a Servicer's primary
compensation are percentages of the principal balance of each Asset, such
amounts will decrease in accordance with the amortization of the Assets. The
Prospectus Supplement with respect to a Series of Securities evidencing
interests in a Trust Fund that includes Mortgage Loans or Contracts may provide
that, as additional compensation, the Servicer may retain all or a portion of
assumption fees, modification fees, late payment charges or Prepayment Premiums
collected from mortgagors and any interest or other income which may be earned
on funds held in the Collection Account or any account established by a Servicer
pursuant to the applicable Agreement.
The Servicer may, to the extent provided in the related Prospectus
Supplement, pay from its servicing compensation certain expenses incurred in
connection with its servicing and managing of the Assets, including, without
limitation, payment of the fees and disbursements of the Trustee and independent
accountants, payment of expenses incurred in connection with distributions and
reports to Securityholders, and payment of any other expenses described in the
related Prospectus Supplement. Certain other expenses, including certain
expenses relating to defaults and liquidations on the Assets and, to the extent
so provided in the related Prospectus Supplement, interest thereon at the rate
specified therein may be borne by the Trust Fund.
If and to the extent provided in the related Prospectus Supplement, the
Servicer may be required to apply a portion of the servicing compensation
otherwise payable to it in respect of any Due Period to certain interest
shortfalls resulting from the voluntary prepayment of any Assets in the related
Trust Fund during such period prior to their respective due dates therein.
51
Evidence as to Compliance
Each Agreement relating to Assets which include Mortgage Loans or Contracts
will provide that on or before a specified date in each year, beginning with the
first such date at least six months after the related Cut-off Date, a firm of
independent public accountants will furnish a statement to the Trustee to the
effect that, on the basis of the examination by such firm conducted
substantially in compliance with either the Uniform Single Attestation Program
for Mortgage Bankers, the Audit Program for Mortgages serviced for FHLMC or such
other program used by the Servicer, the servicing by or on behalf of the
Servicer of mortgage loans under agreements substantially similar to each other
(including the applicable Agreement) was conducted in compliance with the terms
of such agreements or such program except for any significant exceptions or
errors in records that, in the opinion of the firm, either the Audit Program for
Mortgages serviced for FHLMC, or paragraph 4 of the Uniform Single Attestation
Program for Mortgage Bankers, or such other program, requires it to report.
Each such Agreement will also provide for delivery to the Trustee, on or
before a specified date in each year, of an annual statement signed by two
officers of the Servicer to the effect that the Servicer has fulfilled its
obligations under the applicable Agreement throughout the preceding calendar
year or other specified twelve-month period.
Copies of such annual accountants' statement and such statements of
officers will be obtainable by Securityholders without charge upon written
request to the Servicer or other entity specified in the related Prospectus
Supplement at the address set forth in the related Prospectus Supplement.
Certain Matters Regarding Servicers, the Master Servicer and the Depositor
The Servicers and Master Servicer under each Agreement will be named in the
related Prospectus Supplement. The entities serving as Servicer or Master
Servicer may be affiliates of the Depositor and may have other normal business
relationships with the Depositor or the Depositor's affiliates. Reference herein
to the Servicer shall be deemed to be to the Master Servicer, if applicable.
The applicable Agreement will provide that the Servicer may resign from its
obligations and duties thereunder only upon a determination that its duties
under such Agreement are no longer permissible under applicable law or are in
material conflict by reason of applicable law with any other activities carried
on by it, the other activities of the Servicer so causing such a conflict being
of a type and nature carried on by the Servicer at the date of such Agreement.
No such resignation will become effective until the Trustee or a successor
servicer has assumed the Servicer's obligations and duties under the applicable
Agreement.
Each Agreement will further provide that neither any Servicer, the
Depositor nor any director, officer, employee, or agent of a Servicer or the
Depositor will be under any liability to the related Trust Fund or
Securityholders for any action taken, or for refraining from the taking of any
action, in good faith pursuant to the applicable Agreement; provided, however,
that neither a Servicer, the Depositor nor any such person will be protected
against any breach of a representation, warranty or covenant made in such
Agreement, or against any liability specifically imposed thereby, or against any
liability which would otherwise be imposed by reason of willful misfeasance, bad
faith or gross negligence in the performance of obligations or duties thereunder
or by reason of reckless disregard of obligations and duties thereunder. Each
Agreement will further provide that any Servicer, the Depositor and any
director, officer, employee or agent of a Servicer or the Depositor will be
entitled to indemnification by the related Trust Fund and will be held harmless
against any loss, liability or expense incurred in connection with any legal
action relating to the applicable Agreement or the Securities; provided,
however, that such indemnification will not extend to any loss, liability or
expense (i) specifically imposed by such Agreement or otherwise incidental to
the performance of obligations and duties thereunder, including, in the case of
a Servicer, the prosecution of an enforcement action in respect of any specific
Mortgage Loan or Mortgage Loans or Contract or Contracts (except as any such
loss, liability or expense shall be otherwise reimbursable pursuant to such
Agreement); (ii) incurred in connection with any breach of a representation,
warranty or covenant made in such Agreement; (iii) incurred by reason of
misfeasance, bad faith or gross negligence in the performance of obligations or
duties thereunder, or by reason of reckless disregard of such obligations or
duties; (iv) incurred in connection with any violation of any state or federal
securities law; or (v) imposed by any taxing authority if such loss, liability
or expense is not specifically reimbursable pursuant to the terms of the
applicable Agreement. In addition, each Agreement will provide that neither any
Servicer nor the Depositor will be under any obligation to appear in, prosecute
or defend any legal action which is not incidental to its respective
responsibilities under the applicable Agreement and which in its opinion may
involve it in any expense or liability. Any such Servicer or the Depositor may,
however, in its discretion undertake any such action which it may deem necessary
or desirable with respect to the applicable Agreement and the rights and duties
of the parties thereto and the interests of the Securityholders thereunder. In
such event, the legal expenses and costs of such action and any liability
resulting therefrom will be expenses, costs and liabilities of the
Securityholders, and the Servicer or the Depositor, as the case may be, will be
entitled to be reimbursed therefor and to charge the Collection Account.
52
Any person into which the Servicer or the Depositor may be merged or
consolidated, or any person resulting from any merger or consolidation to which
the Servicer or the Depositor is a party, or any person succeeding to the
business of the Servicer or the Depositor, will be the successor of the Servicer
or the Depositor, as the case may be, under the applicable Agreement.
Special Servicers
If and to the extent specified in the related Prospectus Supplement, a
special servicer (a "Special Servicer") may be a party to the applicable
Agreement or may be appointed by the Servicer or another specified party to
perform certain specified duties in respect of servicing the related Mortgage
Loans that would otherwise be performed by the Servicer (for example, the
workout and/or foreclosure of defaulted Mortgage Loans). The rights and
obligations of any Special Servicer will be specified in the related Prospectus
Supplement, and the Servicer will be liable for the performance of a Special
Servicer only if, and to the extent, set forth in such Prospectus Supplement.
Events of Default under the Agreements
Events of default under the applicable Agreement will generally include (i)
any failure by the Servicer to distribute or cause to be distributed to
Securityholders, or to remit to the Trustee for distribution to Securityholders,
any required payment that continues after a grace period, if any; (ii) any
failure by the Servicer duly to observe or perform in any material respect any
of its other covenants or obligations under the applicable Agreement which
continues unremedied for 30 days after written notice of such failure has been
given to the Servicer by the Trustee or the Depositor, or to the Servicer, the
Depositor and the Trustee by Securityholders evidencing not less than 25% of the
Voting Rights; (iii) any breach of a representation or warranty made by the
Servicer under the applicable Agreement which materially and adversely affects
the interests of Securityholders and which continues unremedied for 30 days
after written notice of such breach has been given to the Servicer by the
Trustee or the Depositor, or to the Servicer, the Depositor and the Trustee by
the holders of Securities evidencing not less than 25% of the Voting Rights; and
(iv) certain events of insolvency, readjustment of debt, marshaling of assets
and liabilities or similar proceedings and certain actions by or on behalf of
the Servicer indicating its insolvency or inability to pay its obligations.
Material variations to the foregoing events of default (other than to shorten
cure periods or eliminate notice requirements) will be specified in the related
Prospectus Supplement. The Trustee will, not later than the later of 60 days or
such other period specified in the related Prospectus Supplement after the
occurrence of any event which constitutes or, with notice or lapse of time or
both, would constitute an event of default and five days after certain officers
of the Trustee become aware of the occurrence of such an event, transmit by mail
to the Depositor and all Securityholders of the applicable Series notice of such
occurrence, unless such default shall have been cured or waived.
The manner of determining the "Voting Rights" of a Security or Class or
Classes of Securities will be specified in the related Prospectus Supplement.
Rights Upon Event of Default under the Agreements
So long as an event of default under an Agreement remains unremedied, the
Depositor or the Trustee may, and at the direction of holders of Securities
evidencing not less than 51% (or such other percentage specified in the related
Prospectus Supplement) of the Voting Rights, the Trustee shall terminate all of
the rights and obligations of the Servicer under the applicable Agreement and in
and to the Mortgage Loans (other than as a Securityholder or as the owner of any
Retained Interest), whereupon the Trustee will succeed to all of the
responsibilities, duties and liabilities of the Servicer under the applicable
Agreement (except that if the Trustee is prohibited by law from obligating
itself to make advances regarding delinquent Assets, or if the related
Prospectus Supplement so specifies, then the Trustee will not be obligated to
make such advances) and will be entitled to similar compensation arrangements.
In the event that the Trustee is unwilling or unable so to act, it may or, at
the written request of the holders of Securities entitled to at least 51% (or
such other percentage specified in the related Prospectus Supplement) of the
Voting Rights, it shall appoint, or petition a court of competent jurisdiction
for the appointment of, a loan servicing institution acceptable to the Rating
Agency with a net worth at the time of such appointment of at least $15,000,000
(or such other amount specified in the related Prospectus Supplement) to act as
successor to the Servicer under the applicable Agreement. Pending such
appointment, the Trustee is obligated to act in such capacity. The Trustee and
any such successor may agree upon the servicing compensation to be paid, which
in no event may be greater than the compensation payable to the Servicer under
the applicable Agreement.
53
The holders of Securities representing at least 66 2/3% (or such other
percentage specified in the related Prospectus Supplement) of the Voting Rights
allocated to the respective Classes of Securities affected by any event of
default will be entitled to waive such event of default; provided, however, that
an Event of Default involving a failure to distribute a required payment to
Securityholders described in clause (i) under "--Events of Default under the
Agreements" may be waived only by all of the Securityholders. Upon any such
waiver of an event of default, such event of default shall cease to exist and
shall be deemed to have been remedied for every purpose under the applicable
Agreement.
No Securityholders will have the right under any Agreement to institute any
proceeding with respect thereto unless such holder previously has given to the
Trustee written notice of default and unless the holders of Securities
evidencing not less than 25% (or such other percentage specified in the related
Prospectus Supplement) of the Voting Rights have made written request upon the
Trustee to institute such proceeding in its own name as Trustee thereunder and
have offered to the Trustee reasonable indemnity, and the Trustee for 60 days
(or such other number of days specified in the related Prospectus Supplement)
has neglected or refused to institute any such proceeding. The Trustee, however,
is under no obligation to exercise any of the trusts or powers vested in it by
any Agreement or to make any investigation of matters arising thereunder or to
institute, conduct or defend any litigation thereunder or in relation thereto at
the request, order or direction of any of the Securityholders covered by such
Agreement, unless such Securityholders have offered to the Trustee reasonable
security or indemnity against the costs, expenses and liabilities which may be
incurred therein or thereby.
Amendment
Each Agreement may be amended by the parties thereto, without the consent
of any Securityholders covered by the applicable Agreement, (i) to cure any
ambiguity or mistake, (ii) to correct, modify or supplement any provision
therein which may be inconsistent with any other provision therein or with the
related Prospectus Supplement, (iii) to make any other provisions with respect
to matters or questions arising under the applicable Agreement which are not
materially inconsistent with the provisions thereof, or (iv) to comply with any
requirements imposed by the Code; provided that, in the case of clause (iii),
such amendment will not adversely affect in any material respect the interests
of any Securityholders covered by the applicable Agreement as evidenced either
by an opinion of counsel to such effect or the delivery to the Trustee of
written notification from each Rating Agency that provides, at the request of
the Depositor, a rating for the Offered Securities of the related Series to the
effect that such amendment or supplement will not cause such Rating Agency to
lower or withdraw the then current rating assigned to such Securities. Each
Agreement may also be amended by the Depositor, the Servicer, if any, and the
Trustee, with the consent of the Securityholders affected thereby evidencing not
less than 51% (or such other percentage specified in the related Prospectus
Supplement) of the Voting Rights, for any purpose; provided, however, no such
amendment may (i) reduce in any manner the amount of, or delay the timing of,
payments received or advanced on Assets which are required to be distributed on
any Security without the consent of the Securityholder or (ii) reduce the
consent percentages described in this paragraph without the consent of all the
Securityholders covered by such Agreement then outstanding. However, with
respect to any Series of Securities as to which a REMIC election or a FASIT
election is to be made, the Trustee will not consent to any amendment of the
applicable Agreement unless it shall first have received an opinion of counsel
to the effect that such amendment will not result in the imposition of a tax on
the related Trust Fund or cause the related Trust Fund to fail to qualify as a
REMIC or a FASIT, as the case may be, at any time that the related Securities
are outstanding.
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The Trustee
The Trustee under each Agreement will be named in the related Prospectus
Supplement. The commercial bank, national banking association, banking
corporation or trust company serving as Trustee may have a banking relationship
with the Depositor and its affiliates, with any Servicer and its affiliates and
with any Master Servicer and its affiliates. With respect to certain Series of
Securities, a certificate administrator will perform certain duties and
functions normally performed by the Trustee. Any certificate administrator will
be a party to the applicable Agreement and will be named in the applicable
Prospectus Supplement. Any certificate administrator will have obligations and
rights similar to the Trustee as described in this Prospectus.
Duties of the Trustee
The Trustee will make no representations as to the validity or sufficiency
of any Agreement, the Securities or any Asset or related document and is not
accountable for the use or application by or on behalf of any Servicer of any
funds paid to the Master Servicer or its designee in respect of the Securities
or the Assets, or deposited into or withdrawn from the Collection Account or any
other account by or on behalf of the Servicer. If no Event of Default has
occurred and is continuing, the Trustee is required to perform only those duties
specifically required under the applicable Agreement, as applicable. However,
upon receipt of the various certificates, reports or other instruments required
to be furnished to it, the Trustee is required to examine such documents and to
determine whether they conform to the requirements of the applicable Agreement.
Certain Matters Regarding the Trustee
The Trustee and any director, officer, employee or agent of the Trustee
shall be entitled to indemnification out of the Collection Account for any loss,
liability or expense (including costs and expenses of litigation, and of
investigation, counsel fees, damages, judgments and amounts paid in settlement)
incurred in connection with the Trustee's (i) enforcing its rights and remedies
and protecting the interests, of the Securityholders during the continuance of
an Event of Default, (ii) defending or prosecuting any legal action in respect
of the applicable Agreement or Series of Securities (iii) being the mortgagee of
record with respect to the Mortgage Loans in a Trust Fund and the owner of
record with respect to any Mortgaged Property acquired in respect thereof for
the benefit of Securityholders, or (iv) acting or refraining from acting in good
faith at the direction of the holders of the related Series of Securities
entitled to not less than 25% (or such other percentage as is specified in the
applicable Agreement with respect to any particular matter) of the Voting Rights
for such Series; provided, however, that such indemnification will not extend to
any loss, liability or expense that constitutes a specific liability of the
Trustee pursuant to the applicable Agreement, or to any loss, liability or
expense incurred by reason of willful misfeasance, bad faith or negligence on
the part of the Trustee in the performance of its obligations and duties
thereunder, or by reason of its reckless disregard of such obligations or
duties, or as may arise from a breach of any representation, warranty or
covenant of the Trustee made therein.
Resignation and Removal of the Trustee
The Trustee may at any time resign from its obligations and duties under an
Agreement by giving written notice thereof to the Depositor, the Servicer, if
any, and all Securityholders. Upon receiving such notice of resignation, the
Depositor is required promptly to appoint a successor trustee acceptable to the
Servicer, if any. If no successor trustee shall have been so appointed and have
accepted appointment within 30 days after the giving of such notice of
resignation, the resigning Trustee may petition any court of competent
jurisdiction for the appointment of a successor trustee.
If at any time the Trustee shall cease to be eligible to continue as such
under the applicable Agreement, or if at any time the Trustee shall become
incapable of acting, or shall be adjudged bankrupt or insolvent, or a receiver
of the Trustee or of its property shall be appointed, or any public officer
shall take charge or control of the Trustee or of its property or affairs for
the purpose of rehabilitation, conservation or liquidation, or if a change in
the financial condition of the Trustee has adversely affected or will adversely
affect the rating on any Class of the Securities, then the Depositor may remove
the Trustee and appoint a successor trustee acceptable to the Master Servicer,
if any. Securityholders of any Series entitled to at least 51% (or such other
percentage specified in the related Prospectus Supplement) of the Voting Rights
for such Series may at any time remove the Trustee without cause and appoint a
successor trustee.
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Any resignation or removal of the Trustee and appointment of a successor
trustee shall not become effective until acceptance of appointment by the
successor trustee.
Material Terms of the Indenture
General
The following summary describes the material provisions that may appear in
each Indenture. The Prospectus Supplement for a Series of Notes will describe
any provision of the Indenture relating to such Series that materially differs
from the description thereof contained in this Prospectus. The summaries do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all of the provisions of the Indenture for a Series of Notes. A
form of an Indenture has been filed as an exhibit to the Registration Statement
of which this Prospectus is a part. The Depositor will provide a copy of the
Indenture (without exhibits) relating to any Series of Notes without charge upon
written request of a Securityholder of such Series addressed to Asset Backed
Funding Corp., Bank of America Corporate Center, 100 North Tryon Street,
Charlotte, North Carolina 28255, Attention: Vice President.
Events of Default
Events of default under the Indenture for each Series of Notes will
generally include: (i) a default for thirty (30) days (or such other number of
days specified in such Prospectus Supplement) or more in the payment of any
principal of or interest on any Note of such Series; (ii) failure to perform any
other covenant of the Depositor or the Trust Fund in the Indenture which
continues for a period of sixty (60) days (or such other number of days
specified in such Prospectus Supplement) after notice thereof is given in
accordance with the procedures described in the related Prospectus Supplement;
(iii) any representation or warranty made by the Depositor or the Trust Fund in
the Indenture or in any certificate or other writing delivered pursuant thereto
or in connection therewith with respect to or affecting such Series having been
incorrect in a material respect as of the time made, and such breach is not
cured within sixty (60) days (or such other number of days specified in such
Prospectus Supplement) after notice thereof is given in accordance with the
procedures described in the related Prospectus Supplement; (iv) certain events
of bankruptcy, insolvency, receivership or liquidation of the Depositor or the
Trust Fund; or (v) any other event of default provided with respect to Notes of
that Series.
If an event of default with respect to the Notes of any Series at the time
outstanding occurs and is continuing, either the Indenture Trustee or the
Securityholders of a majority of the then aggregate outstanding amount of the
Notes of such Series may declare the principal amount (or, if the Notes of that
Series are Accrual Securities, such portion of the principal amount as may be
specified in the terms of that Series, as provided in the related Prospectus
Supplement) of all the Notes of such Series to be due and payable immediately.
Such declaration may, under certain circumstances, be rescinded and annulled by
the Securityholders of a majority in aggregate outstanding amount of the Notes
of such Series.
If, following an event of default with respect to any Series of Notes, the
Notes of such Series have been declared to be due and payable, the Indenture
Trustee may, in its discretion, notwithstanding such acceleration, elect to
maintain possession of the collateral securing the Notes of such Series and to
continue to apply distributions on such collateral as if there had been no
declaration of acceleration if such collateral continues to provide sufficient
funds for the payment of principal of and interest on the Notes of such Series
as they would have become due if there had not been such a declaration. In
addition, the Indenture Trustee may not sell or otherwise liquidate the
collateral securing the Notes of a Series following an event of default, other
than a default in the payment of any principal or interest on any Note of such
Series for thirty (30) days or more, unless (a) the Securityholders of 100% (or
such other percentage specified in the related Prospectus Supplement) of the
then aggregate outstanding amount of the Notes of such Series consent to such
sale, (b) the proceeds of such sale or liquidation are sufficient to pay in full
the principal of and accrued interest, due and unpaid, on the outstanding Notes
of such Series at the date of such sale or (c) the Indenture Trustee determines
that such collateral would not be sufficient on an ongoing basis to make all
payments on such Notes as such payments would have become due if such Notes had
not been declared due and payable, and the Indenture Trustee obtains the consent
of the Securityholders of 66 2/3% (or such other percentage specified in the
related Prospectus Supplement) of the then aggregate outstanding amount of the
Notes of such Series.
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In the event that the Indenture Trustee liquidates the collateral in
connection with an event of default involving a default for thirty (30) days (or
such other number of days specified in the related Prospectus Supplement) or
more in the payment of principal of or interest on the Notes of a Series, the
Indenture provides that the Indenture Trustee will have a prior lien on the
proceeds of any such liquidation for unpaid fees and expenses. As a result, upon
the occurrence of such an event of default, the amount available for
distribution to the Securityholders would be less than would otherwise be the
case. However, the Indenture Trustee may not institute a proceeding for the
enforcement of its lien except in connection with a proceeding for the
enforcement of the lien of the Indenture for the benefit of the Securityholders
after the occurrence of such an event of default.
To the extent provided in the related Prospectus Supplement, in the event
the principal of the Notes of a Series is declared due and payable, as described
above, the Securityholders of any such Notes issued at a discount from par may
be entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee, in case an event of default shall occur and be continuing
with respect to a Series of Notes, the Indenture Trustee shall be under no
obligation to exercise any of the rights or powers under the Indenture at the
request or direction of any of the Securityholders of such Series, unless such
holders offered to the Indenture Trustee security or indemnity satisfactory to
it against the costs, expenses and liabilities which might be incurred by it in
complying with such request or direction. Subject to such provisions for
indemnification and certain limitations contained in the Indenture, the
Securityholders of a majority of the then aggregate outstanding amount of the
Notes of such Series shall have the right to direct the time, method and place
of conducting any proceeding for any remedy available to the Indenture Trustee
or exercising any trust or power conferred on the Indenture Trustee with respect
to the Notes of such Series, and the Securityholders of a majority of the then
aggregate outstanding amount of the Notes of such Series may, in certain cases,
waive any default with respect thereto, except a default in the payment of
principal or interest or a default in respect of a covenant or provision of the
Indenture that cannot be modified without the waiver or consent of all the
Securityholders of the outstanding Notes of such Series affected thereby.
Discharge Indenture
The Indenture will be discharged with respect to a Series of Notes (except
with respect to certain continuing rights specified in the Indenture) upon the
delivery to the Indenture Trustee for cancellation of all the Notes of such
Series or, with certain limitations, upon deposit with the Indenture Trustee of
funds sufficient for the payment in full of all of the Notes of such Series.
In addition to such discharge with certain limitations, the Indenture will
provide that, if so specified with respect to the Notes of any Series, the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of such Series (except for certain obligations relating to temporary
Notes and exchange of Notes, to register the transfer of or exchange Notes of
such Series, to replace stolen, lost or mutilated Notes of such Series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the Indenture Trustee, in trust, of money and/or direct obligations
of or obligations guaranteed by the United States of America which through the
payment of interest and principal in respect thereof in accordance with their
terms will provide money in an amount sufficient to pay the principal of and
each installment of interest on the Notes of such Series on the maturity date
for such Notes and any installment of interest on such Notes in accordance with
the terms of the Indenture and the Notes of such Series. In the event of any
such defeasance and discharge of Notes of such Series, holders of Notes of such
Series would be able to look only to such money and/or direct obligations for
payment of principal and interest, if any, on their Notes until maturity.
Indenture Trustee's Annual Report
The Indenture Trustee for each Series of Notes will be required to mail
each year to all related Securityholders a brief report relating to its
eligibility and qualification to continue as Indenture Trustee under the related
Indenture, any amounts advanced by it under the Indenture, the amount, interest
rate and maturity date of certain indebtedness owing by such Trust to the
applicable Indenture Trustee in its individual capacity, the property and funds
physically held by such Indenture Trustee as such and any action taken by it
that materially affects such Notes and that has not been previously reported.
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The Indenture Trustee
The Indenture Trustee for a Series of Notes will be specified in the
related Prospectus Supplement. The Indenture Trustee for any Series may resign
at any time, in which event the Depositor will be obligated to appoint a
successor trustee for such Series. The Depositor may also remove any such
Indenture Trustee if such Indenture Trustee ceases to be eligible to continue as
such under the related Indenture or if such Indenture Trustee becomes insolvent.
In such circumstances the Depositor will be obligated to appoint a successor
trustee for the applicable Series of Notes. Any resignation or removal of the
Indenture Trustee and appointment of a successor trustee for any Series of Notes
does not become effective until acceptance of the appointment by the successor
trustee for such Series.
The bank or trust company serving as Indenture Trustee may have a banking
relationship with the Depositor or any of its affiliates, a Servicer or any of
its affiliates or the Master Servicer or any of its affiliates.
DESCRIPTION OF CREDIT SUPPORT
General
For any Series of Securities, Credit Support may be provided with respect
to one or more Classes thereof or the related Assets. Credit Support may be in
the form of the subordination of one or more Classes of Securities, letters of
credit, insurance policies, guarantees, the establishment of one or more reserve
funds or another method of Credit Support described in the related Prospectus
Supplement, or any combination of the foregoing. If so provided in the related
Prospectus Supplement, any form of Credit Support may be structured so as to be
drawn upon by more than one Series to the extent described therein.
The coverage provided by any Credit Support will be described in the
related Prospectus Supplement. Generally, such coverage will not provide
protection against all risks of loss and will not guarantee repayment of the
entire Security Balance of the Securities and interest thereon. If losses or
shortfalls occur that exceed the amount covered by Credit Support or that are
not covered by Credit Support, Securityholders will bear their allocable share
of deficiencies. Moreover, if a form of Credit Support covers more than one
Series of Securities (each, a "Covered Trust"), Securityholders evidencing
interests in any of such Covered Trusts will be subject to the risk that such
Credit Support will be exhausted by the claims of other Covered Trusts prior to
such Covered Trust receiving any of its intended share of such coverage.
If Credit Support is provided with respect to one or more Classes of
Securities of a Series, or the related Assets, the related Prospectus Supplement
will include a description of (a) the nature and amount of coverage under such
Credit Support, (b) any conditions to payment thereunder not otherwise described
herein, (c) the conditions (if any) under which the amount of coverage under
such Credit Support may be reduced and under which such Credit Support may be
terminated or replaced and (d) the material provisions relating to such Credit
Support. Additionally, the related Prospectus Supplement will set forth certain
information with respect to the obligor under any instrument of Credit Support,
including (i) a brief description of its principal business activities, (ii) its
principal place of business, place of incorporation and the jurisdiction under
which it is chartered or licensed to do business, (iii) if applicable, the
identity of regulatory agencies that exercise primary jurisdiction over the
conduct of its business and (iv) its total assets, and its stockholders' or
policyholders' surplus, if applicable, as of the date specified in the
Prospectus Supplement. See "Risk Factors--Risks Associated with the
Securities--Credit Enhancement is Limited in Amount and Coverage."
Subordinate Securities
If so specified in the related Prospectus Supplement, one or more Classes
of Securities of a Series may be Subordinate Securities. To the extent specified
in the related Prospectus Supplement, the rights of the holders of Subordinate
Securities to receive distributions of principal and interest from the
Collection Account on any Distribution Date will be subordinated to such rights
of the holders of Senior Securities. If so provided in the related Prospectus
Supplement, the subordination of a Class may apply only in the event of (or may
be limited to) certain types of losses or shortfalls. The related Prospectus
Supplement will set forth information concerning the amount of subordination of
a Class or Classes of Subordinate Securities in a Series, the circumstances in
which such subordination will be applicable and the manner, if any, in which the
amount of subordination will be effected.
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Cross-Support Provisions
If the Assets for a Series are divided into separate groups, each
supporting a separate Class or Classes of Securities of a Series, Credit Support
may be provided by cross-support provisions requiring that distributions be made
on Senior Securities evidencing interests in one group of Mortgage Loans prior
to distributions on Subordinate Securities evidencing interests in a different
group of Mortgage Loans within the Trust Fund. The Prospectus Supplement for a
Series that includes a cross-support provision will describe the manner and
conditions for applying such provisions.
Limited Guarantee
If so specified in the related Prospectus Supplement with respect to a
Series of Securities, credit enhancement may be provided in the form of a
limited guarantee issued by a guarantor named therein.
Financial Guaranty Insurance Policy or Surety Bond
If so specified in the related Prospectus Supplement with respect to a
Series of Securities, credit enhancement may be provided in the form of a
financial guaranty insurance policy or a surety bond issued by an insurer named
therein.
Letter of Credit
Alternative credit support with respect to a Series of Securities may be
provided by the issuance of a letter of credit by the bank or financial
institution specified in the related Prospectus Supplement. The coverage, amount
and frequency of any reduction in coverage provided by a letter of credit issued
with respect to a Series of Securities will be set forth in the Prospectus
Supplement relating to such Series.
Pool Insurance Policies
If so specified in the related Prospectus Supplement relating to a Series
of Securities, a pool insurance policy for the Mortgage Loans in the related
Trust Fund will be obtained. The pool insurance policy will cover any loss
(subject to the limitations described in the related Prospectus Supplement) by
reason of default to the extent a related Mortgage Loan is not covered by any
primary mortgage insurance policy. The amount and principal terms of any such
coverage will be set forth in the Prospectus Supplement.
Special Hazard Insurance Policies
If so specified in the related Prospectus Supplement, a special hazard
insurance policy may also be obtained for the related Trust Fund in the amount
set forth in such Prospectus Supplement. The special hazard insurance policy
will, subject to the limitations described in the related Prospectus Supplement,
protect against loss by reason of damage to Mortgaged Properties caused by
certain hazards not insured against under the standard form of hazard insurance
policy for the respective states, in which the Mortgaged Properties are located.
The amount and principal terms of any such coverage will be set forth in the
Prospectus Supplement.
Mortgagor Bankruptcy Bond
If so specified in the related Prospectus Supplement, losses resulting from
a bankruptcy proceeding relating to a mortgagor affecting the Mortgage Loans in
a Trust Fund with respect to a Series of Securities will be covered under a
mortgagor bankruptcy bond (or any other instrument that will not result in a
downgrading of the rating of the Securities of a Series by the Rating Agency or
Rating Agencies that rate such Series). Any mortgagor bankruptcy bond or such
other instrument will provide for coverage in an amount meeting the criteria of
the Rating Agency or Rating Agencies rating the Securities of the related
Series, which amount will be set forth in the related Prospectus Supplement. The
amount and principal terms of any such coverage will be set forth in the
Prospectus Supplement.
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Reserve Funds
If so provided in the Prospectus Supplement for a Series of Securities,
deficiencies in amounts otherwise payable on such Securities or certain Classes
thereof will be covered by one or more reserve funds in which cash, a letter of
credit, Permitted Investments, a demand note or a combination thereof will be
deposited, in the amounts so specified in such Prospectus Supplement. The
reserve funds for a Series may also be funded over time by depositing therein a
specified amount of the distributions received on the related Assets as
specified in the related Prospectus Supplement.
Amounts on deposit in any reserve fund for a Series, together with the
reinvestment income thereon, if any, will be applied for the purposes, in the
manner, and to the extent specified in the related Prospectus Supplement. A
reserve fund may be provided to increase the likelihood of timely distributions
of principal of and interest on the Securities. If so specified in the related
Prospectus Supplement, reserve funds may be established to provide limited
protection against only certain types of losses and shortfalls. Following each
Distribution Date amounts in a reserve fund in excess of any amount required to
be maintained therein may be released from the reserve fund under the conditions
and to the extent specified in the related Prospectus Supplement and will not be
available for further application to the Securities.
Moneys deposited in any reserve funds will be invested in Permitted
Investments, to the extent specified in the related Prospectus Supplement. To
the extent specified in the related Prospectus Supplement, any reinvestment
income or other gain from such investments will be credited to the related
reserve fund for such Series, and any loss resulting from such investments will
be charged to such reserve fund. However, such income may be payable to any
related Servicer or another service provider as additional compensation. To the
extent specified in the related Prospectus Supplement, the reserve fund, if any,
for a Series will not be a part of the Trust Fund.
Additional information concerning any reserve fund will be set forth in the
related Prospectus Supplement, including the initial balance of such reserve
fund, the balance required to be maintained in the reserve fund, the manner in
which such required balance will decrease over time, the manner of funding such
reserve fund, the purposes for which funds in the reserve fund may be applied to
make distributions to Securityholders and use of investment earnings from the
reserve fund, if any.
Overcollateralization
If specified in the related Prospectus Supplement, subordination provisions
of a Trust Fund may be used to accelerate to a limited extent the amortization
of one or more Classes of Securities relative to the amortization of the related
Assets. The accelerated amortization is achieved by the application of certain
excess interest to the payment of principal of one or more Classes of
Securities. This acceleration feature creates, with respect to the Assets or
groups thereof, overcollateralization which results from the excess of the
aggregate principal balance of the related Assets, or a group thereof, over the
principal balance of the related Class or Classes of Securities. Such
acceleration may continue for the life of the related Security, or may be
limited. In the case of limited acceleration, once the required level of
overcollateralization is reached, and subject to certain provisions specified in
the related Prospectus Supplement, such limited acceleration feature may cease,
unless necessary to maintain the required level of overcollateralization.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries, which are general in nature,
of certain legal aspects of loans secured by single-family or multi-family
residential properties. Because such legal aspects are governed primarily by
applicable state law(which laws may differ substantially), the summaries do not
purport to be complete nor to reflect the laws of any particular state, nor to
encompass the laws of all states in which the security for the Mortgage Loans is
situated. The summaries are qualified in their entirety by reference to the
applicable federal and state laws governing the Mortgage Loans. See "Description
of the Trust Funds--Assets."
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General
All of the Mortgage Loans are loans evidenced by a note or bond and secured
by instruments granting a security interest in real property which may be
mortgages, deeds of trust, security deeds or deeds to secure debt, depending
upon the prevailing practice and law in the state in which the Mortgaged
Property is located. Mortgages, deeds of trust and deeds to secure debt are
herein collectively referred to as "mortgages." Any of the foregoing types of
mortgages will create a lien upon, or grant a title interest in, the subject
property, the priority of which will depend on the terms of the particular
security instrument, as well as separate, recorded, contractual arrangements
with others holding interests in the mortgaged property, the knowledge of the
parties to such instrument as well as the order of recordation of the instrument
in the appropriate public recording office. However, recording does not
generally establish priority over governmental claims for real estate taxes and
assessments and other charges imposed under governmental police powers.
Types of Mortgage Instruments
A mortgage either creates a lien against or constitutes a conveyance of
real property between two parties--a mortgagor (the borrower and usually the
owner of the subject property) and a mortgagee (the lender). In contrast, a deed
of trust is a three-party instrument, among a trustor (the equivalent of a
mortgagor), a trustee to whom the mortgaged property is conveyed, and a
beneficiary (the lender) for whose benefit the conveyance is made. As used in
this Prospectus, unless the context otherwise requires, "mortgagor" includes the
trustor under a deed of trust and a grantor under a security deed or a deed to
secure debt. Under a deed of trust, the mortgagor grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale as
security for the indebtedness evidenced by the related note. A deed to secure
debt typically has two parties. By executing a deed to secure debt, the grantor
conveys title to, as opposed to merely creating a lien upon, the subject
property to the grantee until such time as the underlying debt is repaid,
generally with a power of sale as security for the indebtedness evidenced by the
related mortgage note. In case the mortgagor under a mortgage is a land trust,
there would be an additional party because legal title to the property is held
by a land trustee under a land trust agreement for the benefit of the mortgagor.
At origination of a mortgage loan involving a land trust, the mortgagor executes
a separate undertaking to make payments on the mortgage note. The mortgagee's
authority under a mortgage, the trustee's authority under a deed of trust and
the grantee's authority under a deed to secure debt are governed by the express
provisions of the mortgage, the law of the state in which the real property is
located, certain federal laws (including, without limitation, the Soldiers' and
Sailors' Civil Relief Act of 1940) and, in some cases, in deed of trust
transactions, the directions of the beneficiary.
The Mortgages that encumber Multifamily Properties may contain an
assignment of rents and leases, pursuant to which the Mortgagor assigns to the
lender the Mortgagor's right, title and interest as landlord under each lease
and the income derived therefrom, while retaining a revocable license to collect
the rents for so long as there is no default. If the Mortgagor defaults, the
license terminates and the lender is entitled to collect the rents. Local law
may require that the lender take possession of the property and/or obtain a
court-appointed receiver before becoming entitled to collect the rents.
Interest in Real Property
The real property covered by a mortgage, deed of trust, security deed or
deed to secure debt is most often the fee estate in land and improvements.
However, such an instrument may encumber other interests in real property such
as a tenant's interest in a lease of land or improvements, or both, and the
leasehold estate created by such lease. An instrument covering an interest in
real property other than the fee estate requires special provisions in the
instrument creating such interest or in the mortgage, deed of trust, security
deed or deed to secure debt, to protect the mortgagee against termination of
such interest before the mortgage, deed of trust, security deed or deed to
secure debt is paid. The Depositor, the Asset Seller or other entity specified
in the related Prospectus Supplement will make certain representations and
warranties in the applicable Agreement or certain representations and warranties
will be assigned to the Trustee with respect to any Mortgage Loans that are
secured by an interest in a leasehold estate. Such representation and
warranties, if applicable, will be set forth in the Prospectus Supplement.
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Cooperative Loans
If specified in the Prospectus Supplement relating to a Series of Offered
Securities, the Mortgage Loans may also consist of cooperative apartment loans
("Cooperative Loans") secured by security interests in shares issued by
Cooperatives and in the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specific dwelling units in the cooperatives'
buildings. The security agreement will create a lien upon, or grant a title
interest in, the property which it covers, the priority of which will depend on
the terms of the particular security agreement as well as the order of
recordation of the agreement in the appropriate recording office. Such a lien or
title interest is not prior to the lien for real estate taxes and assessments
and other charges imposed under governmental police powers.
Each Cooperative owns in fee or has a leasehold interest in all the real
property and owns in fee or leases the building and all separate dwelling units
therein. The Cooperative is directly responsible for property management and, in
most cases, payment of real estate taxes, other governmental impositions and
hazard and liability insurance. If there is a blanket mortgage or mortgages on
the cooperative apartment building or underlying land, as is generally the case,
or an underlying lease of the land, as is the case in some instances, the
Cooperative, as property mortgagor, or lessee, as the case may be, is also
responsible for meeting these mortgage or rental obligations. A blanket mortgage
is ordinarily incurred by the cooperative in connection with either the
construction or purchase of the Cooperative's apartment building or obtaining of
capital by the Cooperative. The interest of the occupant under proprietary
leases or occupancy agreements as to which that Cooperative is the landlord are
generally subordinate to the interest of the holder of a blanket mortgage and to
the interest of the holder of a land lease. If the Cooperative is unable to meet
the payment obligations (i) arising under a blanket mortgage, the mortgagee
holding a blanket mortgage could foreclose on that mortgage and terminate all
subordinate proprietary leases and occupancy agreements or (ii) arising under
its land lease, the holder of the landlord's interest under the land lease could
terminate it and all subordinate proprietary leases and occupancy agreements.
Also, a blanket mortgage on a cooperative may provide financing in the form of a
mortgage that does not fully amortize, with a significant portion of principal
being due in one final payment at maturity. The inability of the Cooperative to
refinance a mortgage and its consequent inability to make such final payment
could lead to foreclosure by the mortgagee. Similarly, a land lease has an
expiration date and the inability of the Cooperative to extend its term or, in
the alternative, to purchase the land could lead to termination of the
Cooperative's interest in the property and termination of all proprietary leases
and occupancy agreement. In either event, a foreclosure by the holder of a
blanket mortgage or the termination of the underlying lease could eliminate or
significantly diminish the value of any collateral held by the lender that
financed the purchase by an individual tenant stockholder of cooperative shares
or, in the case of the Mortgage Loans, the collateral securing the Cooperative
Loans.
The Cooperative is owned by tenant-stockholders who, through ownership of
stock or shares in the corporation, receive proprietary lease or occupancy
agreements which confer exclusive rights to occupy specific units. Generally, a
tenant-stockholder of a Cooperative must make a monthly payment to the
Cooperative representing such tenant-stockholder's pro rata share of the
Cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a Cooperative and accompanying occupancy rights are financed through
a Cooperative Loan evidenced by a promissory note and secured by an assignment
of and a security interest in the occupancy agreement or proprietary lease and a
security interest in the related Cooperative shares. The lender generally takes
possession of the share certificate and a counterpart of the proprietary lease
or occupancy agreement and a financing statement covering the proprietary lease
or occupancy agreement and the cooperative shares is filed in the appropriate
state and local offices to perfect the lender's interest in its collateral.
Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in the
security agreement covering the assignment of the proprietary lease or occupancy
agreement and the pledge of Cooperative shares. See "Foreclosure--Cooperative
Loans" below.
Land Sale Contracts
Under Land Sale Contracts the contract seller (hereinafter referred to as
the "Contract Lender") retains legal title to the property and enters into an
agreement with the contract purchaser (hereinafter referred to as the "contract
borrower") for the payment of the purchase price, plus interest, over the term
of the Land Sale Contract. Only after full performance by the borrower of the
contract is the contract lender obligated to convey title to the real estate to
the purchaser. As with mortgage or deed of trust financing, during the effective
period of the Land Sale Contract, the contract borrower is responsible for
maintaining the property in good condition and for paying real estate taxes,
assessments and hazard insurance premiums associated with the property.
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The method of enforcing the rights of the contract lender under an
installment contract varies on a state-by-state basis depending upon the extent
to which state courts are willing, or able pursuant to state statute, to enforce
the contract strictly according to its terms. The terms of Land Sale Contracts
generally provide that upon default by the contract borrower, the borrower loses
his or her right to occupy the property, the entire indebtedness is accelerated,
and the buyer's equitable interest in the property is forfeited. The contract
lender in such a situation does not have to foreclose in order to obtain title
to the property, although in some cases a quiet title action is in order if the
contract borrower has filed the Land Sale Contract in local land records and an
ejectment action may be necessary to recover possession. In a few states,
particularly in cases of contract borrower default during the early years of a
Land Sale Contract, the courts will permit ejectment of the buyer and a
forfeiture of his or her interest in the property. However, most state
legislatures have enacted provisions by analogy to mortgage law protecting
borrowers under Land Sale Contracts from the harsh consequences of forfeiture.
Under such statues, a judicial contract may be reinstated upon full payment of
the default amount and the borrower may have a post-foreclosure statutory
redemption right. In other states, courts in equity may permit a contract
borrower with significant investment in the property under a Land Sale Contract
for the sale of real estate to share the proceeds of sale of the property after
the indebtedness is repaid or may otherwise refuse to enforce the forfeiture
clause. Nevertheless, generally speaking, the contract lender's procedures for
obtaining possession and clear title under a Land Sale Contract for the sale of
real estate in a given state are simpler and less time consuming and costly than
are the procedures for foreclosing and obtaining clear title to a mortgaged
property.
Foreclosure
General
Foreclosure is a legal procedure that allows the mortgagee to recover its
mortgage debt by enforcing its rights and available legal remedies under the
mortgage. If the mortgagor defaults in payment or performance of its obligations
under the note or mortgage, the mortgagee has the right to institute foreclosure
proceedings to sell the mortgaged property at public auction to satisfy the
indebtedness.
Foreclosure procedures with respect to the enforcement of a mortgage vary
from state to state. Two primary methods of foreclosing a mortgage are judicial
foreclosure and non-judicial foreclosure pursuant to a power of sale granted in
the mortgage instrument. There are several other foreclosure procedures
available in some states that are either infrequently used or available only in
certain limited circumstances, such as strict foreclosure.
Judicial Foreclosure
A judicial foreclosure proceeding is conducted in a court having
jurisdiction over the mortgaged property. Generally, the action is initiated by
the service of legal pleadings upon all parties having an interest of record in
the real property. Delays in completion of the foreclosure may occasionally
result from difficulties in locating defendants. When the lender's right to
foreclose is contested, the legal proceedings can be time-consuming. Upon
successful completion of a judicial foreclosure proceeding, the court generally
issues a judgment of foreclosure and appoints a referee or other officer to
conduct a public sale of the mortgaged property, the proceeds of which are used
to satisfy the judgment. Such sales are made in accordance with procedures that
vary from state to state.
Equitable Limitations on Enforceability of Certain Provisions
United States courts have traditionally imposed general equitable
principles to limit the remedies available to a mortgagee in connection with
foreclosure. These equitable principles are generally designed to relieve the
mortgagor from the legal effect of mortgage defaults, to the extent that such
effect is perceived as harsh or unfair. Relying on such principles, a court may
alter the specific terms of a loan to the extent it considers necessary to
prevent or remedy an injustice, undue oppression or overreaching, or may require
the lender to undertake affirmative and expensive actions to determine the cause
of the mortgagor's default and the likelihood that the mortgagor will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's and have required that lenders reinstate loans or recast payment
schedules in order to accommodate mortgagors who are suffering from a temporary
financial disability. In other cases, courts have limited the right of the
lender to foreclose if the default under the mortgage is not monetary, e.g., the
mortgagor failed to maintain the mortgaged property adequately or the mortgagor
executed a junior mortgage on the mortgaged property. The exercise by the court
of its equity powers will depend on the individual circumstances of each case
presented to it. Finally, some courts have been faced with the issue of whether
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that a mortgagor receive notice in addition to
statutorily-prescribed minimum notice. For the most part, these cases have
upheld the reasonableness of the notice provisions or have found that a public
sale under a mortgage providing for a power of sale does not involve sufficient
state action to afford constitutional protections to the mortgagor.
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Non-Judicial Foreclosure/Power of Sale
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale pursuant to the power of sale granted in the deed of trust. A
power of sale is typically granted in a deed of trust. It may also be contained
in any other type of mortgage instrument. A power of sale allows a non-judicial
public sale to be conducted generally following a request from the
beneficiary/lender to the trustee to sell the property upon any default by the
mortgagor under the terms of the mortgage note or the mortgage instrument and
after notice of sale is given in accordance with the terms of the mortgage
instrument, as well as applicable state law. In some states, prior to such sale,
the trustee under a deed of trust must record a notice of default and notice of
sale and send a copy to the mortgagor and to any other party who has recorded a
request for a copy of a notice of default and notice of sale. In addition, in
some states the trustee must provide notice to any other party having an
interest of record in the real property, including junior lienholders. A notice
of sale must be posted in a public place and, in most states, published for a
specified period of time in one or more newspapers. The mortgagor or junior
lienholder may then have the right, during a reinstatement period required in
some states, to cure the default by paying the entire actual amount in arrears
(without acceleration) plus the expenses incurred in enforcing the obligation.
In other states, the mortgagor or the junior lienholder is not provided a period
to reinstate the loan, but has only the right to pay off the entire debt to
prevent the foreclosure sale. Generally, the procedure for public sale, the
parties entitled to notice, the method of giving notice and the applicable time
periods are governed by state law and vary among the states. Foreclosure of a
deed to secure debt is also generally accomplished by a non-judicial sale
similar to that required by a deed of trust, except that the lender or its
agent, rather than a trustee, is typically empowered to perform the sale in
accordance with the terms of the deed to secure debt and applicable law.
Public Sale
A third party may be unwilling to purchase a mortgaged property at a public
sale because of the difficulty in determining the value of such property at the
time of sale, due to, among other things, redemption rights which may exist and
the possibility of physical deterioration of the property during the foreclosure
proceedings. For these reasons, it is common for the lender to purchase the
mortgaged property for an amount equal to or less than the underlying debt and
accrued and unpaid interest plus the expenses of foreclosure. Generally, state
law controls the amount of foreclosure costs and expenses which may be recovered
by a lender. Thereafter, subject to the mortgagor's right in some states to
remain in possession during a redemption period, if applicable, the lender will
become the owner of the property and have both the benefits and burdens of
ownership of the mortgaged property. For example, the lender will become
obligated to pay taxes, obtain casualty insurance and to make such repairs at
its own expense as are necessary to render the property suitable for sale. The
lender will commonly obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the property. Depending upon
market conditions, the ultimate proceeds of the sale of the property may not
equal the lender's investment in the property. Moreover, a lender commonly
incurs substantial legal fees and court costs in acquiring a mortgaged property
through contested foreclosure and/or bankruptcy proceedings. Generally, state
law controls the amount of foreclosure expenses and costs, including attorneys'
fees, that may be recovered by a lender.
A junior mortgagee may not foreclose on the property securing the junior
mortgage unless it forecloses subject to senior mortgages and any other prior
liens, in which case it may be obliged to make payments on the senior mortgages
to avoid their foreclosure. In addition, in the event that the foreclosure of a
junior mortgage triggers the enforcement of a "due-on-sale" clause contained in
a senior mortgage, the junior mortgagee may be required to pay the full amount
of the senior mortgage to avoid its foreclosure. Accordingly, with respect to
those Mortgage Loans, if any, that are junior mortgage loans, if the lender
purchases the property the lender's title will be subject to all senior
mortgages, prior liens and certain governmental liens.
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The proceeds received by the referee or trustee from the sale are applied
first to the costs, fees and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage under which the sale was conducted. Any
proceeds remaining after satisfaction of senior mortgage debt are generally
payable to the holders of junior mortgages and other liens and claims in order
of their priority, whether or not the mortgagor is in default. Any additional
proceeds are generally payable to the mortgagor. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgage or a subsequent ancillary proceeding or may require the
institution of separate legal proceedings by such holders.
Rights of Redemption
The purposes of a foreclosure action are to enable the mortgagee to realize
upon its security and to bar the mortgagor, and all persons who have an interest
in the property which is subordinate to the mortgage being foreclosed, from
exercise of their "equity of redemption." The doctrine of equity of redemption
provides that, until the property covered by a mortgage has been sold in
accordance with a properly conducted foreclosure and foreclosure sale, those
having an interest which is subordinate to that of the foreclosing mortgagee
have an equity of redemption and may redeem the property by paying the entire
debt with interest. In addition, in some states, when a foreclosure action has
been commenced, the redeeming party must pay certain costs of such action. Those
having an equity of redemption must generally be made parties and joined in the
foreclosure proceeding in order for their equity of redemption to be cut off and
terminated.
The equity of redemption is a common-law (non-statutory) right which exists
prior to completion of the foreclosure, is not waivable by the mortgagor, must
be exercised prior to foreclosure sale and should be distinguished from the
post-sale statutory rights of redemption. In some states, after sale pursuant to
a deed of trust or foreclosure of a mortgage, the mortgagor and foreclosed
junior lienors are given a statutory period in which to redeem the property from
the foreclosure sale. In some states, statutory redemption may occur only upon
payment of the foreclosure sale price. In other states, redemption may be
authorized if the former mortgagor pays only a portion of the sums due. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The exercise of a right of redemption
would defeat the title of any purchaser from a foreclosure sale or sale under a
deed of trust. Consequently, the practical effect of the redemption right is to
force the lender to maintain the property and pay the expenses of ownership
until the redemption period has expired. In some states, a post-sale statutory
right of redemption may exist following a judicial foreclosure, but not
following a trustee's sale under a deed of trust.
Under the REMIC Provisions currently in effect, property acquired by
foreclosure generally must not be held for more than three calendar years
following the year the Trust Fund acquired the property. With respect to a
Series of Securities for which an election is made to qualify the Trust Fund or
a part thereof as a REMIC, the applicable Agreement will permit foreclosed
property to be held for more than such period of time if the IRS grants an
extension of time within which to sell such property or independent counsel
renders an opinion to the effect that holding such property for such additional
period is permissible under the REMIC Provisions. The applicability of these
limitations if a FASIT election is made with respect to all or a part of the
Trust Fund will be described in the applicable Prospectus Supplement.
Cooperative Loans
The Cooperative shares owned by the tenant-stockholder and pledged to the
lender are, in almost all cases, subject to restrictions on transfer as set
forth in the Cooperative's certificate of incorporation and by-laws, as well as
the proprietary lease or occupancy agreement, and may be canceled by the
Cooperative for failure by the tenant-stockholder to pay rent or other
obligations or charges owed by such tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permit the Cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the Cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder under the
proprietary lease or occupancy agreement will usually constitute a default under
the security agreement between the lender and the tenant-stockholder.
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The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure on a
Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the Cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the UCC and the security
agreement relating to those shares. Article 9 of the UCC requires that a sale be
conducted in a "commercially reasonable" manner. Whether a foreclosure sale has
been conducted in a "commercially reasonable" manner will depend on the facts in
each case. In determining commercial reasonableness, a court will look to the
notice given the debtor and the method, manner, time, place and terms of the
foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperatives to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency.
In the case of foreclosure on a building which was converted from a rental
building to a building owned by a Cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property subject
to rent control and rent stabilization laws which apply to certain tenants who
elected to remain in a building so converted.
Junior Mortgages
Some of the Mortgage Loans may be secured by junior mortgages or deeds of
trust, which are subordinate to first or other senior mortgages or deeds of
trust held by other lenders. The rights of the Trust Fund as the holder of a
junior deed of trust or a junior mortgage are subordinate in lien and in payment
to those of the holder of the senior mortgage or deed of trust, including the
prior rights of the senior mortgagee or beneficiary to receive and apply hazard
insurance and condemnation proceeds and, upon default of the mortgagor, to cause
a foreclosure on the property. Upon completion of the foreclosure proceedings by
the holder of the senior mortgage or the sale pursuant to the deed of trust, the
junior mortgagee's or junior beneficiary's lien will be extinguished unless the
junior lienholder satisfies the defaulted senior loan or asserts its subordinate
interest in a property in foreclosure proceedings. See "--Foreclosure" herein.
Furthermore, because the terms of the junior mortgage or deed of trust are
subordinate to the terms of the first mortgage or deed of trust, in the event of
a conflict between the terms of the first mortgage or deed of trust and the
junior mortgage or deed of trust, the terms of the first mortgage or deed of
trust will generally govern. Upon a failure of the mortgagor or trustor to
perform any of its obligations, the senior mortgagee or beneficiary, subject to
the terms of the senior mortgage or deed of trust, may have the right to perform
the obligation itself. Generally, all sums so expended by the mortgagee or
beneficiary become part of the indebtedness secured by the mortgage or deed of
trust. To the extent a first mortgagee expends such sums, such sums will
generally have priority over all sums due under the junior mortgage.
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Rights of Redemption
The purposes of a foreclosure action are to enable the mortgagee to realize
upon its security and to bar the mortgagor, and all persons who have an interest
in the property which is subordinate to the mortgage being foreclosed, from
exercise of their "equity of redemption." The doctrine of equity of redemption
provides that, until the property covered by a mortgage has been sold in
accordance with a properly conducted foreclosure and foreclosure sale, those
having an interest which is subordinate to that of the foreclosing mortgagee
have an equity of redemption and may redeem the property by paying the entire
debt with interest. In addition, in some states, when a foreclosure action has
been commenced, the redeeming party must pay certain costs of such action. Those
having an equity of redemption must generally be made parties and joined in the
foreclosure proceeding in order for their equity of redemption to be cut off and
terminated.
The equity of redemption is a common-law (non-statutory) right which exists
prior to completion of the foreclosure, is not waivable by the mortgagor, must
be exercised prior to foreclosure sale and should be distinguished from the
post-sale statutory rights of redemption. In some states, after sale pursuant to
a deed of trust or foreclosure of a mortgage, the mortgagor and foreclosed
junior lienors are given a statutory period in which to redeem the property from
the foreclosure sale. In some states, statutory redemption may occur only upon
payment of the foreclosure sale price. In other states, redemption may be
authorized if the former mortgagor pays only a portion of the sums due. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The exercise of a right of redemption
would defeat the title of any purchaser from a foreclosure sale or sale under a
deed of trust. Consequently, the practical effect of the redemption right is to
force the lender to maintain the property and pay the expenses of ownership
until the redemption period has expired. In some states, a post-sale statutory
right of redemption may exist following a judicial foreclosure, but not
following a trustee's sale under a deed of trust.
Anti-Deficiency Legislation, the Bankruptcy Code and Other Limitations on
Lenders
Certain states have imposed statutory prohibitions which limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment would be a personal judgment against the
former borrower equal in most cases to the difference between the net amount
realized upon the public sale of the real property and the amount due to the
lender. Other statutes require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
Finally, other statutory provisions limit any deficiency judgment against the
former borrower following a judicial sale to the excess of the outstanding debt
over the fair market value of the property at the time of the public sale. The
purpose of these statutes is generally to prevent a beneficiary or a mortgagee
from obtaining a large deficiency judgment against the former borrower as a
result of low or no bids at the judicial sale.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the United States Bankruptcy
Code, 11 U.S.C. Sections 101 et seq. (the "Bankruptcy Code"), and state laws
affording relief to debtors may interfere with or affect the ability of a
secured mortgage lender to obtain payment of a mortgage loan, to realize upon
collateral and/or enforce a deficiency judgment. For example, under the
Bankruptcy Code, virtually all actions (including foreclosure actions and
deficiency judgment proceedings) are automatically stayed upon the filing of a
bankruptcy petition, and, usually, no interest or principal payments are made
during the course of the bankruptcy case. Foreclosure of an interest in real
property of a debtor in a case under the Bankruptcy Code can typically occur
only if the bankruptcy court vacates the stay; an action the court may be
reluctant to take, particularly if the debtor has the prospect of restructuring
his or her debts and the mortgage collateral is not deteriorating in value. The
delay and the consequences thereof caused by such automatic stay can be
significant. Also, under the Bankruptcy Code, the filing of a petition in
bankruptcy by or on behalf of a junior lienor (a subordinate lender secured by a
mortgage on the property) may stay a senior lender from taking action to
foreclose.
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A homeowner may file for relief under the Bankruptcy code under any of
three different chapters of the Bankruptcy code. Under Chapter 7, the assets of
the debtor are liquidated and a lender secured by a lien may "bid in" (i.e., bid
up to the amount of the debt) at the sale of the asset. See "--Foreclosure." A
homeowner may also file for relief under Chapter 11 of the bankruptcy code and
reorganize his or her debts through his or her reorganization plan.
Alternatively, a homeowner may file for relief under Chapter 13 of the
Bankruptcy Code and address his or her debts in a rehabilitation plan. (Chapter
13 is often referred to as the "wage earner chapter" or "consumer chapter"
because most individuals seeking to restructure their debts file for relief
under Chapter 13 rather than under Chapter 11.)
The Bankruptcy Code permits a mortgage loan that is secured by property
that does not consist solely of the debtor's principal residence to be modified
without the consent of the lender provided certain substantive and procedural
safeguards are met. Under the Bankruptcy Code, the lender's security interest
may be reduced to the then-current value of the property as determined by the
court if the value is less than the amount due on the loan, thereby leaving the
lender as a general unsecured creditor for the difference between the value of
the collateral and the outstanding balance of the mortgage loan. A borrower's
unsecured indebtedness will typically be discharged in full upon payment of a
substantially reduced amount. Other modifications to a mortgage loan may include
a reduction in the amount of each scheduled payment, which reduction may result
from a reduction in the rate of interest, an alteration of the repayment
schedule, an extension of the final maturity date, and/or a reduction in the
outstanding balance of the secured portion of the loan. In certain
circumstances, subject to the court's approval, a debtor in a case under Chapter
11 of the Bankruptcy Code may have the power to grant liens senior to the lien
of a mortgage.
A reorganization plan under Chapter 11 and a rehabilitation plan under
Chapter 13 of the Bankruptcy Code may each allow a debtor to cure a default with
respect to a mortgage loan on such debtor's residence by paying arrearages over
a period of time and to deaccelerate and reinstate the original mortgage loan
payment schedule, even though the lender accelerated the loan and a final
judgment of foreclosure had been entered in state court (provided no sale of the
property had yet occurred) prior to the filing of the debtor's petition under
the Bankruptcy Code. Under a Chapter 13 plan, curing of defaults must be
accomplished within the five year maximum term permitted for repayment plans,
such term commencing when the repayment plan becomes effective, while defaults
may be cured over a longer period of time under a Chapter 11 plan of
reorganization.
Generally, a repayment plan in a case under Chapter 13 may not modify the
claim of a mortgage lender if the borrower elects to retain the property, the
property is the borrower's principal residence and the property is the lender's
only collateral. Certain courts have allowed modifications when the mortgage
loan is secured both by the debtor's principal residence and by collateral that
is not "inextricably bound" to the real property, such as appliances, machinery,
or furniture. Certain courts have also allowed modifications when the Mortgage
Loan is fully unsecured at the time of bankruptcy.
The general protection for mortgages secured only by the debtor's principal
residence is not applicable in a case under Chapter 13 if the last payment on
the original payment schedule is due before the final date for payment under the
debtor's Chapter 13 plan (which date could be up to five years after the debtor
emerges from bankruptcy). Under several recently decided cases, the terms of
such a loan can be modified in the manner described above. While these decisions
are contrary to the holding in a prior case by a senior appellate court, it is
possible that the later decisions will become the accepted interpretation in
view of the language of the applicable statutory provision. If this
interpretation is adopted by a court considering the treatment in a Chapter 13
repayment plan of a Mortgage Loan, it is possible that the Mortgage Loan could
be modified.
State statutes and general principles of equity may also provide a
mortgagor with means to halt a foreclosure proceeding or sale and to force a
restructuring of a mortgage loan on terms a lender would not otherwise accept.
In a bankruptcy or similar proceeding of a mortgagor, action may be taken
seeking the recovery, as a preferential transfer or on other grounds, of any
payments made by the mortgagor under the related mortgage loan prior to the
bankruptcy or similar proceeding. Payments on long-term debt may be protected
from recovery as preferences if they are payments in the ordinary course of
business made on debts incurred in the ordinary course of business or if the
value of the collateral exceeds the debt at the time of payment. Whether any
particular payment would be protected depends upon the facts specific to a
particular transaction.
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A trustee in bankruptcy, in some cases, may be entitled to collect its
costs and expenses in preserving or selling the mortgaged property ahead of
payment to the lender. Moreover, the laws of certain states also give priority
to certain tax and mechanics liens over the lien of a mortgage. Under the
Bankruptcy Code, if the court finds that actions of the mortgagee have been
unreasonable and inequitable, the lien of the related mortgage may be
subordinated to the claims of unsecured creditors.
The National Bankruptcy Review Commission (the "Bankruptcy Commission"), an
independent commission established under the Bankruptcy Reform Act of 1994 to
study issues and make recommendations relating to the Bankruptcy Code, delivered
its report to the President and Congress in October, 1997. The Bankruptcy
Commission recommended in its report that the Bankruptcy Code be amended to
treat any claim secured only by a junior lien on a borrower's principal
residence as unsecured to the extent that the amount of such claim exceeds the
appraised value of the mortgaged property at the date of origination of the loan
minus the value of all senior liens. If such a change in the Bankruptcy Code
were to be enacted, and if such change were to apply to loans originated prior
to enactment, a substantial number of the Mortgage Loans in a Trust could be
treated, in whole or in part, as unsecured debt in a case under Chapter 13 of
the Bankruptcy Code. As a consequence, borrowers who become Chapter 13 debtors
could have substantially less incentive to make arrangements for repayment of
the Mortgage Loans, and there is, accordingly, a significant risk that the
recovery on such Mortgage Loans would be materially less than the outstanding
balance of such Mortgage Loans, or that there could be no recovery.
The Bankruptcy Commission recommendation described was not incorporated in
bankruptcy reform legislation that was passed by the House of Representatives in
June 1998. There can be no assurance, however, that such proposal would not be
enacted in other legislation.
Bankruptcy reform legislation being considered by the Senate would amend
the Bankruptcy Code (such amendment, the "TILA Amendment") to authorize
bankruptcy court judges to disallow claims based on secured debt if the creditor
failed to comply with certain provisions of the federal Truth in Lending Act. As
most recently proposed, such provision would apply retroactively to secured debt
incurred by a debtor prior to the date of effectiveness of such legislation,
including the Mortgage Loans. The House bill does not include a comparable
provision as of the date hereof. If the TILA Amendment were to become law, a
violation of the Truth in Lending act with respect to a Mortgage Loan could
result in a total loss with respect to such loan in a bankruptcy proceeding. Any
such violation would be a breach of representation and warranty of the
depositor, and the depositor would be obligated to repurchase such Mortgage Loan
as described herein.
Various proposals to amend the Bankruptcy Code in ways that could adversely
affect the value of the Mortgage Loans in a trust have been considered by
Congress, and more such proposed legislation may be considered in the future. No
assurance can be given that any particular proposal will or will not be enacted
into law, or that any provision so enacted will not differ materially from the
proposals described above.
The Bankruptcy Code provides priority to certain tax liens over the lien of
the mortgage. In addition, substantive requirements are imposed upon mortgage
lenders in connection with the origination and the servicing of mortgage loans
by numerous federal and some state consumer protection laws. These laws include
the federal Truth-in-Lending Act, Real Estate Settlement Procedures Act, Equal
Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act, and
related statutes. These federal laws impose specific statutory liabilities upon
lenders who originate mortgage loans and who fail to comply with the provisions
of the applicable laws. In some cases, this liability may affect assignees of
the Mortgage Loans.
Enforceability of Certain Provisions
Standard forms of note, mortgage and deed of trust generally contain
provisions obligating the borrower to pay a late charge if payments are not
timely made and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon late charges which a lender may collect
from a borrower for delinquent payments. Certain states also limit the amounts
that a lender may collect from a borrower as an additional charge if the loan is
prepaid.
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Courts have imposed general equitable principles upon foreclosure. These
equitable principles are generally designed to relieve the borrower from the
legal effect of defaults under the loan documents. Examples of judicial remedies
that may be fashioned include judicial requirements that the lender undertake
affirmative and expensive actions to determine the causes for the borrower's
default and the likelihood that the borrower will be able to reinstate the loan.
In some cases, courts have substituted their judgment for the lender's judgment
and have required lenders to reinstate loans or recast payment schedules to
accommodate borrowers who are suffering from temporary financial disability. In
some cases, courts have limited the right of lenders to foreclose if the default
under the mortgage instrument is not monetary, such as the borrower failing to
adequately maintain the property or the borrower executing a second mortgage or
deed of trust affecting the property. In other cases, some courts have been
faced with the issue of whether federal or state constitutional provisions
reflecting due process concerns for adequate notice require that borrowers under
the deeds of trust receive notices in addition to the statutorily-prescribed
minimum requirements. For the most part, these cases have upheld the notice
provisions as being reasonable or have found that the sale by a trustee under a
deed of trust or under a mortgage having a power of sale does not involve
sufficient state action to afford constitutional protections to the borrower.
Environmental Considerations
A lender may be subject to unforeseen environmental risks when taking a
security interest in real or personal property. Property subject to such a
security interest may be subject to federal, state, and local laws and
regulations relating to environmental protection. Such laws may regulate, among
other things: emissions of air pollutants; discharges of wastewater or storm
water; generation, transport, storage or disposal of hazardous waste or
hazardous substances; operation, closure and removal of underground storage
tanks; removal and disposal of asbestos-containing materials; management of
electrical or other equipment containing polychlorinated biphenyls ("PCBs").
Failure to comply with such laws and regulations may result in significant
penalties, including civil and criminal fines. Under the laws of certain states,
environmental contamination on a property may give rise to a lien on the
property to ensure the availability and/or reimbursement of cleanup costs.
Generally all subsequent liens on such property are subordinated to such a lien
and, in some states, even prior recorded liens are subordinated to such liens
("Superliens"). In the latter states, the security interest of the Trustee in a
property that is subject to such Superlien could be adversely affected.
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act, as amended ("CERCLA"), and under state law in certain states, a
secured party which takes a deed in lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, operates a mortgaged property or undertakes
certain types of activities that may constitute management of the mortgaged
property may become liable in certain circumstances for the costs of remedial
action ("Cleanup Costs") if hazardous wastes or hazardous substances have been
released or disposed of on the property. Such Cleanup Costs may be substantial.
CERCLA imposes strict, as well as joint and several liability for environmental
remediation and/or damage costs on several classes of "potentially responsible
parties," including current "owners and/or operators" of property, irrespective
of whether those owners or operators caused or contributed to the contamination
on the property. In addition, owners and operators of properties that generate
hazardous substances that are disposed of at other "off-site" locations may be
held strictly, jointly and severally liable for environmental remediation and/or
damages at those off-site locations. Many states also have laws that are similar
to CERCLA. Liability under CERCLA or under similar state law could exceed the
value of the property itself as well as the aggregate assets of the property
owner.
The law is unclear as to whether and under what precise circumstances
cleanup costs, or the obligation to take remedial actions, could be imposed on a
secured lender such as the Trust Fund. Under the laws of some states and under
CERCLA, a lender may be liable as an "owner or operator" for costs of addressing
releases or threatened releases of hazardous substances on a mortgaged property
if such lender or its agents or employees have "participated in the management"
of the operations of the borrower, even though the environmental damage or
threat was caused by a prior owner or current owner or operator or other third
party. Excluded from CERCLA's definition of "owner or operator" is a person "who
without participating in the management of . . . [the] facility, holds indicia
of ownership primarily to protect his security interest" (the "secured-creditor
exemption"). This exemption for holders of a security interest such as a secured
lender applies only to the extent that a lender seeks to protect its security
interest in the contaminated facility or property. Thus, if a lender's
activities begin to encroach on the actual management of such facility or
property, the lender faces potential liability as an "owner or operator" under
CERCLA. Similarly, when a lender forecloses and takes title to a contaminated
facility or property, the lender may incur potential CERCLA liability in various
circumstances, including among others, when it holds the facility or property as
an investment (including leasing the facility or property to a third party),
fails to market the property in a timely fashion or fails to properly address
environmental conditions at the property or facility.
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The Resource Conservation and Recovery Act, as amended ("RCRA"), contains a
similar secured-creditor exemption for those lenders who hold a security
interest in a petroleum underground storage tank ("UST") or in real estate
containing a UST, or that acquire title to a petroleum UST or facility or
property on which such a UST is located. As under CERCLA, a lender may lose its
secured-creditor exemption and be held liable under RCRA as a UST owner or
operator if such lender or its employees or agents participate in the management
of the UST. In addition, if the lender takes title to or possession of the UST
or the real estate containing the UST, under certain circumstances the
secured-creditor exemption may be deemed to be unavailable.
A decision in May 1990 of the United States Court of Appeals for the
Eleventh Circuit in United States v. Fleet Factors Corp. very narrowly construed
CERCLA's secured-creditor exemption. The court's opinion suggested that a lender
need not have involved itself in the day-to-day operations of the facility or
participated in decisions relating to hazardous waste to be liable under CERCLA;
rather, liability could attach to a lender if its involvement with the
management of the facility were broad enough to support the inference that the
lender had the capacity to influence the borrower's treatment of hazardous
waste. The court added that a lender's capacity to influence such decisions
could be inferred from the extent of its involvement in the facility's financial
management. A subsequent decision by the United States Court of Appeals for the
Ninth Circuit in In re Bergsoe Metal Corp., apparently disagreeing with, but not
expressly contradicting, the Fleet Factors court, held that a secured lender had
no liability absent "some actual management of the facility" on the part of the
lender.
Court decisions have taken varying views of the scope of the
secured-creditor exemption, leading to administrative and legislative efforts to
provide guidance to lenders on the scope of activities that would trigger CERCLA
and/or RCRA liability. Until recently, these efforts have failed to provide
substantial guidance.
On September 28, 1996, Congress enacted, and on September 30, 1996 the
President signed into law the Asset Conservation Lender Liability and Deposit
Insurance Protection Act of 1996 (the "Asset Conservation Act"). The Asset
Conservation Act was intended to clarify the scope of the secured creditor
exemption. This legislation more clearly defines the kinds of activities that
would constitute "participation in management" and that therefore would trigger
liability for secured parties under CERCLA. It also identified certain
activities that ordinarily would not trigger liability, provided, however, that
such activities did not otherwise rise to the level of "participation in
management." The Asset Conservation Act specifically reverses the Fleet Factors
"capacity to influence" standard. The Asset Conservation Act also provides
additional protection against liability in the event of foreclosure. However,
since the courts have not yet had the opportunity to interpret the new statutory
provisions, the scope of the additional protections offered by the Asset
Conservation Act is not fully defined. It also is important to note that the
Asset Conservation Act does not offer complete protection to lenders and that
the risk of liability remains.
If a secured lender does become liable, it may be entitled to bring an
action for contribution against the owner or operator who created the
environmental contamination or against some other liable party, but that person
or entity may be bankrupt or otherwise judgment-proof. It is therefore possible
that cleanup or other environmental liability costs could become a liability of
the Trust Fund and occasion a loss to the Trust Fund and to Securityholders in
certain circumstances. The new secured creditor amendments to CERCLA, also,
would not necessarily affect the potential for liability in actions by either a
state or a private party under other federal or state laws which may impose
liability on "owners or operators" but do not incorporate the secured-creditor
exemption.
Traditionally, residential mortgage lenders have not taken steps to
evaluate whether hazardous wastes or hazardous substances are present with
respect to any mortgaged property prior to the origination of the mortgage loan
or prior to foreclosure or accepting a deed-in-lieu of foreclosure. Neither the
Depositor nor any Servicer makes any representations or warranties or assumes
any liability with respect to: environmental conditions of such Mortgaged
Property; the absence, presence or effect of hazardous wastes or hazardous
substances on, near or emanating from such Mortgaged Property; the impact on
Securityholders of any environmental condition or presence of any substance on
or near such Mortgaged Property; or the compliance of any Mortgaged Property
with any environmental laws. In addition, no agent, person or entity otherwise
affiliated with the Depositor is authorized or able to make any such
representation, warranty or assumption of liability relative to any such
Mortgaged Property.
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Due-on-Sale Clauses
Unless the related Prospectus Supplement indicates otherwise, the Mortgage
Loans will contain due-on-sale clauses. These clauses generally provide that the
lender may accelerate the maturity of the loan if the mortgagor sells, transfers
or conveys the related Mortgaged Property. The enforceability of due-on-sale
clauses has been the subject of legislation or litigation in many states and, in
some cases, the enforceability of these clauses was limited or denied. However,
with respect to certain loans the Garn-St. Germain Depository Institutions Act
of 1982 preempts state constitutional, statutory and case law that prohibits the
enforcement of due-on-sale clauses and permits lenders to enforce these clauses
in accordance with their terms, subject to certain limited exceptions.
Due-on-sale clauses contained in mortgage loans originated by federal savings
and loan associations of federal savings banks are fully enforceable pursuant to
regulations of the United States Federal Home Loan Bank Board, as succeeded by
the Office of Thrift Supervision, which preempt state law restrictions on the
enforcement of such clauses. Similarly, "due-on-sale" clauses in mortgage loans
made by national banks and federal credit unions are now fully enforceable
pursuant to preemptive regulations of the Comptroller of the Currency and the
National Credit Union Administration, respectively.
The Garn-St. Germain Act also sets forth nine specific instances in which a
mortgage lender covered by the act (including federal savings and loan
associations and federal savings banks) may not exercise a "due-on-sale" clause,
notwithstanding the fact that a transfer of the property may have occurred.
These include intra-family transfers, certain transfers by operation of law,
leases of fewer than three years and the creation of a junior encumbrance.
Regulations promulgated under the Garn-St. Germain Act also prohibit the
imposition of a prepayment penalty upon the acceleration of a loan pursuant to a
due-on-sale clause. The inability to enforce a "due-on-sale" clause may result
in a mortgage that bears an interest rate below the current market rate being
assumed by a new home buyer rather than being paid off, which may affect the
average life of the Mortgage Loans and the number of Mortgage Loans which may
extend to maturity.
Prepayment Charges
Under certain state laws, prepayment charges may not be imposed after a
certain period of time following the origination of mortgage loans secured by
liens encumbering owner-occupied residential properties, if such loans are paid
prior to maturity. With respect to Mortgaged Properties that are owner-occupied,
it is anticipated that prepayment charges may not be imposed with respect to
many of the Mortgage Loans. The absence of such a restraint on prepayment,
particularly with respect to fixed rate Mortgage Loans having higher Mortgage
Rates, may increase the likelihood of refinancing or other early retirement of
such loans.
Subordinate Financing
Where a mortgagor encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and the
senior loan does not, a mortgagor may be more likely to repay sums due on the
junior loan than those on the senior loan. Second, acts of the senior lender
that prejudice the junior lender or impair the junior lender's security may
create a superior equity in favor of the junior lender. For example, if the
mortgagor and the senior lender agree to an increase in the principal amount of
or the interest rate payable on the senior loan, the senior lender may lose its
priority to the extent any existing junior lender is harmed or the mortgagor is
additionally burdened. Third, if the mortgagor defaults on the senior loan
and/or any junior loan or loans, the existence of junior loans and actions taken
by junior lenders can impair the security available to the senior lender and can
interfere with or delay the taking of action by the senior lender. Moreover, the
bankruptcy of a junior lender may operate to stay foreclosure or similar
proceedings by the senior lender.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. A similar federal statute
was in effect with respect to mortgage loans made during the first three months
of 1980. The Office of Thrift Supervision is authorized to issue rules and
regulations and to publish interpretations governing implementation of Title V.
The statute authorized any state to reimpose interest rate limits by adopting,
before April 1, 1983, a law or constitutional provision that expressly rejects
application of the federal law. In addition, even where Title V is not so
rejected, any state is authorized by the law to adopt a provision limiting
discount points or other charges on mortgage loans covered by Title V. Certain
states have taken action to reimpose interest rate limits and/or to limit
discount points or other charges.
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The Depositor believes that a court interpreting Title V would hold that
residential first mortgage loans that are originated on or after January 1, 1980
are subject to federal preemption. Therefore, in a state that has not taken the
requisite action to reject application of Title V or to adopt a provision
limiting discount points or other charges prior to origination of such mortgage
loans, any such limitation under such state's usury law would not apply to such
mortgage loans.
In any state in which application of Title V has been expressly rejected or
a provision limiting discount points or other charges is adopted, no mortgage
loan originated after the date of such state action will be eligible for
inclusion in a Trust Fund unless (i) such mortgage loan provides for such
interest rate, discount points and charges as are permitted in such state or
(ii) such mortgage loan provides that the terms thereof shall be construed in
accordance with the laws of another state under which such interest rate,
discount points and charges would not be usurious and the mortgagor's counsel
has rendered an opinion that such choice of law provision would be given effect.
Statutes differ in their provisions as to the consequences of a usurious
loan. One group of statutes requires the lender to forfeit the interest due
above the applicable limit or impose a specified penalty. Under this statutory
scheme, the mortgagor may cancel the recorded mortgage or deed of trust upon
paying its debt with lawful interest, and the lender may foreclose, but only for
the debt plus lawful interest. A second group of statutes is more severe. A
violation of this type of usury law results in the invalidation of the
transaction, thereby permitting the mortgagor to cancel the recorded mortgage or
deed of trust without any payment or prohibiting the lender from foreclosing.
Alternative Mortgage Instruments
Alternative mortgage instruments, including adjustable rate mortgage loans
and early ownership mortgage loans, originated by non-federally chartered
lenders have historically been subject to a variety of restrictions. Such
restrictions differed from state to state, resulting in difficulties in
determining whether a particular alternative mortgage instrument originated by a
state-chartered lender was in compliance with applicable law. These difficulties
were alleviated substantially as a result of the enactment of Title VIII of the
Garn-St. Germain Act ("Title VIII"). Title VIII provides that, notwithstanding
any state law to the contrary, state-chartered banks may originate alternative
mortgage instruments in accordance with regulations promulgated by the
Comptroller of the Currency with respect to origination of alternative mortgage
instruments by national banks; state-chartered credit unions may originate
alternative mortgage instruments in accordance with regulations promulgated by
the National Credit Union Administration with respect to origination of
alternative mortgage instruments by federal credit unions; and all other
non-federally chartered housing creditors, including state-chartered savings and
loan associations, state-chartered savings banks and mutual savings banks and
mortgage banking companies, may originate alternative mortgage instruments in
accordance with the regulations promulgated by the Federal Home Loan Bank Board,
predecessor to the Office of Thrift Supervision, with respect to origination of
alternative mortgage instruments by federal savings and loan associations. Title
VIII provides that any state may reject applicability of the provisions of Title
VIII by adopting, prior to October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of such provisions. Certain states have
taken such action.
Homeowners Protection Act of 1998
The Homeowners Protection Act of 1998 ("HOPA") provides for certain
disclosure and termination requirements for primary mortgage insurance ("PMI").
The termination provisions of HOPA apply only to mortgage loans relating to
single-family primary residences originated on or after July 29, 1999. Such
termination provisions govern when a mortgagor may cancel the requirement to
maintain PMI and when the requirement to maintain PMI is automatically
terminated. In general, voluntary termination is permitted and automatic
termination occurs when the principal balance of the mortgage loan is reduced to
80% or 78%, respectively, of the original property value. The disclosure
requirements of HOPA vary depending on whether the mortgage loan was originated
before or after July 29, 1999. Such disclosure requirements include notification
of the circumstances whereby a mortgagor may cancel PMI, the date when PMI
automatically terminates and servicer contact information. In addition, HOPA
provides that no later than 30 days after cancellation or termination of PMI,
the servicer shall provide written notification that such PMI is terminated and
no further payments are due or payable. Any servicer, mortgagee or mortgage
insurer that violates provisions of HOPA is subject to possible liability which
includes, but is not limited to, actual damages, statutory damages and
reasonable attorney's fees.
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Texas Home Equity Loans
Generally, any "cash-out" refinance or other non-purchase money transaction
(except for rate/term refinance loans and certain other narrow exceptions)
secured by a Texas resident's principal residence is subject to the provisions
set forth in Section 50(a)(6) of Article XVI of the Constitution of Texas (the
"Texas Home Equity Laws"). The Texas Home Equity Laws provide for certain
disclosure requirements, caps on allowable fees, required loan closing
procedures and other restrictions. Failure, inadvertent or otherwise, to comply
with any requirement may render the Mortgage Loan unenforceable and/or the lien
on the Mortgaged Property invalid. Because mortgage loans which are subject to
the Texas Home Equity Laws can be foreclosed only pursuant to court order,
rather than non-judicial foreclosure as is available for other types of mortgage
loans in Texas, delays and increased losses may result in connection with
foreclosures of such loans. If a court were to find that any requirement of the
Texas Home Equity Laws was not complied with, the court could refuse to allow
foreclosure to proceed, declare the lien on the Mortgaged Property to be
invalid, and/or require the originating lender or the holder of the note to
forfeit some or all principal and interest of the related Mortgage Loan. Title
insurance generally available on such Mortgage Loans may exclude coverage for
some of the risks described in this paragraph.
Soldiers' and Sailors' Civil Relief Act of 1940
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "Relief Act"), a mortgagor who enters military service
after the origination of such mortgagor's Mortgage Loan (including a mortgagor
who is a member of the National Guard or is in reserve status at the time of the
origination of the Mortgage Loan and is later called to active duty) may not be
charged interest above an annual rate of 6% during the period of such
mortgagor's active duty status, unless a court orders otherwise upon application
of the lender. It is possible that such action could have an effect, for an
indeterminate period of time, on the ability of the Servicer to collect full
amounts of interest on certain of the Mortgage Loans in a Trust Fund. Any
shortfall in interest collections resulting from the application of the Relief
Act could result in losses to the holders of the Certificates of the related
Series. Further, the Relief Act imposes limitations which would impair the
ability of the Servicer to foreclose on an affected Mortgage Loan during the
mortgagor's period of active duty status. Thus, in the event that such a
Mortgage Loan goes into default, there may be delays and losses occasioned by
the inability to realize upon the Mortgaged Property in a timely fashion.
Certain states have enacted comparable legislation which may interfere with or
affect the ability of the Servicer to timely collect payments of principal and
interest on, or to foreclose on, Mortgage Loans of mortgagors in such states who
are active or reserve members of the armed services.
Forfeiture for Drug, RICO and Money Laundering Violations
Federal law provides that property purchased or improved with assets
derived from criminal activity or otherwise tainted, or used in the commission
of certain offenses, can be seized and ordered forfeited to the United States of
America. The offenses which can trigger such a seizure and forfeiture include,
among others, violations of the Racketeer Influenced and Corrupt Organizations
Act, the Bank Secrecy Act, the anti-money laundering laws and regulations,
including the USA Patriot Act of 2001 and the regulations issued thereunder, as
well as the narcotic drug laws. In many instances, the United States may seize
the property even before a conviction occurs.
In the event of a forfeiture proceeding, a lender may be able to establish
its interest in the property by proving that (i) its mortgage was executed and
recorded before the commission of the illegal conduct from which the assets used
to purchase or improve the property were derived or before any other crime upon
which the forfeiture is based, or (2) the lender, at the time of the execution
of the mortgage, "did not know or was reasonably without cause to believe that
the property was subject to forfeiture." However, there can be no assurance that
such a defense will be successful.
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CERTAIN LEGAL ASPECTS OF THE CONTRACTS
The following discussion contains summaries, which are general in nature,
of certain legal matters relating to the Contracts. Because such legal aspects
are governed primarily by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the security for the Contracts is situated. The summaries are qualified in their
entirety by reference to the appropriate laws of the states in which Contracts
may be originated.
General
As a result of the assignment of the Contracts to the Trustee, the Trustee
will succeed collectively to all of the rights (including the right to receive
payment on the Contracts) of the obligee under the Contracts. Each Contract
evidences both (a) the obligation of the obligor to repay the loan evidenced
thereby, and (b) the grant of a security interest in the Manufactured Home to
secure repayment of such loan. Certain aspects of both features of the Contracts
are described more fully below.
The Contracts generally are "chattel paper" as defined in the UCC in effect
in the states in which the Manufactured Homes initially were registered.
Pursuant to the UCC, the sale of chattel paper is treated in a manner similar to
perfection of a security interest in chattel paper. Under the applicable
Agreement, the Servicer will transfer physical possession of the Contracts to
the Trustee or its custodian or may retain possession of the Contracts as
custodian for the Trustee. In addition, the Servicer will make an appropriate
filing of a UCC-1 financing statement in the appropriate states to give notice
of the Trustee's ownership of the Contracts. The Contracts will be stamped or
marked otherwise to reflect their assignment from the Company to the Trustee
only if provided in the related Prospectus Supplement. Therefore, if, through
negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the Contracts without notice of such assignment, the
Trustee's interest in Contracts could be defeated.
Security Interests in the Manufactured Homes
The Manufactured Homes securing the Contracts may be located in all 50
states. Security interests in manufactured homes may be perfected either by
notation of the secured party's lien on the certificate of title or by delivery
of the required documents and payment of a fee to the state motor vehicle
authority, depending on state law. In some nontitle states, perfection pursuant
to the provisions of the UCC is required. The Asset Seller may effect such
notation or delivery of the required documents and fees, and obtain possession
of the certificate of title, as appropriate under the laws of the state in which
any manufactured home securing a manufactured housing conditional sales contract
is registered. In the event the Asset Seller fails, due to clerical error, to
effect such notation or delivery, or files the security interest under the wrong
law (for example, under a motor vehicle title statute rather than under the UCC,
in a few states), the Asset Seller may not have a first priority security
interest in the Manufactured Home securing a Contract. As manufactured homes
have become larger and often have been attached to their sites without any
apparent intention to move them, courts in many states have held that
manufactured homes, under certain circumstances, may become subject to real
estate title and recording laws. As a result, a security interest in a
manufactured home could be rendered subordinate to the interests of other
parties claiming an interest in the home under applicable state real estate law.
In order to perfect a security interest in a manufactured home under real estate
laws, the holder of the security interest must file either a "fixture filing"
under the provisions of the UCC or a real estate mortgage under the real estate
laws of the state where the home is located. These filings must be made in the
real estate records office of the county where the home is located.
Substantially all of the Contracts contain provisions prohibiting the borrower
from permanently attaching the Manufactured Home to its site. So long as the
borrower does not violate this agreement, a security interest in the
Manufactured Home will be governed by the certificate of title laws or the UCC,
and the notation of the security interest on the certificate of title or the
filing of a UCC financing statement will be effective to maintain the priority
of the security interest in the Manufactured Home. If, however, a Manufactured
Home is permanently attached to its site, other parties could obtain an interest
in the Manufactured Home which is prior to the security interest originally
retained by the Asset Seller and transferred to the Depositor. With respect to a
Series of Securities and if so described in the related Prospectus Supplement,
the Servicer may be required to perfect a security interest in the Manufactured
Home under applicable real estate laws. The Warranting Party will represent that
as of the date of the sale to the Depositor it has obtained a perfected first
priority security interest by proper notation or delivery of the required
documents and fees with respect to substantially all of the Manufactured Homes
securing the Contracts.
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The Depositor will cause the security interests in the Manufactured Homes
to be assigned to the Trustee on behalf of the Securityholders. The Depositor or
the Trustee will amend the certificates of title (or file UCC-3 statements) to
identify the Trustee as the new secured party, and will deliver the certificates
of title to the Trustee or note thereon the interest of the Trustee only if
specified in the related Prospectus Supplement. Accordingly, the Asset Seller
(or other originator of the Contracts) will continue to be named as the secured
party on the certificates of title relating to the Manufactured Homes. In some
states, such assignment is an effective conveyance of such security interest
without amendment of any lien noted on the related certificate of title and the
new secured party succeeds to Servicer's rights as the secured party. However,
in some states, in the absence of an amendment to the certificate of title (or
the filing of a UCC-3 statement), such assignment of the security interest in
the Manufactured Home may not be held effective or such security interests may
not be perfected and in the absence of such notation or delivery to the Trustee,
the assignment of the security interest in the Manufactured Home may not be
effective against creditors of the Asset Seller (or such other originator of the
Contracts) or a trustee in bankruptcy of the Asset Seller (or such other
originator).
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien of the Asset Seller
(or other originator of the Contracts) on the certificate of title or delivery
of the required documents and fees will be sufficient to protect the
Securityholders against the rights of subsequent purchasers of a Manufactured
Home or subsequent lenders who take a security interest in the Manufactured
Home. If there are any Manufactured Homes as to which the security interest
assigned to the Trustee is not perfected, such security interest would be
subordinate to, among others, subsequent purchasers for value of Manufactured
Homes and holders of perfected security interests. There also exists a risk in
not identifying the Trustee as the new secured party on the certificate of title
that, through fraud or negligence, the security interest of the Trustee could be
released.
In the event that the owner of a Manufactured Home moves it to a state
other than the state in which such Manufactured Home initially is registered,
under the laws of most states the perfected security interest in the
Manufactured Home would continue for four months after such relocation and
thereafter only if and after the owner re-registers the Manufactured Home in
such state. If the owner were to relocate a Manufactured Home to another state
and not re-register the Manufactured Home in such state, and if steps are not
taken to re-perfect the Trustee's security interest in such state, the security
interest in the Manufactured Home would cease to be perfected. A majority of
states generally require surrender of a certificate of title to re-register a
Manufactured Home; accordingly, the Servicer must surrender possession if it
holds the certificate of title to such Manufactured Home or, in the case of
Manufactured Homes registered in states which provide for notation of lien, the
Asset Seller (or other originator) would receive notice of surrender if the
security interest in the Manufactured Home is noted on the certificate of title.
Accordingly, the Trustee would have the opportunity to re-perfect its security
interest in the Manufactured Home in the state of relocation. In states which do
not require a certificate of title for registration of a manufactured home,
re-registration could defeat perfection. In the ordinary course of servicing the
manufactured housing contracts, the Servicer takes steps to effect such
re-perfection upon receipt of notice of re-registration or information from the
obligor as to relocation. Similarly, when an obligor under a manufactured
housing contract sells a manufactured home, the Servicer must surrender
possession of the certificate of title or, if it is noted as lienholder on the
certificate of title, will receive notice as a result of its lien noted thereon
and accordingly will have an opportunity to require satisfaction of the related
manufactured housing conditional sales contract before release of the lien.
Under the applicable Agreement, the Servicer is obligated to take such steps, at
the Servicer's expense, as are necessary to maintain perfection of security
interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home and liens for personal property taxes take priority even over
a perfected security interest. The Warranting Party will represent in the
applicable Agreement that it has no knowledge of any such liens with respect to
any Manufactured Home securing payment on any Contract. However, such liens
could arise at any time during the term of a Contract. No notice will be given
to the Trustee or Securityholders in the event such a lien arises.
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Enforcement of Security Interests in Manufactured Homes
The Servicer on behalf of the Trustee, to the extent required by the
applicable Agreement, may take action to enforce the Trustee's security interest
with respect to Contracts in default by repossession and resale of the
Manufactured Homes securing such defaulted Contracts. So long as the
Manufactured Home has not become subject to the real estate law, a creditor can
repossess a Manufactured Home securing a Contract by voluntary surrender, by
"self-help" repossession that is "peaceful" (i.e., without breach of the peace)
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a Contract must give the
debtor a number of days' notice, which varies from 10 to 30 days depending on
the state, prior to commencement of any repossession. The UCC and consumer
protection laws in most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting such a sale. The law in most states also requires that the debtor be
given notice of any sale prior to resale of the unit so that the debtor may
redeem at or before such resale. In the event of such repossession and resale of
a Manufactured Home, the Trustee would be entitled to be paid out of the sale
proceeds before such proceeds could be applied to the payment of the claims of
unsecured creditors or the holders of subsequently perfected security interests
or, thereafter, to the debtor.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgment from a debtor for any deficiency on repossession and
resale of the manufactured home securing such debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments, and in many
cases the defaulting borrower would have no assets with which to pay a judgment.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
Soldiers' and Sailors' Civil Relief Act of 1940
The terms of the Relief Act apply to an obligor on a Contract as described
for a mortgagor on a Mortgage Loan under "Certain Legal Aspects of Mortgage
Loans--Soldiers' and Sailors' Civil Relief Act of 1940."
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.
Transfers of Manufactured Homes; Enforceability of Due-on-Sale Clauses
The Contracts, in general, prohibit the sale or transfer of the related
Manufactured Homes without the consent of the Servicer and permit the
acceleration of the maturity of the Contracts by the Servicer upon any such sale
or transfer that is not consented to. Generally, it is expected that the
Servicer will permit most transfers of Manufactured Homes and not accelerate the
maturity of the related Contracts. In certain cases, the transfer may be made by
a delinquent obligor in order to avoid a repossession proceeding with respect to
a Manufactured Home.
In the case of a transfer of a Manufactured Home after which the Servicer
desires to accelerate the maturity of the related Contract, the Servicer's
ability to do so will depend on the enforceability under state law of the
"due-on-sale" clause. The Garn-St. Germain Depositary Institutions Act of 1982
preempts, subject to certain exceptions and conditions, state laws prohibiting
enforcement of "due-on-sale" clauses applicable to the Manufactured Homes.
Consequently, in some states the Servicer may be prohibited from enforcing a
"due-on-sale" clause in respect of certain Manufactured Homes.
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Applicability of Usury Laws
Title V provides that, subject to the following conditions, state usury
limitations shall not apply to any loan which is secured by a first lien on
certain kinds of manufactured housing. The Contracts would be covered if they
satisfy certain conditions, among other things, governing the terms of any
prepayments, late charges and deferral fees and requiring a 30-day notice period
prior to instituting any action leading to repossession of or foreclosure with
respect to the related unit.
Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
The related Asset Seller will represent that all of the Contracts comply with
applicable usury law.
78
FEDERAL INCOME TAX CONSEQUENCES
General
The following discussion represents the opinion of Cadwalader, Wickersham &
Taft, as to the anticipated material federal income tax consequences of the
purchase, ownership and disposition of the Securities offered hereunder. This
discussion is directed solely to Securityholders that hold the Securities as
capital assets within the meaning of Section 1221 of the Code and does not
purport to discuss all federal income tax consequences that may be applicable to
particular categories of investors, some of which (such as banks, insurance
companies and foreign investors) may be subject to special rules. Further, the
authorities on which this discussion, and the opinion referred to below, are
based are subject to change or differing interpretations, which could apply
retroactively. In addition to the federal income tax consequences described
herein, potential investors should consider the state and local tax
consequences, if any, of the purchase, ownership and disposition of the
Securities. See "State and Other Tax Consequences." Securityholders are advised
to consult their own tax advisors concerning the federal, state, local or other
tax consequences to them of the purchase, ownership and disposition of the
Securities offered hereunder.
The following discussion addresses securities of four general types: (i)
securities ("REMIC Securities") representing interests in a Trust Fund, or a
portion thereof, that the Trustee will elect to have treated as a REMIC under
Sections 860A through 860G (the "REMIC Provisions") of the Code, (ii) securities
("Grantor Trust Securities") representing interests in a Trust Fund ("Grantor
Trust Fund") as to which no such election will be made, (iii) securities
("Partnership Securities") representing interests in a Trust Fund ("Partnership
Trust Fund") which is treated as a partnership for federal income tax purposes,
and (iv) securities ("Debt Securities") representing indebtedness of a
Partnership Trust Fund for federal income tax purposes. The Prospectus
Supplement for each Series of Securities will indicate which of the foregoing
treatments will apply to such Series and, if a REMIC election (or elections)
will be made for the related Trust Fund, will identify all "regular interests"
and "residual interests" in the REMIC. For purposes of this tax discussion, (i)
references to a "Securityholder" or a "holder" are to the beneficial owner of a
Security, (ii) references to "REMIC Pool" are to an entity or portion thereof as
to which a REMIC election will be made and (iii) unless indicated otherwise in
the applicable Prospectus Supplement, references to "Mortgage Loans" include
Contracts. Except as set forth in the applicable Prospectus Supplement, no REMIC
election will be made with respect to Unsecured Home Improvement Loans. The
discussion below assumes that no election will be made to treat the Trust Fund,
or any portion thereof, as a FASIT under Sections 860H through 860L of the Code.
If a FASIT election is made for a particular Series, the Prospectus Supplement
for that Series will address the material federal income tax consequences of
such election. Securities issued with respect to a Series for which a FASIT
election has been made are referred to herein as "FASIT Securities."
The following discussion is based in part upon the rules governing original
issue discount that are set forth in Sections 1271-1273 and 1275 of the Code and
in the Treasury regulations issued thereunder (the "OID Regulations"), and in
part upon the REMIC Provisions and the Treasury regulations issued thereunder
(the "REMIC Regulations"). The OID Regulations do not adequately address certain
issues relevant to, and in some instances provide that they are not applicable
to, securities such as the Securities.
Taxable Mortgage Pools
Corporate income tax can be imposed on the net income of certain entities
issuing non-REMIC debt obligations secured by real estate mortgages ("Taxable
Mortgage Pools"). Any entity other than a REMIC or a FASIT will be considered a
Taxable Mortgage Pool if (i) substantially all of the assets of the entity
consist of debt obligations and more than 50% of such obligations consist of
"real estate mortgages," (ii) such entity is the obligor under debt obligations
with two or more maturities, and (iii) under the terms of the debt obligations
on which the entity is the obligor, payments on such obligations bear a
relationship to payments on the obligations held by the entity. Furthermore, a
group of assets held by an entity can be treated as a separate Taxable Mortgage
Pool if the assets are expected to produce significant cash flow that will
support one or more of the entity's issues of debt obligations. The Depositor
generally will structure offerings of non-REMIC Securities to avoid the
application of the Taxable Mortgage Pool rules.
79
REMICS
Classification of REMICs
With respect to each Series of REMIC Securities, assuming compliance with
all provisions of the related Pooling and Servicing Agreement, the related Trust
Fund (or each applicable portion thereof) will qualify as a REMIC and the REMIC
Securities offered with respect thereto will be considered to evidence ownership
of "regular interests" ("Regular Securities") or "residual interests" ("Residual
Securities") in that REMIC within the meaning of the REMIC Provisions.
In order for the REMIC Pool to qualify as a REMIC, there must be ongoing
compliance on the part of the REMIC Pool with the requirements set forth in the
Code. The REMIC Pool must fulfill an asset test, which requires that no more
than a de minimis portion of the assets of the REMIC Pool, as of the close of
the third calendar month beginning after the "Startup Day" (which for purposes
of this discussion is the date of issuance of the REMIC Securities) and at all
times thereafter, may consist of assets other than "qualified mortgages" and
"permitted investments." The REMIC Regulations provide a safe harbor pursuant to
which the de minimis requirement will be met if at all times the aggregate
adjusted basis of the nonqualified assets is less than 1% of the aggregate
adjusted basis of all the REMIC Pool's assets. An entity that fails to meet the
safe harbor may nevertheless demonstrate that it holds no more than a de minimis
amount of nonqualified assets. A REMIC Pool also must provide "reasonable
arrangements" to prevent its residual interests from being held by "disqualified
organizations" or agents thereof and must furnish applicable tax information to
transferors or agents that violate this requirement. The Pooling and Servicing
Agreement with respect to each Series of REMIC Securities will contain
provisions meeting these requirements. See "--Taxation of Owners of Residual
Securities--Tax-Related Restrictions on Transfer of Residual
Securities--Disqualified Organizations."
A qualified mortgage is any obligation that is principally secured by an
interest in real property and that is either transferred to the REMIC Pool on
the Startup Day or is purchased by the REMIC Pool within a three-month period
thereafter pursuant to a fixed price contract in effect on the Startup Day.
Qualified mortgages include whole mortgage loans, such as the Mortgage Loans,
and, generally, certificates of beneficial interest in a grantor trust that
holds mortgage loans and regular interests in another REMIC, such as lower-tier
regular interests in Tiered REMICs. The REMIC Regulations specify that loans
secured by timeshare interests, shares held by a tenant stockholder in a
cooperative housing corporation, and manufactured housing that qualifies as a
"single family residence" under Code section 25(e)(10) can be qualified
mortgages. A qualified mortgage includes a qualified replacement mortgage, which
is any property that would have been treated as a qualified mortgage if it were
transferred to the REMIC Pool on the Startup Day and that is received either (i)
in exchange for any qualified mortgage within a three-month period thereafter or
(ii) in exchange for a "defective obligation" within a two-year period
thereafter. A "defective obligation" includes (i) a mortgage in default or as to
which default is reasonably foreseeable, (ii) a mortgage as to which a customary
representation or warranty made at the time of transfer to the REMIC Pool has
been breached, (iii) a mortgage that was fraudulently procured by the mortgagor,
and (iv) a mortgage that was not in fact principally secured by real property
(but only if such mortgage is disposed of within 90 days of discovery). A
Mortgage Loan that is "defective" as described in clause (iv) that is not sold
or, if within two years of the Startup Day, exchanged, within 90 days of
discovery, ceases to be a qualified mortgage after such 90-day period.
Permitted investments include cash flow investments, qualified reserve
assets, and foreclosure property. A cash flow investment is an investment,
earning a return in the nature of interest, of amounts received on or with
respect to qualified mortgages for a temporary period, not exceeding 13 months,
until the next scheduled distribution to holders of interests in the REMIC Pool.
A qualified reserve asset is any intangible property held for investment that is
part of any reasonably required reserve maintained by the REMIC Pool to provide
for payments of expenses of the REMIC Pool or amounts due on the regular or
residual interests in the event of defaults (including delinquencies) on the
qualified mortgages, lower than expected reinvestment returns, prepayment
interest shortfalls and certain other contingencies. The reserve fund will be
disqualified if more than 30% of the gross income from the assets in such fund
for the year is derived from the sale or other disposition of property held for
less than three months, unless required to prevent a default on the regular
interests caused by a default on one or more qualified mortgages. A reserve fund
must be reduced "promptly and appropriately" as payments on the Mortgage Loans
are received. Foreclosure property is real property acquired by the REMIC Pool
in connection with the default or imminent default of a qualified mortgage and
generally may not be held beyond the close of the third calendar year beginning
after the taxable year of acquisition unless an extension is granted by the IRS.
80
In addition to the foregoing requirements, the various interests in a REMIC
Pool also must meet certain requirements. All of the interests in a REMIC Pool
must be either of the following: (i) one or more Classes of regular interests or
(ii) a single class of residual interests on which distributions, if any, are
made pro rata. A regular interest is an interest in a REMIC Pool that is issued
on the Startup Day with fixed terms, is designated as a regular interest, and
unconditionally entitles the holder to receive a specified principal amount (or
other similar amount), and provides that interest payments (or other similar
amounts), if any, at or before maturity either are payable based on a fixed rate
or a qualified variable rate, or consist of a specified, nonvarying portion of
the interest payments on qualified mortgages. Such a specified portion may
consist of a fixed number of basis points, a fixed percentage of the total
interest, or a qualified variable rate, inverse variable rate or difference
between two fixed or qualified variable rates on some or all of the qualified
mortgages. The specified principal amount of a regular interest that provides
for interest payments consisting of a specified, nonvarying portion of interest
payments on qualified mortgages may be zero. A residual interest is an interest
in a REMIC Pool other than a regular interest that is issued on the Startup Day
and that is designated as a residual interest. An interest in a REMIC Pool may
be treated as a regular interest even if payments of principal with respect to
such interest are subordinated to payments on other regular interests or the
residual interest in the REMIC Pool, and are dependent on the absence of
defaults or delinquencies on qualified mortgages or permitted investments, lower
than reasonably expected returns on permitted investments, unanticipated
expenses incurred by the REMIC Pool or prepayment interest shortfalls.
Accordingly, the Regular Securities of a Series will constitute one or more
Classes of regular interests, and the Residual Securities with respect to that
Series will constitute a single Class of residual interests with respect to each
REMIC Pool.
If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for such status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for such
year and thereafter. In that event, such entity may be taxable as a corporation
under Treasury regulations, and the related REMIC Securities may not be accorded
the status or given the tax treatment described below. Although the Code
authorizes the Treasury Department to issue regulations providing relief in the
event of an inadvertent termination of REMIC status, no such regulations have
been issued. Any such relief, moreover, may be accompanied by sanctions, such as
the imposition of a corporate tax on all or a portion of the Trust Fund's income
for the period in which the requirements for such status are not satisfied. The
Pooling and Servicing Agreement with respect to each REMIC Pool will include
provisions designed to maintain the Trust Fund's status as a REMIC under the
REMIC Provisions. It is not anticipated that the status of any Trust Fund as a
REMIC will be terminated.
Characterization of Investments in REMIC Securities
In general, the REMIC Securities will be treated as "real estate assets"
within the meaning of Section 856(c)(4)(A) of the Code and assets described in
Section 7701(a)(19)(C) of the Code in the same proportion that the assets of the
REMIC Pool underlying such Securities would be so treated. Moreover, if 95% or
more of the assets of the REMIC Pool qualify for either of the foregoing
treatments at all times during a calendar year, the REMIC Securities will
qualify for the corresponding status in their entirety for that calendar year.
If the assets of the REMIC Pool include Buydown Mortgage Loans, it is possible
that the percentage of such assets constituting "loans . . . secured by an
interest in real property which is . . . residential real property" for purposes
of Code Section 7701(a)(19)(C)(v) may be required to be reduced by the amount of
the related funds paid thereon (the "Buydown Funds"). Interest (including
original issue discount) on the Regular Securities and income allocated to the
Class of Residual Securities will be interest described in Section 856(c)(3)(B)
of the Code to the extent that such Securities are treated as "real estate
assets" within the meaning of Section 856(c)(4)(A) of the Code. In addition, the
Regular Securities generally will be "qualified mortgages" within the meaning of
Section 860G(a)(3) of the Code if transferred to another REMIC on its Startup
Day in exchange for regular or residual interests therein. Regular Securities
held by a FASIT will qualify for treatment as "permitted assets" within the
meaning of Section 860L(c)(1)(G) of the Code. The determination as to the
percentage of the REMIC Pool's assets that constitute assets described in the
foregoing sections of the Code will be made with respect to each calendar
quarter based on the average adjusted basis of each category of the assets held
by the REMIC Pool during such calendar quarter. The REMIC will report those
determinations to Securityholders in the manner and at the times required by
applicable Treasury regulations. The Small Business Job Protection Act of 1996
(the "SBJPA of 1996") repealed the reserve method of bad debts of domestic
building and loan associations and mutual savings banks, and thus has eliminated
the asset category of "qualifying real property loans" in former Code Section
593(d) for taxable years beginning after December 31, 1995. The requirements in
the SBJPA of 1996 that such institutions must "recapture" a portion of their
existing bad debt reserves is suspended if a certain portion of their assets are
maintained in "residential loans" under Code Section 7701(a)(19)(C)(v), but only
if such loans were made to acquire, construct or improve the related real
property and not for the purpose of refinancing. However, no effort will be made
to identify the portion of the Mortgage Loans of any Series meeting this
requirement, and no representation is made in this regard.
81
The assets of the REMIC Pool will include, in addition to Mortgage Loans,
payments on Mortgage Loans held pending distribution on the REMIC Securities and
property acquired by foreclosure held pending sale, and may include amounts in
reserve accounts. It is unclear whether property acquired by foreclosure held
pending sale and amounts in reserve accounts would be considered to be part of
the Mortgage Loans, or whether such assets (to the extent not invested in assets
described in the foregoing sections) otherwise would receive the same treatment
as the Mortgage Loans for purposes of all of the foregoing sections. The REMIC
Regulations do provide, however, that payments on Mortgage Loans held pending
distribution are considered part of the Mortgage Loans for purposes of Section
856(c)(4)(A) of the Code. Furthermore, foreclosure property generally will
qualify as "real estate assets" under Section 856(c)(4)(A) of the Code.
Tiered REMIC Structures
For certain Series of REMIC Securities, two or more separate elections may
be made to treat designated portions of the related Trust Fund as REMICs
("Tiered REMICs") for federal income tax purposes. Upon the issuance of any such
Series of REMIC Securities, Cadwalader, Wickersham & Taft will deliver its
opinion generally to the effect that, assuming compliance with all provisions of
the related Pooling and Servicing Agreement, the Tiered REMICs will each qualify
as a REMIC and the REMIC Securities issued by the Tiered REMICs will be
considered to evidence ownership of Regular Securities or Residual Securities in
the related REMIC within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Securities will be
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Code and
"loans secured by an interest in real property" under Section 7701(a)(19)(C) of
the Code, and whether the income on such Securities is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
Taxation of Owners of Regular Securities
General
In general, interest, original issue discount, and market discount on a
Regular Security will be treated as ordinary income to a holder of the Regular
Security (the "Regular Securityholder"), and principal payments on a Regular
Security will be treated as a return of capital to the extent of the Regular
Securityholder's basis in the Regular Security allocable thereto. Regular
Securityholders must use the accrual method of accounting with regard to Regular
Securities, regardless of the method of accounting otherwise used by such
Regular Securityholder.
Original Issue Discount
Accrual Securities will be, and other Classes of Regular Securities may be,
issued with "original issue discount" within the meaning of Code Section
1273(a). Holders of any Class or subclass of Regular Securities having original
issue discount generally must include original issue discount in ordinary income
for federal income tax purposes as it accrues, in accordance with a constant
yield method that takes into account the compounding of interest, in advance of
the receipt of the cash attributable to such income. The following discussion is
based in part on OID Regulations issued on February 2, 1994, as amended on June
14, 1996, under Code Section 1271 through 1273 and 1275 and in part on the
provisions of the 1986 Act. Regular Securityholders should be aware, however,
that the OID Regulations do not adequately address certain issues relevant to
prepayable securities, such as the Regular Securities. To the extent such issues
are not addressed in such regulations, the Depositor intends to apply the
methodology described in the Conference Committee Report to the 1986 Act. No
assurance can be provided that the IRS will not take a different position as to
those matters not currently addressed by the OID Regulations. Moreover, the OID
Regulations include an anti-abuse rule allowing the IRS to apply or depart from
the OID Regulations where necessary or appropriate to ensure a reasonable tax
result in light of the applicable statutory provisions. A tax result will not be
considered unreasonable under the anti-abuse rule in the absence of a
substantial effect on the present value of a taxpayer's tax liability. Investors
are advised to consult their own tax advisors as to the discussion therein and
the appropriate method for reporting interest and original issue discount with
respect to the Regular Securities.
82
Each Regular Security (except to the extent described below with respect to
a Regular Security on which principal is distributed in a single installment or
by lots of specified principal amounts upon the request of a Securityholder or
by random lot (a "Non-Pro Rata Security")) will be treated as a single
installment obligation for purposes of determining the original issue discount
includable in a Regular Securityholder's income. The total amount of original
issue discount on a Regular Security is the excess of the "stated redemption
price at maturity" of the Regular Security over its "issue price." The issue
price of a Class of Regular Securities offered pursuant to this Prospectus
generally is the first price at which a substantial amount of such Class is sold
to the public (excluding bond houses, brokers and underwriters). Although
unclear under the OID Regulations, it is anticipated that the Trustee will treat
the issue price of a Class as to which there is no substantial sale as of the
issue date or that is retained by the Depositor as the fair market value of the
Class as of the issue date. The issue price of a Regular Security also includes
any amount paid by an initial Regular Securityholder for accrued interest that
relates to a period prior to the issue date of the Regular Security, unless the
Regular Securityholder elects on its federal income tax return to exclude such
amount from the issue price and to recover it on the first Distribution Date.
The stated redemption price at maturity of a Regular Security always includes
the original principal amount of the Regular Security, but generally will not
include distributions of interest if such distributions constitute "qualified
stated interest." Under the OID Regulations, qualified stated interest generally
means interest payable at a single fixed rate or a qualified variable rate (as
described below), provided that such interest payments are unconditionally
payable at intervals of one year or less during the entire term of the Regular
Security. Because there is no penalty or default remedy in the case of
nonpayment of interest with respect to a Regular Security, it is possible that
no interest on any Class of Regular Securities will be treated as qualified
stated interest. However, except as provided in the following three sentences or
in the applicable Prospectus Supplement, because the underlying Mortgage Loans
provide for remedies in the event of default, it is anticipated that the Trustee
will treat interest with respect to the Regular Securities as qualified stated
interest. Distributions of interest on an Accrual Security, or on other Regular
Securities with respect to which deferred interest will accrue, will not
constitute qualified stated interest, in which case the stated redemption price
at maturity of such Regular Securities includes all distributions of interest as
well as principal thereon. Likewise, it is anticipated that the Trustee will
treat an interest-only Class or a Class on which interest is substantially
disproportionate to its principal amount (a so-called "super-premium" Class) as
having no qualified stated interest. Where the interval between the issue date
and the first Distribution Date on a Regular Security is shorter than the
interval between subsequent Distribution Dates, the interest attributable to the
additional days will be included in the stated redemption price at maturity.
Under a de minimis rule, original issue discount on a Regular Security will
be considered to be zero if such original issue discount is less than 0.25% of
the stated redemption price at maturity of the Regular Security multiplied by
the weighted average maturity of the Regular Security. For this purpose, the
weighted average maturity of the Regular Security is computed as the sum of the
amounts determined by multiplying the number of full years (i.e., rounding down
partial years) from the issue date until each distribution in reduction of
stated redemption price at maturity is scheduled to be made by a fraction, the
numerator of which is the amount of each distribution included in the stated
redemption price at maturity of the Regular Security and the denominator of
which is the stated redemption price at maturity of the Regular Security. The
Conference Committee Report to the 1986 Act provides that the schedule of such
distributions should be determined in accordance with the assumed rate of
prepayment of the Mortgage Loans (the "Prepayment Assumption") and the
anticipated reinvestment rate, if any, relating to the Regular Securities. The
Prepayment Assumption with respect to a Series of Regular Securities will be set
forth in the applicable Prospectus Supplement. Holders generally must report de
minimis original issue discount pro rata as principal payments are received, and
such income will be capital gain if the Regular Security is held as a capital
asset. Under the OID Regulations, however, Regular Securityholders may elect to
accrue all de minimis original issue discount as well as market discount and
market premium, under the constant yield method. See "--Election to Treat All
Interest Under the Constant Yield Method."
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A Regular Securityholder generally must include in gross income for any
taxable year the sum of the "daily portions," as defined below, of the original
issue discount on the Regular Security accrued during an accrual period for each
day on which it holds the Regular Security, including the date of purchase but
excluding the date of disposition. The Trustee will treat the monthly period
ending on the day before each Distribution Date as the accrual period. With
respect to each Regular Security, a calculation will be made of the original
issue discount that accrues during each successive full accrual period (or
shorter period from the date of original issue) that ends on the day before the
related Distribution Date on the Regular Security. The Conference Committee
Report to the 1986 Act states that the rate of accrual of original issue
discount is intended to be based on the Prepayment Assumption. The original
issue discount accruing in a full accrual period would be the excess, if any, of
(i) the sum of (a) the present value of all of the remaining distributions to be
made on the Regular Security as of the end of that accrual period, and (b) the
distributions made on the Regular Security during the accrual period that are
included in the Regular Security's stated redemption price at maturity, over
(ii) the adjusted issue price of the Regular Security at the beginning of the
accrual period. The present value of the remaining distributions referred to in
the preceding sentence is calculated based on (i) the yield to maturity of the
Regular Security at the issue date, (ii) events (including actual prepayments)
that have occurred prior to the end of the accrual period, and (iii) the
Prepayment Assumption. For these purposes, the adjusted issue price of a Regular
Security at the beginning of any accrual period equals the issue price of the
Regular Security, increased by the aggregate amount of original issue discount
with respect to the Regular Security that accrued in all prior accrual periods
and reduced by the amount of distributions included in the Regular Security's
stated redemption price at maturity that were made on the Regular Security in
such prior periods. The original issue discount accruing during any accrual
period (as determined in this paragraph) will then be divided by the number of
days in the period to determine the daily portion of original issue discount for
each day in the period. With respect to an initial accrual period shorter than a
full accrual period, the daily portions of original issue discount must be
determined according to an appropriate allocation under any reasonable method.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Securityholder generally
will increase to take into account prepayments on the Regular Securities as a
result of prepayments on the Mortgage Loans that exceed the Prepayment
Assumption, and generally will decrease (but not below zero for any period) if
the prepayments are slower than the Prepayment Assumption. An increase in
prepayments on the Mortgage Loans with respect to a Series of Regular Securities
can result in both a change in the priority of principal payments with respect
to certain Classes of Regular Securities and either an increase or decrease in
the daily portions of original issue discount with respect to such Regular
Securities.
In the case of a Non-Pro Rata Security, it is anticipated that the Trustee
will determine the yield to maturity of such Security based upon the anticipated
payment characteristics of the Class as a whole under the Prepayment Assumption.
In general, the original issue discount accruing on each Non-Pro Rata Security
in a full accrual period would be its allocable share of the original issue
discount with respect to the entire Class, as determined in accordance with the
preceding paragraph. However, in the case of a distribution in retirement of the
entire unpaid principal balance of any Non-Pro Rata Security (or portion of such
unpaid principal balance), (a) the remaining unaccrued original issue discount
allocable to such Security (or to such portion) will accrue at the time of such
distribution, and (b) the accrual of original issue discount allocable to each
remaining Security of such Class will be adjusted by reducing the present value
of the remaining payments on such Class and the adjusted issue price of such
Class to the extent attributable to the portion of the unpaid principal balance
thereof that was distributed. The Depositor believes that the foregoing
treatment is consistent with the "pro rata prepayment" rules of the OID
Regulations, but with the rate of accrual of original issue discount determined
based on the Prepayment Assumption for the Class as a whole. Investors are
advised to consult their tax advisors as to this treatment.
Acquisition Premium
A purchaser of a Regular Security having original issue discount at a price
greater than its adjusted issue price but less than its stated redemption price
at maturity will be required to include in gross income the daily portions of
the original issue discount on the Regular Security reduced pro rata by a
fraction, the numerator of which is the excess of its purchase price over such
adjusted issue price and the denominator of which is the excess of the remaining
stated redemption price at maturity over the adjusted issue price.
Alternatively, such a subsequent purchaser may elect to treat all such
acquisition premium under the constant yield method, as described below under
the heading "--Election to Treat All Interest Under the Constant Yield Method."
84
Variable Rate Regular Securities
Regular Securities may provide for interest based on a variable rate. Under
the OID Regulations, interest is treated as payable at a variable rate if,
generally, (i) the issue price does not exceed the original principal balance by
more than a specified amount and (ii) the interest compounds or is payable at
least annually at current values of (a) one or more "qualified floating rates,"
(b) a single fixed rate and one or more qualified floating rates, (c) a single
"objective rate," or (d) a single fixed rate and a single objective rate that is
a "qualified inverse floating rate." A floating rate is a qualified floating
rate if variations can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds. A multiple of a qualified
floating rate is considered a qualified floating rate only if the rate is equal
to either (a) the product of a qualified floating rate and a fixed multiple that
is greater than 0.65 but not more than 1.35 or (b) the product of a qualified
floating rate and a fixed multiple that is greater that 0.65 but not more than
1.35, increased or decreased by a fixed rate. Such rate may also be subject to a
fixed cap or floor, or a cap or floor that is not reasonably expected as of the
issue date to affect the yield of the instrument significantly. An objective
rate is any rate (other than a qualified floating rate) that is determined using
a single fixed formula and that is based on objective financial or economic
information, provided that such information is not (i) within the control of the
issuer or a related party or (ii) unique to the circumstances of the issuer or a
related party. A qualified inverse floating rate is a rate equal to a fixed rate
minus a qualified floating rate that inversely reflects contemporaneous
variations in the cost of newly borrowed funds; an inverse floating rate that is
not a qualified inverse floating rate may nevertheless be an objective rate. A
Class of Regular Securities may be issued under this Prospectus that does not
have a variable rate under the foregoing rules, for example, a Class that bears
different rates at different times during the period it is outstanding such that
it is considered significantly "front-loaded" or "back-loaded" within the
meaning of the OID Regulations. It is possible that such a Class may be
considered to bear "contingent interest" within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of contingent
interest, are by their terms not applicable to Regular Securities. However, if
final regulations dealing with contingent interest with respect to Regular
Securities apply the same principles as the OID Regulations, such regulations
may lead to different timing of income inclusion that would be the case under
the OID Regulations. Furthermore, application of such principles could lead to
the characterization of gain on the sale of contingent interest Regular
Securities as ordinary income. Investors should consult their tax advisors
regarding the appropriate treatment of any Regular Security that does not pay
interest at a fixed rate or variable rate as described in this paragraph.
Under the REMIC Regulations, a Regular Security (i) bearing interest at a
rate that qualifies as a variable rate under the OID Regulations that is tied to
current values of a variable rate (or the highest, lowest or average of two or
more variable rates, including a rate based on the average cost of funds of one
or more financial institutions), or a positive or negative multiple of such a
rate (plus or minus a specified number of basis points), or that represents a
weighted average of rates on some or all of the Mortgage Loans, including such a
rate that is subject to one or more caps or floors, or (ii) bearing one or more
such variable rates for one or more periods, or one or more fixed rates for one
or more periods, and a different variable rate or fixed rate for other periods,
qualifies as a regular interest in a REMIC. Accordingly, unless otherwise
indicated in the applicable Prospectus Supplement, it is anticipated that the
Trustee will treat Regular Securities that qualify as regular interests under
this rule in the same manner as obligations bearing a variable rate for original
issue discount reporting purposes.
The amount of original issue discount with respect to a Regular Security
bearing a variable rate of interest will accrue in the manner described above
under "Original Issue Discount," with the yield to maturity and future payments
on such Regular Security generally to be determined by assuming that interest
will be payable for the life of the Regular Security based on the initial rate
(or, if different, the value of the applicable variable rate as of the pricing
date) for the relevant Class. Unless required otherwise by applicable final
regulations, it is anticipated that the Trustee will treat such variable
interest as qualified stated interest, other than variable interest on an
interest-only or super-premium Class, which will be treated as non-qualified
stated interest includable in the stated redemption price at maturity. Ordinary
income reportable for any period will be adjusted based on subsequent changes in
the applicable interest rate index.
Although unclear under the OID Regulations, unless required otherwise by
applicable final regulations, the Seller intends to treat Regular Securities
bearing an interest rate that is a weighted average of the net interest rates on
Mortgage Loans as having qualified stated interest, except to the extent that
initial "teaser" rates cause sufficiently "back-loaded" interest to create more
than de minimis original issue discount. The yield on such Regular Securities
for purposes of accruing original issue discount will be a hypothetical fixed
rate based on the fixed rates, in the case of fixed-rate Mortgage Loans, and
initial "teaser rates" followed by fully indexed rates, in the case of
adjustable-rate Mortgage Loans. In the case of adjustable-rate Mortgage Loans,
the applicable index used to compute interest on the Mortgage Loans in effect on
the pricing date (or possibly the issue date) will be deemed to be in effect
beginning with the period in which the first weighted average adjustment date
occurring after the issue date occurs. Adjustments will be made in each accrual
period either increasing or decreasing the amount of ordinary income reportable
to reflect the actual Pass-Through Rate on the Regular Securities.
85
Market Discount
A subsequent purchaser of a Regular Security also may be subject to the
market discount rules of Code Sections 1276 through 1278. Under these sections
and the principles applied by the OID Regulations in the context of original
issue discount, "market discount" is the amount by which the purchaser's
original basis in the Regular Security (i) is exceeded by the remaining
outstanding principal payments and interest payments other than qualified stated
interest payments due on a Regular Security, or (ii) in the case of a Regular
Security having original issue discount, is exceeded by the adjusted issue price
of such Regular Security at the time of purchase. Such purchaser generally will
be required to recognize ordinary income to the extent of accrued market
discount on such Regular Security as distributions includable in the stated
redemption price at maturity thereof are received, in an amount not exceeding
any such distribution. Such market discount would accrue in a manner to be
provided in Treasury regulations and should take into account the Prepayment
Assumption. The Conference Committee Report to the 1986 Act provides that until
such regulations are issued, such market discount would accrue either (i) on the
basis of a constant interest rate, or (ii) in the ratio of stated interest
allocable to the relevant period to the sum of the interest for such period plus
the remaining interest as of the end of such period, or in the case of a Regular
Security issued with original issue discount, in the ratio of original issue
discount accrued for the relevant period to the sum of the original issue
discount accrued for such period plus the remaining original issue discount as
of the end of such period. Such purchaser also generally will be required to
treat a portion of any gain on a sale or exchange of the Regular Security as
ordinary income to the extent of the market discount accrued to the date of
disposition under one of the foregoing methods, less any accrued market discount
previously reported as ordinary income as partial distributions in reduction of
the stated redemption price at maturity were received. Such purchaser will be
required to defer deduction of a portion of the excess of the interest paid or
accrued on indebtedness incurred to purchase or carry a Regular Security over
the interest distributable thereon. The deferred portion of such interest
expense in any taxable year generally will not exceed the accrued market
discount on the Regular Security for such year. Any such deferred interest
expense is, in general, allowed as a deduction not later than the year in which
the related market discount income is recognized or the Regular Security is
disposed of. As an alternative to the inclusion of market discount in income on
the foregoing basis, the Regular Securityholder may elect to include market
discount in income currently as it accrues on all market discount instruments
acquired by such Regular Securityholder in that taxable year or thereafter, in
which case the interest deferral rule will not apply. See "--Election to Treat
All Interest Under the Constant Yield Method" below regarding an alternative
manner in which such election may be deemed to be made. A person who purchases a
Regular Security at a price lower than the remaining amounts includable in the
stated redemption price at maturity of the security, but higher than its
adjusted issue price, does not acquire the Regular Security with market
discount, but will be required to report original issue discount, appropriately
adjusted to reflect the excess of the price paid over the adjusted issue price.
Market discount with respect to a Regular Security will be considered to be
zero if such market discount is less than 0.25% of the remaining stated
redemption price at maturity of such Regular Security (or, in the case of a
Regular Security having original issue discount, the adjusted issue price of
such Regular Security) multiplied by the weighted average maturity of the
Regular Security (determined as described above in the third paragraph under
"--Original Issue Discount") remaining after the date of purchase. It appears
that de minimis market discount would be reported in a manner similar to de
minimis original issue discount. See "--Original Issue Discount" above.
Under provisions of the OID Regulations relating to contingent payment
obligations, a secondary purchaser of a Regular Security that has "contingent
interest" at a discount generally would continue to accrue interest and
determine adjustments on the Regular Security based on the original projected
payment schedule devised by the issuer of the Security. The holder of such a
Regular Security would be required, however, to allocate the difference between
the adjusted issue price of the Regular Security and its basis in the Regular
Security as positive adjustments to the accruals or projected payments on the
Regular Security over the remaining term of the Regular Security in a manner
that is reasonable (e.g., based on a constant yield to maturity).
Treasury regulations implementing the market discount rules have not yet
been issued, and uncertainty exists with respect to many aspects of those rules.
Due to the substantial lack of regulatory guidance with respect to the market
discount rules, it is unclear how those rules will affect any secondary market
that develops for a given Class of Regular Securities. Prospective investors in
Regular Securities should consult their own tax advisors regarding the
application of the market discount rules to the Regular Securities. Investors
should also consult Revenue Procedure 92-67 concerning the elections to include
market discount in income currently and to accrue market discount on the basis
of the constant yield method.
86
Amortizable Premium
A Regular Security purchased at a cost greater than its remaining stated
redemption price at maturity generally is considered to be purchased at a
premium. If the Regular Securityholder holds such Regular Security as a "capital
asset" within the meaning of Code Section 1221, the Regular Securityholder may
elect under Code Section 171 to amortize such premium under a constant yield
method that reflects compounding based on the interval between payments on the
Regular Security. Such election will apply to all taxable debt obligations
(including REMIC regular interests) acquired by the Regular Securityholder at a
premium held in that taxable year or thereafter, unless revoked with the
permission of the IRS. Final Treasury regulations have been issued with respect
to amortizable bond premiums which do not by their terms apply to prepayable
debt instruments such as the Regular Securities. However, the Conference
Committee Report to the 1986 Act indicates a Congressional intent that the same
rules that apply to the accrual of market discount on installment obligations
will also apply to amortizing bond premium under Code Section 171 on installment
obligations such as the Regular Securities, although it is unclear whether the
alternatives to the constant interest method described above under "--Market
Discount" are available. Amortizable bond premium generally will be treated as
an offset to interest income on a Regular Security, rather than as a separate
deduction. See "--Election to Treat All Interest Under the Constant Yield
Method" below regarding an alternative manner in which the Code Section 171
election may be deemed to be made.
Amortizable premium on a Regular Security that is subject to redemption at
the option of the issuer generally must be amortized as if the optional
redemption price and date were the Security's principal amount and maturity date
if doing so would result in a smaller amount of premium amortization during the
period ending with the optional redemption date. Thus, a holder of a Regular
Security would not be able to amortize any premium on a Regular Security that is
subject to optional redemption at a price equal to or greater than the
Securityholder's acquisition price unless and until the redemption option
expires. A Regular Security subject to redemption at the option of the issuer
described in the preceding sentence will be treated as having matured on the
redemption date for the redemption price and then as having been reissued on
that date for that price. Any premium remaining on the Regular Security at the
time of the deemed reissuance will be amortized on the basis of (i) the original
principal amount and maturity date or (ii) the price and date of any succeeding
optional redemption, under the principles described above.
Election to Treat All Interest Under the Constant Yield Method
A holder of a debt instrument such as a Regular Security may elect to treat
all interest that accrues on the instrument using the constant yield method,
with none of the interest being treated as qualified stated interest. For
purposes of applying the constant yield method to a debt instrument subject to
such an election, (i) "interest" includes stated interest, original issue
discount, de minimis original issue discount, market discount and de minimis
market discount, as adjusted by any amortizable bond premium or acquisition
premium and (ii) the debt instrument is treated as if the instrument were issued
on the holder's acquisition date in the amount of the holder's adjusted basis
immediately after acquisition. It is unclear whether, for this purpose, the
initial Prepayment Assumption would continue to apply or if a new prepayment
assumption as of the date of the holder's acquisition would apply. A holder
generally may make such an election on an instrument by instrument basis or for
a Class or group of debt instruments. However, if the holder makes such an
election with respect to a debt instrument with amortizable bond premium or with
market discount, the holder is deemed to have made elections to amortize bond
premium or to report market discount income currently as it accrues under the
constant yield method, respectively, for all premium bonds held or market
discount bonds acquired by the holder in the same taxable year or thereafter.
The election is made on the holder's federal income tax return for the year in
which the debt instrument is acquired and is irrevocable except with the
approval of the IRS. Investors should consult their own tax advisors regarding
the advisability of making such an election.
87
Treatment of Losses
Regular Securityholders will be required to report income with respect to
Regular Securities on the accrual method of accounting, without giving effect to
delays or reductions in distributions attributable to defaults or delinquencies
on the Mortgage Loans, except to the extent it can be established that such
losses are uncollectable. Accordingly, the holder of a Regular Security,
particularly a Subordinate Security, may have income, or may incur a diminution
in cash flow as a result of a default or delinquency, but may not be able to
take a deduction (subject to the discussion below) for the corresponding loss
until a subsequent taxable year. In this regard, investors are cautioned that
while they may generally cease to accrue interest income if it reasonably
appears that the interest will be uncollectable, the IRS may take the position
that original issue discount must continue to be accrued in spite of its
uncollectibility until the debt instrument is disposed of in a taxable
transaction or becomes worthless in accordance with the rules of Code Section
166. Under Code Section 166, it appears that Regular Securityholders that are
corporations or that otherwise hold the Regular Securities in connection with a
trade or business should in general be allowed to deduct as an ordinary loss
such loss with respect to principal sustained during the taxable year on account
of any such Regular Securities becoming wholly or partially worthless, and that,
in general, Regular Securityholders that are not corporations and do not hold
the Regular Securities in connection with a trade or business should be allowed
to deduct as a short-term capital loss any loss sustained during the taxable
year on account of a portion of any such Regular Securities becoming wholly
worthless. Although the matter is not free from doubt, such non-corporate
Regular Securityholders should be allowed a bad debt deduction at such time as
the principal balance of such Regular Securities is reduced to reflect losses
resulting from any liquidated Mortgage Loans. The IRS, however, could take the
position that non-corporate holders will be allowed a bad debt deduction to
reflect such losses only after all the Mortgage Loans remaining in the Trust
Fund have been liquidated or the applicable Class of Regular Securities has been
otherwise retired. The IRS could also assert that losses on the Regular
Securities are deductible based on some other method that may defer such
deductions for all holders, such as reducing future cashflow for purposes of
computing original issue discount. This may have the effect of creating
"negative" original issue discount which would be deductible only against future
positive original issue discount or otherwise upon termination of the Class.
Regular Securityholders are urged to consult their own tax advisors regarding
the appropriate timing, amount and character of any loss sustained with respect
to such Regular Securities. While losses attributable to interest previously
reported as income should be deductible as ordinary losses by both corporate and
non-corporate holders, the IRS may take the position that losses attributable to
accrued original issue discount may only be deducted as capital losses in the
case of non-corporate holders who do not hold the Regular Securities in
connection with a trade or business. Special loss rules are applicable to banks
and thrift institutions, including rules regarding reserves for bad debts. Such
taxpayers are advised to consult their tax advisors regarding the treatment of
losses on Regular Securities.
Sale or Exchange of Regular Securities
If a Regular Securityholder sells or exchanges a Regular Security, the
Regular Securityholder will recognize gain or loss equal to the difference, if
any, between the amount received and its adjusted basis in the Regular Security.
The adjusted basis of a Regular Security generally will equal the original cost
of the Regular Security to the seller, increased by any original issue discount
or market discount previously included in the seller's gross income with respect
to the Regular Security and reduced by amounts included in the stated redemption
price at maturity of the Regular Security that were previously received by the
seller, by any amortized premium, and by any recognized losses.
Except as described above with respect to market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Security realized by an investor who holds the Regular Security as a
capital asset will be capital gain or loss and will be long-term or short-term
depending on whether the Regular Security has been held for the long-term
capital gain holding period (currently, more than one year). Such gain will be
treated as ordinary income (i) if a Regular Security is held as part of a
"conversion transaction" as defined in Code Section 1258(c), up to the amount of
interest that would have accrued on the Regular Securityholder's net investment
in the conversion transaction at 120% of the appropriate applicable Federal rate
in effect at the time the taxpayer entered into the transaction minus any amount
previously treated as ordinary income with respect to any prior disposition of
property that was held as part of such transaction, (ii) in the case of a
non-corporate taxpayer, to the extent such taxpayer has made an election under
Code Section 163(d)(4) to have net capital gains taxed as investment income at
ordinary income rates, or (iii) to the extent that such gain does not exceed the
excess, if any, of (a) the amount that would have been includable in the gross
income of the holder if its yield on such Regular Security were 110% of the
applicable Federal rate as of the date of purchase, over (b) the amount of
income actually includable in the gross income of such holder with respect to
such Regular Security. In addition, gain or loss recognized from the sale of a
Regular Security by certain banks or thrift institutions will be treated as
ordinary income or loss pursuant to Code Section 582(c). Long-term capital gains
of certain noncorporate taxpayers generally are subject to a lower maximum tax
rate than ordinary income or short-term capital gains of such taxpayers for
property held for more than one year. Currently, the maximum tax rate for
corporations is the same with respect to both ordinary income and capital gains.
88
Taxation of Owners of Residual Securities
Taxation of REMIC Income
Generally, the "daily portions" of REMIC taxable income or net loss will be
includable as ordinary income or loss in determining the federal taxable income
of holders of Residual Securities ("Residual Holders"), and will not be taxed
separately to the REMIC Pool. The daily portions of REMIC taxable income or net
loss of a Residual Holder are determined by allocating the REMIC Pool's taxable
income or net loss for each calendar quarter ratably to each day in such quarter
and by allocating such daily portion among the Residual Holders in proportion to
their respective holdings of Residual Securities in the REMIC Pool on such day.
REMIC taxable income is generally determined in the same manner as the taxable
income of an individual using the accrual method of accounting, except that (i)
the limitations on deductibility of investment interest expense and expenses for
the production of income do not apply, (ii) all bad loans will be deductible as
business bad debts, and (iii) the limitation on the deductibility of interest
and expenses related to tax-exempt income will apply. The REMIC Pool's gross
income includes interest, original issue discount income and market discount
income, if any, on the Mortgage Loans, reduced by amortization of any premium on
the Mortgage Loans, plus income from amortization of issue premium, if any, on
the Regular Securities, plus income on reinvestment of cash flows and reserve
assets, plus any cancellation of indebtedness income upon allocation of realized
losses to the Regular Securities. The REMIC Pool's deductions include interest
and original issue discount expense on the Regular Securities, servicing fees on
the Mortgage Loans, other administrative expenses of the REMIC Pool and realized
losses on the Mortgage Loans. The requirement that Residual Holders report their
pro rata share of taxable income or net loss of the REMIC Pool will continue
until there are no Securities of any Class of the related Series outstanding.
The taxable income recognized by a Residual Holder in any taxable year will
be affected by, among other factors, the relationship between the timing of
recognition of interest, original issue discount or market discount income or
amortization of premium with respect to the Mortgage Loans, on the one hand, and
the timing of deductions for interest (including original issue discount) or
income from amortization of issue premium on the Regular Securities, on the
other hand. In the event that an interest in the Mortgage Loans is acquired by
the REMIC Pool at a discount, and one or more of such Mortgage Loans is prepaid,
the prepayment may be used in whole or in part to make distributions in
reduction of principal on the Regular Securities, and (ii) the discount on the
Mortgage Loans which is includable in income may exceed the deduction allowed
upon such distributions on those Regular Securities on account of any unaccrued
original issue discount relating to those Regular Securities. When there is more
than one Class of Regular Securities that distribute principal sequentially,
this mismatching of income and deductions is particularly likely to occur in the
early years following issuance of the Regular Securities when distributions in
reduction of principal are being made in respect of earlier Classes of Regular
Securities to the extent that such Classes are not issued with substantial
discount or are issued at a premium. If taxable income attributable to such a
mismatching is realized, in general, losses would be allowed in later years as
distributions on the later maturing Classes of Regular Securities are made.
Taxable income may also be greater in earlier years than in later years as a
result of the fact that interest expense deductions, expressed as a percentage
of the outstanding principal amount of such a Series of Regular Securities, may
increase over time as distributions in reduction of principal are made on the
lower yielding Classes of Regular Securities, whereas, to the extent the REMIC
Pool consists of fixed rate Mortgage Loans, interest income with respect to any
given Mortgage Loan will remain constant over time as a percentage of the
outstanding principal amount of that loan. Consequently, Residual Holders must
have sufficient other sources of cash to pay any federal, state, or local income
taxes due as a result of such mismatching or unrelated deductions against which
to offset such income, subject to the discussion of "excess inclusions" below
under "--Limitations on Offset or Exemption of REMIC Income." The timing of such
mismatching of income and deductions described in this paragraph, if present
with respect to a Series of Securities, may have a significant adverse effect
upon a Residual Holder's after-tax rate of return.
89
A portion of the income of a Residual Securityholder may be treated
unfavorably in three contexts: (i) it may not be offset by current or net
operating loss deductions; (ii) it will be considered unrelated business taxable
income to tax-exempt entities; and (iii) it is ineligible for any statutory or
treaty reduction in the 30% withholding tax otherwise available to a foreign
Residual Securityholder. See "--Limitations on Offset or Exemption of REMIC
Income" below. In addition, a Residual Holder's taxable income during certain
periods may exceed the income reflected by such Residual Holders for such
periods in accordance with generally accepted accounting principles. Investors
should consult their own accountants concerning the accounting treatment of
their investment in Residual Securities.
Basis and Losses
The amount of any net loss of the REMIC Pool that may be taken into account
by the Residual Holder is limited to the adjusted basis of the Residual Security
as of the close of the quarter (or time of disposition of the Residual Security
if earlier), determined without taking into account the net loss for the
quarter. The initial adjusted basis of a purchaser of a Residual Security is the
amount paid for such Residual Security. Such adjusted basis will be increased by
the amount of taxable income of the REMIC Pool reportable by the Residual Holder
and will be decreased (but not below zero), first, by a cash distribution from
the REMIC Pool and, second, by the amount of loss of the REMIC Pool reportable
by the Residual Holder. Any loss that is disallowed on account of this
limitation may be carried over indefinitely with respect to the Residual Holder
as to whom such loss was disallowed and may be used by such Residual Holder only
to offset any income generated by the same REMIC Pool.
A Residual Holder will not be permitted to amortize directly the cost of
its Residual Security as an offset to its share of the taxable income of the
related REMIC Pool. However, the taxable income will not include cash received
by the REMIC Pool that represents a recovery of the REMIC Pool's basis in its
assets. Although the law is unclear in certain respects, such recovery of basis
by the REMIC Pool will have the effect of amortization of the issue price of the
Residual Securities over their life. However, in view of the possible
acceleration of the income of Residual Holders described above under "--Taxation
of REMIC Income," the period of time over which such issue price is effectively
amortized may be longer than the economic life of the Residual Securities.
A Residual Security may have a negative value if the net present value of
anticipated tax liabilities exceeds the present value of anticipated cash flows.
The REMIC Regulations appear to treat the issue price of such a residual
interest as zero rather than such negative amount for purposes of determining
the REMIC Pool's basis in its assets. The preamble to the REMIC Regulations
states that the IRS may provide future guidance on the proper tax treatment of
payments made by a transferor of such a residual interest to induce the
transferee to acquire the interest, and Residual Holders should consult their
own tax advisors in this regard.
Further, to the extent that the initial adjusted basis of a Residual Holder
(other than an original holder) in the Residual Security is greater than the
corresponding portion of the REMIC Pool's basis in the Mortgage Loans, the
Residual Holder will not recover a portion of such basis until termination of
the REMIC Pool unless future Treasury regulations provide for periodic
adjustments to the REMIC income otherwise reportable by such holder. The REMIC
Regulations currently in effect do not so provide. See "--Treatment of Certain
Items of REMIC Income and Expense--Market Discount" below regarding the basis of
Mortgage Loans to the REMIC Pool and "--Sale or Exchange of a Residual Security"
below regarding possible treatment of a loss upon termination of the REMIC Pool
as a capital loss.
Treatment of Certain Items of REMIC Income and Expense
Although it is anticipated that the Trustee will compute REMIC income and
expense in accordance with the Code and applicable regulations, the authorities
regarding the determination of specific items of income and expense are subject
to differing interpretations. The Depositor makes no representation as to the
specific method that will be used for reporting income with respect to the
Mortgage Loans and expenses with respect to the Regular Securities, and
different methods could result in different timing or reporting of taxable
income or net loss to Residual Holders or differences in capital gain versus
ordinary income.
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Original Issue Discount and Premium. Generally, the REMIC Pool's deductions
for original issue discount and income from amortization of premium will be
determined in the same manner as original issue discount income on Regular
Securities as described above under "--Taxation of Owners of Regular
Securities--Original Issue Discount" and "--Variable Rate Regular Securities,"
without regard to the de minimis rule described therein, and "--Taxation of
Owners of Regular Securities--Amortizable Premium."
Market Discount. The REMIC Pool will have market discount income in respect
of Mortgage Loans if, in general, the basis of the REMIC Pool in such Mortgage
Loans is exceeded by their unpaid principal balances. The REMIC Pool's basis in
such Mortgage Loans is generally the fair market value of the Mortgage Loans
immediately after the transfer thereof to the REMIC Pool. The REMIC Regulations
provide that such basis is equal in the aggregate to the issue prices of all
regular and residual interests in the REMIC Pool. The accrued portion of such
market discount would be recognized currently as an item of ordinary income in a
manner similar to original issue discount. Market discount income generally
should accrue in the manner described above under "--Taxation of Owners of
Regular Securities--Market Discount."
Premium. Generally, if the basis of the REMIC Pool in the Mortgage Loans
exceeds the unpaid principal balances thereof, the REMIC Pool will be considered
to have acquired such Mortgage Loans at a premium equal to the amount of such
excess. As stated above, the REMIC Pool's basis in Mortgage Loans is the fair
market value of the Mortgage Loans, based on the aggregate of the issue prices
of the regular and residual interests in the REMIC Pool immediately after the
transfer thereof to the REMIC Pool. In a manner analogous to the discussion
above under "--Taxation of Owners of Regular Securities--Amortizable Premium," a
person that holds a Mortgage Loan as a capital asset under Code Section 1221 may
elect under Code Section 171 to amortize premium on Mortgage Loans originated
after September 27, 1985 under the constant yield method. Amortizable bond
premium will be treated as an offset to interest income on the Mortgage Loans,
rather than as a separate deduction item. Because substantially all of the
mortgagors on the Mortgage Loans are expected to be individuals, Code Section
171 will not be available for premium on Mortgage Loans originated on or prior
to September 27, 1985. Premium with respect to such Mortgage Loans may be
deductible in accordance with a reasonable method regularly employed by the
holder thereof. The allocation of such premium pro rata among principal payments
should be considered a reasonable method; however, the IRS may argue that such
premium should be allocated in a different manner, such as allocating such
premium entirely to the final payment of principal.
Limitations on Offset or Exemption of REMIC Income
A portion (or all) of the REMIC taxable income includable in determining
the federal income tax liability of a Residual Holder will be subject to special
treatment. That portion, referred to as the "excess inclusion," is equal to the
excess of REMIC taxable income for the calendar quarter allocable to a Residual
Security over the daily accruals for such quarterly period of (i) 120% of the
long-term applicable Federal rate that would have applied to the Residual
Security (if it were a debt instrument) on the Startup Day under Code Section
1274(d), multiplied by (ii) the adjusted issue price of such Residual Security
at the beginning of such quarterly period. For this purpose, the adjusted issue
price of a Residual Security at the beginning of a quarter is the issue price of
the Residual Security, plus the amount of such daily accruals of REMIC income
described in this paragraph for all prior quarters, decreased by any
distributions made with respect to such Residual Security prior to the beginning
of such quarterly period. Accordingly, the portion of the REMIC Pool's taxable
income that will be treated as excess inclusions will be a larger portion of
such income as the adjusted issue price of the Residual Securities diminishes.
The portion of a Residual Holder's REMIC taxable income consisting of the
excess inclusions generally may not be offset by other deductions, including net
operating loss carryforwards, on such Residual Holder's return. However, net
operating loss carryovers are determined without regard to excess inclusion
income. Further, if the Residual Holder is an organization subject to the tax on
unrelated business income imposed by Code Section 511, the Residual Holder's
excess inclusions will be treated as unrelated business taxable income of such
Residual Holder for purposes of Code Section 511. In addition, REMIC taxable
income is subject to 30% withholding tax with respect to certain persons who are
not U.S. Persons (as defined below under "--Tax-Related Restrictions on Transfer
of Residual Securities--Foreign Investors"), and the portion thereof
attributable to excess inclusions is not eligible for any reduction in the rate
of withholding tax (by treaty or otherwise). See "--Taxation of Certain Foreign
Investors--Residual Securities" below. Finally, if a real estate investment
trust or a regulated investment company owns a Residual Security, a portion
(allocated under Treasury regulations yet to be issued) of dividends paid by the
real estate investment trust or regulated investment company could not be offset
by net operating losses of its shareholders, would constitute unrelated business
taxable income for tax-exempt shareholders, and would be ineligible for
reduction of withholding to certain persons who are not U.S. Persons. The SBJPA
of 1996 has eliminated the special rule permitting Section 593 institutions
("thrift institutions") to use net operating losses and other allowable
deductions to offset their excess inclusion income from Residual Securities that
have "significant value" within the meaning of the REMIC Regulations, effective
for taxable years beginning after December 31, 1995, except with respect to
Residual Securities continuously held by a thrift institution since November 1,
1995.
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In addition, the SBJPA of 1996 provides three rules for determining the
effect of excess inclusions on the alternative minimum taxable income of a
Residual Holder. First, alternative minimum taxable income for a Residual Holder
is determined without regard to the special rule, discussed above, that taxable
income cannot be less than excess inclusions. Second, a Residual Holder's
alternative minimum taxable income for a taxable year cannot be less than the
excess inclusions for the year. Third, the amount of any alternative minimum tax
net operating loss deduction must be computed without regard to any excess
inclusions. These rules are effective for taxable years beginning after December
31, 1986, unless a Residual Holder elects to have such rules apply only to
taxable years beginning after August 20, 1996.
Tax-Related Restrictions on Transfer of Residual Securities
Disqualified Organizations. If any legal or beneficial interest in a
Residual Security is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (i) the
present value of the total anticipated excess inclusions with respect to such
Residual Security for periods after the transfer and (ii) the highest marginal
federal income tax rate applicable to corporations. The REMIC Regulations
provide that the anticipated excess inclusions are based on actual prepayment
experience to the date of the transfer and projected payments based on the
Prepayment Assumption. The present value rate equals the applicable Federal rate
under Code Section 1274(d) as of the date of the transfer for a term ending with
the last calendar quarter in which excess inclusions are expected to accrue.
Such rate is applied to the anticipated excess inclusions from the end of the
remaining calendar quarters in which they arise to the date of the transfer.
Such a tax generally would be imposed on the transferor of the Residual
Security, except that where such transfer is through an agent (including a
broker, nominee, or other middleman) for a Disqualified Organization, the tax
would instead be imposed on such agent. However, a transferor of a Residual
Security would in no event be liable for such tax with respect to a transfer if
the transferee furnished to the transferor an affidavit stating that the
transferee is not a Disqualified Organization and, as of the time of the
transfer, the transferor does not have actual knowledge that such affidavit is
false. The tax also may be waived by the IRS if the Disqualified Organization
promptly disposes of the Residual Security and the transferor pays income tax at
the highest corporate rate on the excess inclusion for the period the Residual
Security is actually held by the Disqualified Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Security during a taxable year and a
Disqualified Organization is the record holder of an equity interest in such
entity, then a tax is imposed on such entity equal to the product of (i) the
amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period such interest is held by such Disqualified
Organization, and (ii) the highest marginal federal corporate income tax rate.
Such tax would be deductible from the ordinary gross income of the Pass-Through
Entity for the taxable year. The Pass-Through Entity would not be liable for
such tax if it has received an affidavit from such record holder that it is not
a Disqualified Organization or stating such holder's taxpayer identification
number and, during the period such person is the record holder of the Residual
Security, the Pass-Through Entity does not have actual knowledge that such
affidavit is false.
For taxable years beginning on or after January 1, 1998, if an "electing
large partnership" holds a Residual Security, all interests in the electing
large partnership are treated as held by Disqualified Organizations for purposes
of the tax imposed upon a Pass-Through Entity by section 860E(c) of the Code. An
exception to this tax, otherwise available to a Pass-Through Entity that is
furnished certain affidavits by record holders of interests in the entity and
that does not know such affidavits are false, is not available to an electing
large partnership.
For these purposes, (i) "Disqualified Organization" means the United
States, any state or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing (provided, that such term does not include an instrumentality if all
of its activities are subject to tax and a majority of its board of directors in
not selected by any such governmental entity), any cooperative organization
furnishing electric energy or providing telephone service or persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 531) that is exempt from
taxation under the Code unless such organization is subject to the tax on
unrelated business income imposed by Code Section 511, (ii) "Pass-Through
Entity" means any regulated investment company, real estate investment trust,
common trust fund, partnership, trust or estate and certain corporations
operating on a cooperative basis. Except as may be provided in Treasury
regulations, any person holding an interest in a Pass-Through Entity as a
nominee for another will, with respect to such interest, be treated as a
Pass-Through Entity, and (iii) an "electing large partnership" means any
partnership having more than 100 members during the preceding tax year (other
than certain service partnerships and commodity pools), which elect to apply
simplified reporting provisions under the Code.
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The Pooling and Servicing Agreement with respect to a Series will provide
that no legal or beneficial interest in a Residual Security may be transferred
or registered unless (i) the proposed transferee furnished to the transferor and
the Trustee an affidavit providing its taxpayer identification number and
stating that such transferee is the beneficial owner of the Residual Security
and is not a Disqualified Organization and is not purchasing such Residual
Security on behalf of a Disqualified Organization (i.e., as a broker, nominee or
middleman thereof) and (ii) the transferor provides a statement in writing to
the Trustee that it has no actual knowledge that such affidavit is false.
Moreover, the Pooling and Servicing Agreement will provide that any attempted or
purported transfer in violation of these transfer restrictions will be null and
void and will vest no rights in any purported transferee. Each Residual Security
with respect to a Series will bear a legend referring to such restrictions on
transfer, and each Residual Holder will be deemed to have agreed, as a condition
of ownership thereof, to any amendments to the related Pooling and Servicing
Agreement required under the Code or applicable Treasury regulations to
effectuate the foregoing restrictions. Information necessary to compute an
applicable excise tax must be furnished to the IRS and to the requesting party
within 60 days of the request, and the Depositor or the Trustee may charge a fee
for computing and providing such information.
Noneconomic Residual Interests. The REMIC Regulations would disregard
certain transfers of Residual Securities, in which case the transferor would
continue to be treated as the owner of the Residual Securities and thus would
continue to be subject to tax on its allocable portion of the net income of the
REMIC Pool. Under the REMIC Regulations, a transfer of a "noneconomic residual
interest" (as defined below) to a Residual Holder (other than a Residual Holder
who is not a U.S. Person as defined below under "--Foreign Investors") is
disregarded to all federal income tax purposes if a significant purpose of the
transfer is to impede the assessment or collection of tax. A residual interest
in a REMIC (including a residual interest with a positive value at issuance) is
a "noneconomic residual interest" unless, at the time of the transfer, (i) the
present value of the expected future distributions on the residual interest at
least equals the product of the present value of the anticipated excess
inclusions and the highest corporate income tax rate in effect for the year in
which the transfer occurs, and (ii) the transferor reasonably expects that the
transferee will receive distributions from the REMIC at or after the time at
which taxes accrue on the anticipated excess inclusions in an amount sufficient
to satisfy the accrued taxes on each excess inclusion. The anticipated excess
inclusions and the present value rate are determined in the same manner as set
forth above under "--Disqualified Organizations." The REMIC Regulations explain
that a significant purpose to impede the assessment or collection of tax exists
if the transferor, at the time of the transfer, either knew or should have known
that the transferee would be unwilling or unable to pay taxes due on its share
of the taxable income of the REMIC. A safe harbor is provided if (i) the
transferor conducted, at the time of the transfer, a reasonable investigation of
the financial condition of the transferee and found that the transferee
historically had paid its debts as they came due and found no significant
evidence to indicate that the transferee would not continue to pay its debts as
they came due in the future, and (ii) the transferee represents to the
transferor that it understands that, as the holder of the non-economic residual
interest, the transferee may incur liabilities in excess of any cash flows
generated by the interest and that the transferee intends to pay taxes
associated with holding the residual interest as they become due. The Pooling
and Servicing Agreement with respect to each Series of Certificates will require
the transferee of a Residual Security to certify to the matters in the preceding
sentence as part of the affidavit described above under the heading
"Disqualified Organizations."
In addition to the two conditions set forth above for the transferor of a
noneconomic residual interest to be presumed not to have knowledge that the
transferee would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC, recently proposed Treasury regulations would add a
third condition for the transferor to be presumed to lack such knowledge. This
third condition would require that the present value of the anticipated tax
liabilities associated with holding the noneconomic residual interest not exceed
the sum of:
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(i) the present value of any consideration given to the transferee to
acquire the interest;
(ii) the present value of the expected future distributions on the
interest; and
(iii) the present value of the anticipated tax savings associated with
holding the interest as the REMIC generates losses.
For purposes of the computations under this third condition, the transferee is
assumed to pay tax at the highest corporate rate of tax specified in the Code.
Further, present values generally are computed using a discount rate equal to
the applicable Federal rate set forth in Section 1274(d) of the Code compounded
semiannually. However, a lower rate may be used if the transferee can
demonstrate that it regularly borrows, in the course of its trade or business,
substantial funds at such lower rate from unrelated third parties. In some
situations, to satisfy this third condition, the transferor of a noneconomic
residual interest may have to pay more consideration to the transferee than
would otherwise be the case if the proposed regulations were not applicable. If
adopted, the proposed regulations would apply to the transfer of a noneconomic
residual interest made on or after February 4, 2000. Prospective investors
should consult their own tax advisors as to the applicability and effect of the
proposed regulations.
Additionally, the IRS has issued Revenue Procedure 2001-12 (the "Revenue
Procedure") dealing with the transfer of noneconomic residual interests such as
a Residual Security. The Revenue Procedure restates the safe harbor described in
the proposed Treasury regulations discussed above and adds an alternative test
for meeting the safe harbor. To meet the alternative test, (i) the transferee
must be a domestic "C" corporation (other than a corporation exempt from
taxation or a regulated investment company or real estate investment trust) that
meets certain asset tests; (ii) the transferee must agree in writing that any
subsequent transfer of the residual interest would be to an eligible "C"
corporation and would meet the requirements for a safe harbor transfer under the
Revenue Procedure; (iii) the facts and circumstances known to the transferor on
or before the date of the transfer must not reasonably indicate that the taxes
associated with ownership of the residual interest will not be paid by the
transferee.
Unless otherwise indicated in the applicable Prospectus Supplement, the
Pooling and Servicing Agreement will not require that transfers of the Residual
Securities meet the safe harbor under either the test contained in the proposed
Treasury regulations or the alternative test provided by the Revenue Procedure.
Persons considering the purchase of the Residual Securities should consult their
advisors regarding the advisability of meeting the safe harbor in any transfer
the Residual Securities.
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Security that has "tax avoidance potential" to a "foreign person" will
be disregarded for all federal tax purposes. This rule appears intended to apply
to a transferee who is not a "U.S. Person" (as defined below), unless such
transferee's income is effectively connected with the conduct of a trade or
business within the United States. A Residual Security is deemed to have tax
avoidance potential unless, at the time of the transfer, (i) the future value of
expected distributions equals at least 30% of the anticipated excess inclusions
after the transfer, and (ii) the transferor reasonably expects that the
transferee will receive sufficient distributions from the REMIC Pool at or after
the time at which the excess inclusions accrue and prior to the end of the next
succeeding taxable year for the accumulated withholding tax liability to be
paid. If the non-U.S. Person transfers the Residual Security back to a U.S.
Person, the transfer will be disregarded and the foreign transferor will
continue to be treated as the owner unless arrangements are made so that the
transfer does not have the effect of allowing the transferor to avoid tax on
accrued excess inclusions.
The Prospectus Supplement relating to the Certificates of a Series may
provide that a Residual Security may not be purchased by or transferred to any
person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which such a transfer may be made. The term "U.S.
Person" means a citizens or resident of the United States, a corporation or
partnership (unless, in the case of a partnership, Treasury regulations are
adopted that provide otherwise) created or organized in or under the laws of the
United States, any state thereof or the District of Columbia, including an
entity treated as a corporation or partnership for federal income tax purposes,
an estate that is subject to U.S. federal income tax regardless of the source of
its income, or a trust if a court within the United States is able to exercise
primary supervision over the administration of such trust and one or more such
U.S. Persons have the authority to control all substantial decisions of such
trust (or, to the extent provided in applicable Treasury regulations, certain
trusts in existence on August 20, 1996 which are eligible to elect to be treated
as U.S. Persons).
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Sale or Exchange of a Residual Security
Upon the sale or exchange of a Residual Security, the Residual Holder will
recognize gain or loss equal to the excess, if any, of the amount realized over
the adjusted basis (as described above under "--Taxation of Owners of Residual
Securities--Basis and Losses") of such Residual Holder in such Residual Security
at the time of the sale or exchange. In addition to reporting the taxable income
of the REMIC Pool, a Residual Holder will have taxable income to the extent that
any cash distribution to it from the REMIC Pool exceeds such adjusted basis on
that Distribution Date. Such income will be treated as gain from the sale or
exchange of the Residual Holder's Residual Security, in which case, if the
Residual Holder has an adjusted basis in its Residual Security remaining when
its interest in the REMIC Pool terminates, and if it holds such Residual
Security as a capital asset under Code Section 1221, then it will recognize a
capital loss at that time in the amount of such remaining adjusted basis.
Any gain on the sale of a Residual Security will be treated as ordinary
income (i) if a Residual Security is held as part of a "conversion transaction"
as defined in Code Section 1258(c), up to the amount of interest that would have
accrued on the Residual Holder's net investment in the conversion transaction at
120% of the appropriate applicable Federal rate in effect at the time the
taxpayer entered into the transaction minus any amount previously treated as
ordinary income with respect to any prior disposition of property that was held
as a part of such transaction or (ii) in the case of a non-corporate taxpayer,
to the extent such taxpayer has made an election under Code Section 163(d)(4) to
have net capital gains taxed as investment income at ordinary income rates. In
addition, gain or loss recognized from the sale of a Residual Security by
certain banks or thrift institutions will be treated as ordinary income or loss
pursuant to Code Section 582(c).
The Conference Committee Report to the 1986 Act provides that, except as
provided in Treasury regulations yet to be issued, the wash sale rules of Code
Section 1091 will apply to dispositions of Residual Securities where the seller
of the Residual Security, during the period beginning six months before the sale
or disposition of the Residual Security and ending six months after such sale or
disposition, acquires (or enters into any other transaction that results in the
application of Code Section 1091) any residual interest in any REMIC or any
interest in a "taxable mortgage pool" (such as a non-REMIC owner trust) that is
economically comparable to a Residual Security.
Mark to Market Regulations
On December 24, 1996, the IRS issued final regulations (the "Mark to Market
Regulations") under Code Section 475 relating to the requirement that a
securities dealer mark to market securities held for sale to customers. This
mark-to-market requirement applies to all securities of a dealer, except to the
extent that the dealer has specifically identified a security as held for
investment. The Mark to Market Regulations provide that, for purposes of this
mark to market requirement, a Residual Security is not treated as a security and
thus may not be marked to market. The Mark to Market Regulations apply to all
Residual Securities acquired on or after January 4, 1995.
Taxes That May Be Imposed on the REMIC Pool
Prohibited Transactions
Income from certain transaction by the REMIC Pool, called prohibited
transactions, will not be part of the calculation of income or loss includable
in the federal income tax returns of Residual Holders, but rather will be taxed
directly to the REMIC Pool at a 100% rate. Prohibited transactions generally
include (i) the disposition of a qualified mortgages other than for (a)
substitution within two years of the Startup Day for a defective (including a
defaulted) obligation (or repurchase in lieu of substitution of a defective
(including a defaulted) obligation at any time) or for any qualified mortgage
within three months of the Startup Day, (b) foreclosure, default, or imminent
default of a qualified mortgage, (c) bankruptcy or insolvency of the REMIC Pool,
or (d) a qualified (complete) liquidation, (ii) the receipt of income from
assets that are not the type of mortgages or investments that the REMIC Pool is
permitted to hold, (iii) the receipt of compensation for services, or (iv) the
receipt of gain from disposition of cash flow investments other than pursuant to
a qualified liquidation. Notwithstanding (i) and (iv), it is not a prohibited
transaction to sell a qualified mortgage or cash flow investment held by a REMIC
Pool to prevent a default on Regular Securities as a result of a default on
qualified mortgages or to facilitate a clean-up call (generally, an optional
termination to save administrative costs when no more than a small percentage of
the Securities is outstanding). The REMIC Regulations indicate that the
modification of a Mortgage Loan generally will not be treated as a disposition
if it is occasioned by a default or reasonably foreseeable default, an
assumption of the Mortgage Loan, the waiver of a due-on-sale or
due-on-encumbrance clause, or the conversion of an interest rate by a mortgagor
pursuant to the terms of a convertible adjustable rate Mortgage Loan.
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Contributions to the REMIC Pool After the Startup Day
In general, the REMIC Pool will be subject to a tax at a 100% rate on the
value of any property contributed to the REMIC Pool after the Startup Day.
Exceptions are provided for cash contributions to the REMIC Pool (i) during the
three months following the Startup Day, (ii) made to a qualified reserve fund by
a Residual Holder, (iii) in the nature of a guarantee, (iv) made to facilitate a
qualified liquidation or clean-up call, and (v) as otherwise permitted in
Treasury regulations yet to be issued. It is not anticipated that there will be
any contributions to the REMIC Pool after the Startup Day.
Net Income from Foreclosure Property
The REMIC Pool will be subject of federal income tax at the highest
corporate rate on "net income from foreclosure property," determined by
reference to the rules applicable to real estate investment trusts. Generally,
property acquired by deed in lieu of foreclosure would be treated as
"foreclosure property" for a period ending with the close of the third calendar
year beginning after the year in which the REMIC Pool acquires such property,
with a possible extension. Net income from foreclosure property generally means
gain from the sale of a foreclosure property that is inventory property and
gross income from foreclosure property other than qualifying rents and other
qualifying income for a real estate investment trust. It is not anticipated that
the REMIC Pool will have any taxable net income from foreclosure property.
Liquidation of the REMIC Pool
If a REMIC Pool adopts a plan of complete liquidation, within the meaning
of Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in
the REMIC Pool's final tax return a date on which such adoption is deemed to
occur, and sells all of its assets (other than cash) within a 90-day period
beginning on such date, the REMIC Pool will not be subject to the prohibited
transaction rules on the sale of its assets, provided that the REMIC Pool
credits or distributes in liquidation all of the sale proceeds plus its cash
(other than amounts retained to meet claims) to holders of Regular Securities
and Residual Holders within the 90-day period.
Administrative Matters
The REMIC Pool will be required to maintain its books on a calendar year
basis and to file federal income tax returns for federal income tax purposes in
a manner similar to a partnership. The form for such income tax return is Form
1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return. The
Trustee will be required to sign the REMIC Pool's returns. Treasury regulations
provide that, except where there is a single Residual Holder for an entire
taxable year, the REMIC Pool will be subject to the procedural and
administrative rules of the Code applicable to partnerships, including the
determination by the IRS of any adjustments to, among other things, items of
REMIC income, gain, loss, deduction, or credit in a unified administrative
proceeding. The Master Servicer will be obligated to act as "tax matters
person," as defined in applicable Treasury regulations, with respect to the
REMIC Pool as agent of the Residual Holders holding the largest percentage
interest in the Residual Securities. If the Code or applicable Treasury
regulations do not permit the Master Servicer to act as tax matters person in
its capacity as agent of such Residual Holder, such Residual Holder or such
other person specified pursuant to Treasury regulations will be required to act
as tax matters person. The tax matters person generally has responsibility for
overseeing and providing notice to the other Residual Holders of certain
administrative and judicial proceedings regarding the REMIC Pool's tax affairs,
although other holders of the Residual Securities of the same Series would be
able to participate in such proceedings in appropriate circumstances.
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Limitations on Deduction of Certain Expenses
An investor who is an individual, estate, or trust will be subject to
limitation with respect to certain itemized deductions described in Code Section
67, to the extent that such itemized deductions, in the aggregate, do not exceed
2% of the investor's adjusted gross income. In addition, Code Section 68
provides that itemized deductions otherwise allowable for a taxable year of an
individual taxpayer will be reduced by the lesser or (i) 3% of the excess, if
any, of adjusted gross income over $100,000 ($50,000 in the case of a married
individual filing a separate return) (subject to annual adjustments for
inflation after 1991), or (ii) 80% of the amount of itemized deductions
otherwise allowable for such year. In the case of a REMIC Pool, such deductions
may include deductions under Code Section 212 for the Servicing Fee and all
administrative and other expenses relating to the REMIC Pool, or any similar
expenses allocated to the REMIC Pool with respect to a regular interest it holds
in another REMIC. Such investors who hold REMIC Securities either directly or
indirectly through certain pass-through entities may have their pro rata share
of such expenses allocated to them as additional gross income, but may be
subject to such limitation on deductions. In addition, such expenses are not
deductible at all for purposes of computing the alternative minimum tax, and may
cause such investors to be subject to significant additional tax liability.
Temporary Treasury regulations provide that the additional gross income and
corresponding amount of expenses generally are to be allocated entirely to the
holders of Residual Securities in the case of a REMIC Pool that would not
qualify as a fixed investment trust in the absence of a REMIC election. With
respect to a REMIC Pool that would be classified as an investment trust in the
absence of a REMIC election or that is substantially similar to an investment
trust, any holder of a Regular Security that is an individual, trust, estate, or
pass-through entity also will be allocated its pro rata share of such expenses
and a corresponding amount of income and will be subject to the limitations or
deductions imposed by Code Sections 67 and 68, as described above. Unless
indicated otherwise in the applicable Prospectus Supplement, all such expenses
will be allocable to the Residual Securities. In general, such allocable portion
will be determined based on the ratio that a REMIC Securityholder's income,
determined on a daily basis, bears to the income of all holders of Regular
Securities and Residual Securities with respect to a REMIC Pool. As a result,
individuals, estates or trusts holding REMIC Securities (either directly or
indirectly through a grantor trust, partnership, S corporation, REMIC, or
certain other pass-through entities described in the foregoing temporary
Treasury regulations) may have taxable income in excess of the interest income
at the pass-through rate on Regular Securities that are issued in a single Class
or otherwise consistently with fixed investment trust status or in excess of
cash distributions for the related period on Residual Securities.
Taxation of Certain Foreign Investors
Regular Securities
Interest, including original issue discount, distributable to Regular
Securityholders who are non-resident aliens, foreign corporations, or other
Non-U.S. Persons (as defined below), generally will be considered "portfolio
interest" and, therefore, generally will not be subject to 30% United States
withholding tax, provided that (i) such interest is not effectively connected
with the conduct of a trade or business in the United States of the
Securityholder, (ii) such Non-U.S. Person is not a "10-percent shareholder"
within the meaning of Code Section 871(h)(3)(B) or a controlled foreign
corporation described in Code Section 881(c)(3)(C) and (iii) such Non-U.S.
Person provides the Trustee, or the person who would otherwise be required to
withhold tax from such distributions under Code Section 1441 or 1442, with an
appropriate statement, signed under penalties of perjury, identifying the
beneficial owner and stating, among other things, that the beneficial owner of
the Regular Security is a Non-U.S. Person. If such statement, or any other
required statement, is not provided, 30% withholding will apply unless reduced
or eliminated pursuant to an applicable tax treaty or unless the interest on the
Regular Security is effectively connected with the conduct of a trade or
business within the United States by such Non-U.S. Person. In the latter case,
such Non-U.S. Person will be subject to United States federal income tax at
regular rates. Investors who are Non-U.S. Persons should consult their own tax
advisors regarding the specific tax consequences to them of owning a Regular
Security. The term "Non-U.S. Person" means any person who is not a U.S. Person.
The IRS has issued final regulations (the "New Regulations") which provide
alternative methods of satisfying the beneficial ownership certification
requirement described above. The New Regulations were effective January 1, 2001.
The New Regulations require, in the case of Regular Securities held by a foreign
partnership, that (x) the certification described above be provided by the
partners rather than by the foreign partnership and (y) the partnership provide
certain information, including a United States taxpayer identification number. A
look-through rule applies in the case of tiered partnerships. Non-U.S. Persons
should consult their own tax advisors concerning the application of the
certification requirements in the New Regulations.
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Residual Securities
The Conference Committee Report to the 1986 Act indicates that amounts paid
to Residual Holders who are Non-U.S. Persons generally should be treated as
interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Treasury regulations provide that amount distributed to
Residual Holders may qualify as "portfolio interest," subject to the conditions
described in "--Regular Securities" above, but only to the extent that (i) the
Mortgage Loans were issued after July 18, 1984 and (ii) the Trust Fund or
segregated pool of assets therein (as to which a separate REMIC election will be
made), to which the Residual Security relates, consists of obligations issued in
"registered form" within the meaning of Code Section 163(f)(1). Generally,
Mortgage Loans will not be, but regular interests in another REMIC Pool will be,
considered obligations issued in registered form. Furthermore, Residual Holders
will not be entitled to any exemption from the 30% withholding tax (or lower
treaty rate) to the extent of that portion of REMIC taxable income that
constitutes an "excess inclusion." See "--Taxation of Owners of Residual
Securities--Limitations on Offset or Exemption of REMIC Income." If the amounts
paid to Residual Holders who are Non-U.S. Persons are effectively connected with
the conduct of a trade or business within the United States by such Non-U.S.
Persons, 30% (or lower treaty rate) withholding will not apply. Instead, the
amounts paid to such Non-U.S. Persons will be subject to United States federal
income tax at regular rates. If 30% (or lower treaty rate) withholding is
applicable, such amounts generally will be taken into account for purposes of
withholding only when paid or otherwise distributed (or when the Residual
Security is disposed of) under rules similar to withholding upon disposition of
debt instruments that have original issue discount. See "--Taxation of Owners of
Residual Securities--Tax-Related Restrictions on Transfer of Residual
Securities--Foreign Investors" above concerning the disregard of certain
transfers having "tax avoidance potential." Investors who are Non-U.S. Persons
should consult their own tax advisors regarding the specific tax consequences to
them of owning Residual Securities.
Backup Withholding
Distributions made on the Regular Securities, and proceeds from the sale of
the Regular Securities to or through certain brokers, may be subject to a
"backup" withholding tax under Code Section 3406 of 30% (decreasing to 28% by
2006) on "reportable payments" (including interest distributions, original issue
discount, and, under certain circumstances, principal distributions) unless the
Regular Holder complies with certain reporting and/or certification procedures,
including the provision of its taxpayer identification number to the Trustee,
its agent or the broker who effected the sale of the Regular Security, or such
Holder is otherwise an exempt recipient under applicable provisions of the Code.
Any amounts to be withheld from distribution on the Regular Securities would be
refunded by the IRS or allowed as a credit against the Regular Holder's federal
income tax liability. The New Regulations change certain of the rules relating
to certain presumptions currently available relating to information reporting
and backup withholding. Non-U.S. Persons are urged to contact their own tax
advisors regarding the application to them of backup withholding and information
reporting.
Reporting Requirements
Reports of accrued interest, original issue discount and information
necessary to compute the accrual of market discount will be made annually to the
IRS and to individuals, estates, non-exempt and non-charitable trusts, and
partnerships who are either holders of record of Regular Securities or
beneficial owners who own Regular Securities through a broker or middleman as
nominee. All brokers, nominees and all other non-exempt holders of record of
Regular Securities (including corporations, non-calendar year taxpayers,
securities or commodities dealers, real estate investment trusts, investment
companies, common trust funds, thrift institutions and charitable trusts) may
request such information for any calendar quarter by telephone or in writing by
contacting the person designated in Internal Revenue Service Publication 938
with respect to a particular Series of Regular Securities. Holders through
nominees must request such information from the nominee.
The IRS's Form 1066 has an accompanying Schedule Q, Quarterly Notice to
Residual Interest Holders of REMIC Taxable Income or Net Loss Allocation.
Treasury regulations require that Schedule Q be furnished by the REMIC Pool to
each Residual Holder by the end of the month following the close of each
calendar quarter (41 days after the end of a quarter under proposed Treasury
regulations) in which the REMIC Pool is in existence). Treasury regulations
require that, in addition to the foregoing requirements, information must be
furnished quarterly to Residual Holders, furnished annually, if applicable, to
holders of Regular Securities, and filed annually with the IRS concerning Code
Section 67 expenses (see "--Taxes That May Be Imposed on the REMIC
Pool--Limitations on Deduction of Certain Expenses" above) allocable to such
holders. Furthermore, under such regulations, information must be furnished
quarterly to Residual Holders, furnished annually to holders of Regular
Securities, and filed annually with the IRS concerning the percentage of the
REMIC Pool's assets meeting the qualified asset tests described above under
"Characterization of Investments in REMIC Securities."
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Residual Holders should be aware that their responsibilities as holders of
the residual interest in a REMIC Pool, including the duty to account for their
shares of the REMIC Pool's income or loss on their returns, continue for the
life of the REMIC Pool, even after the principal and interest on their Residual
Securities have been paid in full.
Treasury regulations provide that a Residual Holder is not required to
treat items on its return consistently with their treatment on the REMIC Pool's
return if the Holder owns 100% of the Residual Securities for the entire
calendar year. Otherwise, each Residual Holder is required to treat items on its
returns consistently with their treatment on the REMIC Pool's return, unless the
Holder either files a statement identifying the inconsistency or establishes
that the inconsistency resulted from incorrect information received from the
REMIC Pool. The IRS may assess a deficiency resulting from a failure to comply
with the consistency requirement without instituting an administrative
proceeding at the REMIC Pool level. A REMIC Pool typically will not register as
a tax shelter pursuant to Code Section 6111 because it generally will not have a
net loss for any of the first five taxable years of its existence. Any person
that holds a Residual Security as a nominee for another person may be required
to furnish the related REMIC Pool, in a manner to be provided in Treasury
regulations, with the name and address of such person and other specified
information.
Grantor Trust Funds
Classification of Grantor Trust Funds
With respect to each Series of Grantor Trust Securities, assuming
compliance with all provisions of the applicable Agreement, the related Grantor
Trust Fund will be classified as a grantor trust under subpart E, part I of
subchapter J of the Code and not as a partnership, an association taxable as a
corporation, or a "taxable mortgage pool" within the meaning of Code Section
7701(i). Accordingly, each holder of a Grantor Trust Security generally will be
treated as the beneficial owner of an undivided interest in the Mortgage Loans
included in the Grantor Trust Fund.
Standard Securities
General
Where there is no Retained Interest or "excess" servicing with respect to
the Mortgage Loans underlying the Securities of a Series, and where such
Securities are not designated as "Stripped Securities," the holder of each such
Security in such Series (referred to herein as "Standard Securities") will be
treated as the owner of a pro rata undivided interest in the ordinary income and
corpus portions of the Grantor Trust Fund represented by its Standard Security
and will be considered the beneficial owner of a pro rata undivided interest in
each of the Mortgage Loans, subject to the discussion below under
"--Recharacterization of Servicing Fees." Accordingly, the holder of a Standard
Security of a particular Series will be required to report on its federal income
tax return its pro rata share of the entire income from the Mortgage Loans
represented by its Standard Security, including interest at the coupon rate on
such Mortgage Loans, original issue discount (if any), prepayment fees,
assumption fees, and late payment charges received by the Servicer, in
accordance with such Securityholder's method of accounting. A Securityholder
generally will be able to deduct its share of the Servicing Fee and all
administrative and other expenses of the Trust Fund in accordance with its
method of accounting, provided that such amounts are reasonable compensation for
services rendered to that Grantor Trust Fund. However, investors who are
individuals, estates or trusts who own Securities, either directly or indirectly
through certain pass-through entities, will be subject to limitations with
respect to certain itemized deductions described in Code Section 67, including
deductions under Code Section 212 for the Servicing Fee and all such
administrative and other expenses of the Grantor Trust Fund, to the extent that
such deductions, in the aggregate, do not exceed two percent of an investor's
adjusted gross income. In addition, Code Section 68 provides that itemized
deductions otherwise allowable for a taxable year of an individual taxpayer will
be reduced by the lesser of (i) 3% of the excess, if any, of adjusted gross
income over $100,000 ($50,000 in the case of a married individual filing a
separate return) (in each case, as adjusted annually for post-1991 inflation),
or (ii) 80% of the amount of itemized deductions otherwise allowable for such
year. As a result, such investors holding Standard Securities, directly or
indirectly through a pass-through entity, may have aggregate taxable income in
excess of the aggregate amount of cash received on such Standard Securities with
respect to interest at the pass-through rate or as discount income on such
Standard Securities. In addition, such expenses are not deductible at all for
purposes of computing the alternative minimum tax, and may cause such investors
to be subject to significant additional tax liability. Moreover, where there is
Retained Interest with respect to the Mortgage Loans underlying a Series of
Securities or where the servicing fees are in excess of reasonable servicing
compensation, the transaction will be subject to the application of the
"stripped bond" and "stripped coupon" rules of the Code, as described below
under "--Stripped Securities" and "--Recharacterization of Servicing Fees,"
respectively.
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Holders of Standard Securities, particularly any Class of a Series which is
a Subordinate Security, may incur losses of interest or principal with respect
to the Mortgage Loans. Such losses would be deductible generally only as
described above under "--REMICs--Taxation of Owners of Regular
Securities--Treatment of Losses," except that Securityholders on the cash method
of accounting would not be required to report qualified stated interest as
income until actual receipt.
Tax Status
With respect to a Series, Cadwalader, Wickersham & Taft or Hunton &
Williams has advised the Depositor that, except with respect to a Trust Fund
consisting of Unsecured Home Improvement Loans:
1. A Standard Security owned by a "domestic building and loan
association" within the meaning of Code Section 7701(a)(19) will be
considered to represent "loans . . . secured by an interest in real
property which is . . . residential real property" within the meaning of
Code Section 7701(a)(19)(C)(v), provided that the real property securing
the Mortgage Loans represented by that Standard Security is of the type
described in such section of the Code.
2. A Standard Security owned by a real estate investment trust will be
considered to represent "real estate assets" within the meaning of Code
Section 856(c)(4)(A) to the extent that the assets of the related Grantor
Trust Fund consist of qualified assets, and interest income on such assets
will be considered "interest on obligations secured by mortgages on real
property" to such extent within the meaning of Code Section 856(c)(3)(B).
3. A Standard Security owned by a REMIC will be considered to
represent an "obligation (including any participation or certificate of
beneficial ownership therein) which is principally secured by an interest
in real property" within the meaning of Code Section 860G(a)(3)(A) to the
extent that the assets of the related Grantor Trust Fund consist of
"qualified mortgages" within the meaning of Code Section 860G(a)(3).
An issue arises as to whether Buydown Mortgage Loans may be characterized
in their entirety under the Code provisions cited in clauses 1 and 2 of the
immediately preceding paragraph or whether the amount qualifying for such
treatment must be reduced by the amount of the Buydown Mortgage Funds. There is
indirect authority supporting treatment of an investment in a Buydown Mortgage
Loan as entirely secured by real property if the fair market value of the real
property securing the loan exceeds the principal amount of the loan at the time
of issuance or acquisition, as the case may be. There is no assurance that the
treatment described above is proper. Accordingly, Securityholders are urged to
consult their own tax advisors concerning the effects of such arrangements on
the characterization of such Securityholder's investment for federal income tax
purposes.
Premium and Discount
Securityholders are advised to consult with their tax advisors as to the
federal income tax treatment of premium and discount arising either upon initial
acquisition of Standard Securities or thereafter.
Premium. The treatment of premium incurred upon the purchase of a Standard
Security will be determined generally as described above under
"--REMICs--Taxation of Owners of Residual Securities--Premium." The rules
allowing for the amortization of premium are available with respect to Mortgage
Loans originated after September 27, 1985.
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Original Issue Discount. The original issue discount rules of Code Section
1271 through 1275 will be applicable to a Securityholder's interest in those
Mortgage Loans as to which the conditions for the application of those sections
are met. Rules regarding periodic inclusion of original issue discount income
generally are applicable to mortgages originated after March 2, 1984. Under the
OID Regulations, original issue discount could arise by the charging of points
by the originator of the mortgages in an amount greater than the statutory de
minimis exception, including a payment of points that is currently deductible by
the borrower under applicable Code provisions or, under certain circumstances,
by the presence of "teaser" rates on the Mortgage Loans. See "--Stripped
Securities" below regarding original issue discount on Stripped Securities.
Original issue discount generally must be reported as ordinary gross income
as it accrues under a constant interest method that takes into account the
compounding of interest, in advance of the cash attributable to such income.
Unless indicated otherwise in the applicable Prospectus Supplement, no
prepayment assumption will be assumed for purposes of such accrual. However,
Code Section 1272 provides for a reduction in the amount of original issue
discount includable in the income of a holder of an obligation that acquires the
obligation after its initial issuance at a price greater than the sum of the
original issue price and the previously accrued original issue discount, less
prior payments of principal. Accordingly, if such Mortgage Loans acquired by a
Securityholder are purchased at a price equal to the then unpaid principal
amount of such Mortgage Loans, no original issue discount attributable to the
difference between the issue price and the original principal amount of such
Mortgage Loans (i.e., points) will be includable by such holder.
Market Discount. Securityholders also will be subject to the market
discount rules to the extent that the conditions for application of those
sections are met. Market discount on the Mortgage Loans will be determined and
will be reported as ordinary income generally in the manner described above
under "--REMICs--Taxation of Owners of Regular Securities--Market Discount,"
except that the ratable accrual methods described therein will not apply.
Rather, the holder will accrue market discount pro rata over the life of the
Mortgage Loans, unless the constant yield method is elected. Unless indicated
otherwise in the applicable Prospectus Supplement, no prepayment assumption will
be assumed for purposes of such accrual.
Recharacterization of Servicing Fees
If the servicing fees paid to a Servicer were deemed to exceed reasonable
servicing compensation, the amount of such excess would represent neither income
nor a deduction to Securityholders. In this regard, there are no authoritative
guidelines for federal income tax purposes as to either the maximum amount of
servicing compensation that may be considered reasonable in the context of this
or similar transactions or whether, in the case of Standard Securities, the
reasonableness of servicing compensation should be determined on a weighted
average or loan-by-loan basis. If a loan-by-loan basis is appropriate, the
likelihood that such amount would exceed reasonable servicing compensation as to
some of the Mortgage Loans would be increased. IRS guidance indicates that a
servicing fee in excess of reasonable compensation ("excess servicing") will
cause the Mortgage Loans to be treated under the "stripped bond" rules. Such
guidance provides safe harbors for servicing deemed to be reasonable and
requires taxpayers to demonstrate that the value of servicing fees in excess of
such amounts is not greater than the value of the services provided.
Accordingly, if the IRS's approach is upheld, a Servicer who receives a
servicing fee in excess of such amounts would be viewed as retaining an
ownership interest in a portion of the interest payments on the Mortgage Loans.
Under the rules of Code Section 1286, the separation of ownership of the right
to receive some or all of the interest payments on an obligation from the right
to receive some or all of the principal payments on the obligation would result
in treatment of such Mortgage Loans as "stripped coupons" and "stripped bonds."
Subject to the de minimis rule discussed below under "Stripped Securities," each
stripped bond or stripped coupon could be considered for this purpose as a
non-interest bearing obligation issued on the date of issue of the Standard
Securities, and the original issue discount rules of the Code would apply to the
holder thereof. While Securityholders would still be treated as owners of
beneficial interests in a grantor trust for federal income tax purposes, the
corpus of such trust could be viewed as excluding the portion of the Mortgage
Loans the ownership of which is attributed to the Servicer, or as including such
portion as a second Class of equitable interest. Applicable Treasury regulations
treat such an arrangement as a fixed investment trust, since the multiple
Classes of trust interests should be treated as merely facilitating direct
investments in the trust assets and the existence of multiple Classes of
ownership interests is incidental to that purpose. In general, such a
recharacterization should not have any significant effect upon the timing or
amount of income reported by a Securityholder, except that the income reported
by a cash method holder may be slightly accelerated. See "--Stripped Securities"
below for a further description of the federal income tax treatment of stripped
bonds and stripped coupons.
101
Sale or Exchange of Standard Securities
Upon sale or exchange of a Standard Securities, a Securityholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and its aggregate adjusted basis in the Mortgage Loans and other assets
represented by the Security. In general, the aggregate adjusted basis will equal
the Securityholder's cost for the Standard Security, exclusive of accrued
interest, increased by the amount of any income previously reported with respect
to the Standard Security and decreased by the amount of any losses previously
reported with respect to the Standard Security and the amount of any
distributions (other than accrued interest) received thereon. Except as provided
above with respect to market discount on any Mortgage Loans, and except for
certain financial institutions subject to the provisions of Code Section 582(c),
any such gain or loss generally would be capital gain or loss if the Standard
Security was held as a capital asset. However, gain on the sale of a Standard
Security will be treated as ordinary income (i) if a Standard Security is held
as part of a "conversion transaction" as defined in Code Section 1258(c), up to
the amount of interest that would have accrued on the Securityholder's net
investment in the conversion transaction at 120% of the appropriate applicable
Federal rate in effect at the time the taxpayer entered into the transaction
minus any amount previously treated as ordinary income with respect to any prior
disposition of property that was held as part of such transaction or (ii) in the
case of a non-corporate taxpayer, to the extent such taxpayer has made an
election under Code Section 163(d)(4) to have net capital gains taxed as
investment income at ordinary income rates. Long-term capital gains of certain
noncorporate taxpayers generally are subject to a lower maximum tax rate than
ordinary income or short-term capital gains of such taxpayers for property held
for more than one year. The maximum tax rate for corporations currently is the
same with respect to both ordinary income and capital gains.
Stripped Securities
General
Pursuant to Code Section 1286, the separation of ownership of the right to
receive some or all of the principal payments on an obligation from ownership of
the right to receive some or all of the interest payments results in the
creation of "stripped bonds" with respect to principal payments and "stripped
coupons" with respect to interest payments. For purposes of this discussion,
Securities that are subject to those rules will be referred to as "Stripped
Securities." The Securities will be subject to those rules if (i) the Depositor
or any of its affiliates retains (for its own account or for purposes of
resale), in the form of Retained Interest or otherwise, an ownership interest in
a portion of the payments on the Mortgage Loans, (ii) the Depositor or any of
its affiliates is treated as having an ownership interest in the Mortgage Loans
to the extent it is paid (or retains) servicing compensation in an amount
greater than reasonable consideration for servicing the Mortgage Loans (see
"--Standard Securities--Recharacterization of Servicing Fees" above), and (iii)
a Class of Securities are issued in two or more Classes or subclasses
representing the right to non-pro-rata percentages of the interest and principal
payments on the Mortgage Loans.
In general, a holder of a Stripped Security will be considered to own
"stripped bonds" with respect to its pro rata share of all or a portion of the
principal payments on each Mortgage Loan and/or "stripped coupons" with respect
to its pro rata share of all or a portion of the interest payments on each
Mortgage Loan, including the Stripped Security's allocable share of the
servicing fees paid to a Servicer, to the extent that such fees represent
reasonable compensation for services rendered. See the discussion above under
"--Standard Securities--Recharacterization of Servicing Fees." Although not free
from doubt, for purposes of reporting to Stripped Securityholders, the servicing
fees will be allocated to the Classes of Stripped Securities in proportion to
the distributions to such Classes for the related period or periods. The holder
of a Stripped Security generally will be entitled to a deduction each year in
respect of the servicing fees, as described above under "--Standard
Securities--General," subject to the limitation described therein.
Code Section 1286 treats a stripped bond or a stripped coupon generally as
an obligation issued at an original issue discount on the date that such
stripped interest is purchased. Although the treatment of Stripped Securities
for federal income tax purposes is not clear in certain respects, particularly
where such Stripped Securities are issued with respect to a Mortgage Pool
containing variable-rate Mortgage Loans, the Depositor has been advised by
counsel that (i) the Grantor Trust Fund will be treated as a grantor trust under
subpart E, part I of subchapter J of the Code and not as an association taxable
as a corporation or a "taxable mortgage pool" within the meaning of Code Section
7701(i), and (ii) each Stripped Security should be treated as a single
installment obligation for purposes of calculating original issue discount and
gain or loss on disposition. This treatment is based on the interrelationship of
Code Section 1286, Code Sections 1272 through 1275, and the OID Regulations.
Although it is possible that computations with respect to Stripped Securities
could be made in one of the ways described below under "--Possible Alternative
Characterizations," the OID Regulations state, in general, that two or more debt
instruments issued by a single issuer to a single investor in a single
transaction should be treated as a single debt instrument. Accordingly, for
original issue discount purposes, all payments on any Stripped Securities should
be aggregated and treated as though they were made on a single debt instrument.
The Pooling and Servicing Agreement will require that the Trustee make and
report all computations described below using this aggregate approach, unless
substantial legal authority requires otherwise.
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Furthermore, Treasury regulations provide for treatment of a Stripped
Security as a single debt instrument issued on the date it is purchased for
purposes of calculating any original issue discount. In addition, under such
regulations, a Stripped Security that represents a right to payments of both
interest and principal may be viewed either as issued with original issue
discount or market discount (as described below), at a de minimis original issue
discount, or, presumably, at a premium. This treatment indicates that the
interest component of such a Stripped Security would be treated as qualified
stated interest under the OID Regulations, assuming it is not an interest-only
or super-premium Stripped Security. Further, these regulations provide that the
purchaser of such a Stripped Security will be required to account for any
discount as market discount rather than original issue discount if either (i)
the initial discount with respect to the Stripped Security was treated as zero
under the de minimis rule, or (ii) no more than 100 basis points in excess of
reasonable servicing is stripped off the related Mortgage Loans. Any such market
discount would be reportable as described above under "--REMICs--Taxation of
Owners of Regular Securities--Market Discount," without regard to the de minimis
rule therein, assuming that a prepayment assumption is employed in such
computation.
The holder of a Stripped Security will be treated as owning an interest in
each of the Mortgage Loans held by the Grantor Trust Fund and will recognize an
appropriate share of the income and expenses associated with the Mortgage Loans.
Accordingly, an individual, trust or estate that holds a Stripped Security
directly or through a pass-through entity will be subject to the limitations on
deductions imposed by Code Sections 67 and 68.
A holder of a Stripped Security, particularly any Class of a Series which
is a Subordinate Security, may deduct losses incurred with respect to the
Stripped Security as described above under "--Standard Securities--General."
Status of Stripped Securities
No specific legal authority exists as to whether the character of the
Stripped Securities, for federal income tax purposes, will be the same as that
of the Mortgage Loans. Although the issue is not free from doubt, counsel has
advised the Depositor that, except with respect to a Trust Fund consisting of
Unsecured Home Improvement Loans, Stripped Securities owned by applicable
holders should be considered to represent "real estate assets" within the
meaning of Code Section 856(c)(4)(A), "obligation[s] . . . principally secured
by an interest in real property which is . . . residential real estate" within
the meaning of Code Section 860G(a)(3)(A), and "loans . . . secured by an
interest in real property" within the meaning of Code Section 7701(a)(19)(C)(v),
and interest (including original issue discount) income attributable to Stripped
Securities should be considered to represent "interest on obligations secured by
mortgages on real property" within the meaning of Code Section 856(c)(3)(B),
provided that in each case the Mortgage Loans and interest on such Mortgage
Loans qualify for such treatment. The application of such Code provisions to
Buydown Mortgage Loans is uncertain. See "--Standard Securities--Tax Status"
above.
Taxation of Stripped Securities
Original Issue Discount. Except as described above under "--General," each
Stripped Security will be considered to have been issued at an original issue
discount for federal income tax purposes. Original issue discount with respect
to a Stripped Security must be included in ordinary income as it accrues, in
accordance with a constant yield method that takes into account the compounding
of interest, which may be prior to the receipt of the cash attributable to such
income. Based in part on the issue discount required to be included in the
income of a holder of a Stripped Security (referred to in this discussion as a
"Stripped Securityholder") in any taxable year likely will be computed generally
as described above under "--REMICs--Taxation of Owner of Regular
Securities--Original Issue Discount" and "--Variable Rate Regular Securities."
However, with the apparent exception of a Stripped Security qualifying as a
market discount obligation as described above under "--General," the issue price
of a Stripped Security will be the purchase price paid by each holder thereof,
and the stated redemption price at maturity will include the aggregate amount of
the payments, other than qualified stated interest, to be made on the Stripped
Security to such Securityholder, presumably under the Prepayment Assumption.
103
If the Mortgage Loans prepay at a rate either faster or slower than that
under the Prepayment Assumption, a Securityholder's recognition of original
issue discount will be either accelerated or decelerated and the amount of such
original issue discount will be either increased or decreased depending on the
relative interests in principal and interest on each Mortgage Loan represented
by such Securityholder's Stripped Security. While the matter is not free from
doubt, the holder of a Stripped Security should be entitled in the year that it
becomes certain (assuming no further prepayments) that the holder will not
recover a portion of its adjusted basis in such Stripped Security to recognize a
loss (which may be a capital loss) equal to such portion of unrecoverable basis.
As an alternative to the method described above, the fact that some or all
of the interest payments with respect to the Stripped Securities will not be
made if the Mortgage Loans are prepaid could lead to the interpretation that
such interest payments are "contingent" within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of contingent
interest, are by their terms not applicable to prepayable securities such as the
Stripped Securities. However, if final regulations dealing with contingent
interest with respect to the Stripped Securities apply the same principles as
the OID Regulations, such regulations may lead to different timing of income
inclusion that would be the case under the OID Regulations. Furthermore,
application of such principles could lead to the characterization of gain on the
sale of contingent interest Stripped Securities as ordinary income. Investors
should consult their tax advisors regarding the appropriate tax treatment of
Stripped Securities.
Sale or Exchange of Stripped Securities. Sale or exchange of a Stripped
Security prior to its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the Securityholder's
adjusted basis in such Stripped Security, as described above under
"--REMICs--Taxation of Owners of Regular Securities--Sale or Exchange of Regular
Securities." Gain or loss from the sale or exchange of a Stripped Security
generally will be capital gain or loss to the Securityholder if the Stripped
Security is held as a "capital asset" within the meaning of Code section 1221,
and will be long-term or short-term depending on whether the Stripped Security
has been held for the long-term capital gain holding period (currently, more
than one year). To the extent that a subsequent purchaser's purchase price is
exceeded by the remaining payments on the Stripped Securities, such subsequent
purchaser will be required for federal income tax purposes to accrue and report
such excess as if it were original issue discount in the manner described above.
It is not clear for this purpose whether the assumed prepayment rate that is to
be used in the case of a Securityholder other than an original Securityholder
should be the Prepayment Assumption or a new rate based on the circumstances at
the date of subsequent purchase.
Purchase of More Than One Class of Stripped Securities. When an investor
purchases more than one Class of Stripped Securities, it is currently unclear
whether for federal income tax purposes such Classes of Stripped Securities
should be treated separately or aggregated for purposes of the rules described
above.
Possible Alternative Characterization. The characterizations of the
Stripped Securities discussed above are not the only possible interpretations of
the applicable Code provisions. For example, the Securityholder may be treated
as the owner of (i) one installment obligation consisting of such Stripped
Security's pro rata share of the payments attributable to principal on each
Mortgage Loan and a second installment obligation consisting of such Stripped
Security's pro rata share of the payments attributable to interest on each
Mortgage Loan, (ii) as many stripped bonds or stripped coupons as there are
scheduled payments of principal and/or interest on each Mortgage Loan, or (iii)
a separate installment obligation for each Mortgage Loan, representing the
Stripped Security's pro rata share of payments of principal and/or interest to
be made with respect thereto. Alternatively, the holder of one or more Classes
of Stripped Securities may be treated as the owner of a pro rata fractional
undivided interest in each Mortgage Loan to the extent that such Stripped
Security, or Classes of Stripped Securities in the aggregate, represent the same
pro rata portion of principal and interest on each such Mortgage Loan, and a
stripped bond or stripped coupon (as the case may be), treated as an installment
obligation or contingent payment obligation, as to the remainder. Treasury
regulations regarding original issue discount on stripped obligations make the
foregoing interpretations less likely to be applicable. The preamble to such
regulations states that they are premised on the assumption that an aggregation
approach is appropriate for determining whether original issue discount on a
stripped bond or stripped coupon is de minimis, and solicits comments on
appropriate rules for aggregating stripped bonds and stripped coupons under Code
Section 1286.
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Because of these possible varying characterizations of Stripped Securities
and the resultant differing treatment of income recognition, Securityholders are
urged to consult their own tax advisors regarding the proper treatment of
Stripped Securities for federal income tax purposes.
Reporting Requirements and Backup Withholding
The Trustee will furnish, within a reasonable time after the end of each
calendar year, to each Securityholder at any time during such year, such
information (prepared on the basis described above) as is necessary to enable
such Securityholder to prepare its federal income tax returns. Such information
will include the amount of original issue discount accrued on Securities held by
persons other than Securityholders exempted from the reporting requirements.
However, the amount required to be reported by the Trustee may not be equal to
the proper amount of original issue discount required to be reported as taxable
income by a Securityholder, other than an original Securityholder that purchased
at the issue price. In particular, in the case of Stripped Securities, unless
provided otherwise in the applicable Prospectus Supplement, such reporting will
be based upon a representative initial offering price of each Class of Stripped
Securities. The Trustee will also file such original issue discount information
with the IRS. If a Securityholder fails to supply an accurate taxpayer
identification number or if the Secretary of the Treasury determines that a
Securityholder has not reported all interest and dividend income required to be
shown on his federal income tax return, 30% backup withholding may be required
in respect of any reportable payments, as described above under
"--REMICs--Taxation of Certain Foreign Investors--Backup Withholding."
Taxation of Certain Foreign Investors
To the extent that a Security evidences ownership in Mortgage Loans that
are issued on or before July 18, 1984, interest or original issue discount paid
by the person required to withhold tax under Code Section 1441 or 1442 to
nonresident aliens, foreign corporations, or other Non-U.S. Persons generally
will be subject to 30% United States withholding tax, or such lower rate as may
be provided for interest by an applicable tax treaty. Accrued original issue
discount recognized by the Securityholder on the sale or exchange of such a
Security also will be subject to federal income tax at the same rate.
Treasury regulations provide that interest or original issue discount paid
by the Trustee or other withholding agent to a Non-U.S. Person evidencing
ownership interest in Mortgage Loans issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and such persons will be
subject to the same certification requirements, described above under
"--REMICs--Taxation of Certain Foreign Investors--Regular Securities."
Partnership Trust Funds
Classification of Partnership Trust Funds
With respect to each Series of Partnership Securities or Debt Securities,
Cadwalader, Wickersham & Taft or Hunton & Williams will deliver its opinion that
the Trust Fund will not be a taxable mortgage pool or an association (or
publicly traded partnership) taxable as a corporation for federal income tax
purposes. This opinion will be based on the assumption that the terms of the
applicable Agreement and related documents will be complied with, and on
counsel's conclusion that the nature of the income of the Trust Fund will exempt
it from the rule that certain publicly traded partnerships are taxable as
corporations.
Characterization of Investments in Partnership Securities and Debt Securities
For federal income tax purposes, (i) Partnership Securities and Debt
Securities held by a thrift institution taxed as a domestic building and loan
association will not constitute "loans . . . secured by an interest in real
property which is . . . residential real property" within the meaning of Code
Section 7701(a)(19)(C)(v) and (ii) interest on Debt Securities held by a real
estate investment trust will not be treated as "interest on obligations secured
by mortgages on real property or on interests in real property" within the
meaning of Code Section 856(c)(3)(B), and Debt Securities held by a real estate
investment trust will not constitute "real estate assets" within the meaning of
Code Section 856(c)(4)(A), but Partnership Securities held by a real estate
investment trust will qualify under those sections based on the real estate
investments trust's proportionate interest in the assets of the Partnership
Trust Fund qualifying for such treatments based on capital accounts.
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Taxation of Debt Securityholders
Treatment of the Debt Securities as Indebtedness
The Depositor will agree, and the Securityholders will agree by their
purchase of Debt Securities, to treat the Debt Securities as debt for federal
income tax purposes. No regulations, published rulings, or judicial decisions
exist that discuss the characterization for federal income tax purposes of
securities with terms substantially the same as the Debt Securities. However,
with respect to each Series of Debt Securities, Cadwalader, Wickersham & Taft or
Hunton & Williams will deliver its opinion that the Debt Securities will be
classified as indebtedness for federal income tax purposes. The discussion below
assumes this characterization of the Debt Securities is correct.
If, contrary to the opinion of counsel, the IRS successfully asserted that
the Debt Securities were not debt for federal income tax purposes, the Debt
Securities might be treated as equity interests in the Partnership Trust, and
the timing and amount of income allocable to holders of such Debt Securities may
be different than as described in the following paragraph.
Debt Securities generally will be subject to the same rules of taxation as
Regular Securities issued by a REMIC, as described above, except that (i) income
reportable on Debt Securities is not required to be reported under the accrual
method unless the holder otherwise uses the accrual method and (ii) the special
rule treating a portion of the gain on sale or exchange of a Regular Security as
ordinary income is inapplicable to Debt Securities. See "--REMICs--Taxation of
Owners of Regular Securities" and "--Sale or Exchange of Regular Securities."
Taxation of Owners of Partnership Securities
Treatment of the Partnership Trust Fund as a Partnership
If so specified in the applicable Prospectus Supplement, the Depositor will
agree, and the Securityholders will agree by their purchase of Securities, to
treat the Partnership Trust Fund as a partnership for purposes of federal and
state income tax, franchise tax and any other tax measured in whole or in part
by income, with the assets of the partnership being the assets held by the
Partnership Trust Fund, the partners of the partnership being the
Securityholders (including the Depositor), and the Debt Securities (if any)
being debt of the partnership. However, the proper characterization of the
arrangement involving the Partnership Trust Fund, the Partnership Securities,
the Debt Securities, and the Depositor is not clear, because there is no
authority on transactions closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because one or more of the Classes of Partnership Securities have certain
features characteristic of debt, the Partnership Securities might be considered
debt of the Depositor or the Partnership Trust Fund. Any such characterization
would not result in materially adverse tax consequences to Securityholders as
compared to the consequences from treatment of the Partnership Securities as
equity in a partnership, described below. The following discussion assumes that
the Partnership Securities represent equity interests in a partnership.
Partnership Taxation
As a partnership, the Partnership Trust Fund will not be subject to federal
income tax. Rather, each Securityholder will be required to separately take into
account such holder's allocated share of income, gains, losses, deductions and
credits of the Partnership Trust Fund. It is anticipated that the Partnership
Trust Fund's income will consist primarily of interest earned on the Mortgage
Loans (including appropriate adjustments for market discount, original issue
discount and bond premium) as described above under "--Grantor Trust Funds--
Standard Securities--General" and "--Premium and Discount") and any gain upon
collection or disposition of Mortgage Loans. The Partnership Trust Fund's
deductions will consist primarily of interest accruing with respect to the Debt
Securities, servicing and other fees, and losses or deductions upon collection
or disposition of Debt Securities.
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The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Agreements and related documents). The applicable Agreement will provide, in
general, that the Securityholders will be allocated taxable income of the
Partnership Trust Fund for each Due Period equal to the sum of (i) the interest
that accrues on the Partnership Securities in accordance with their terms for
such Due Period, including interest accruing at the applicable pass-through rate
for such Due Period and interest on amounts previously due on the Partnership
Securities but not yet distributed; (ii) any Partnership Trust Fund income
attributable to discount on the Mortgage Loans that corresponds to any excess of
the principal amount of the Partnership Securities over their initial issue
price; and (iii) any other amounts of income payable to the Securityholders for
such Due Period. Such allocation will be reduced by any amortization by the
Partnership Trust Fund of premium on Mortgage Loans that corresponds to any
excess of the issue price of Partnership Securities over their principal amount.
All remaining taxable income of the Partnership Trust Fund will be allocated to
the Depositor. Based on the economic arrangement of the parties, this approach
for allocating Partnership Trust Fund income should be permissible under
applicable Treasury regulations, although no assurance can be given that the IRS
would not require a greater amount of income to be allocated to Securityholders.
Moreover, even under the foregoing method of allocation, Securityholders may be
allocated income equal to the entire pass-through rate plus the other items
described above even though the Trust Fund might not have sufficient cash to
make current cash distributions of such amount. Thus, cash basis holders will in
effect be required to report income from the Partnership Securities on the
accrual basis and Securityholders may become liable for taxes on Partnership
Trust Fund income even if they have not received cash from the Partnership Trust
Fund to pay such taxes.
Part or all of the taxable income allocated to a Securityholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) may constitute "unrelated business
taxable income" generally taxable to such a holder under the Code.
A share of expenses of the Partnership Trust Fund (including fees of the
Master Servicer but not interest expense) allocable to an individual, estate or
trust Securityholder would be miscellaneous itemized deductions subject to the
limitations described above under "--Grantor Trust Funds--Standard
Securities--General". Accordingly, such deductions might be disallowed to the
individual in whole or in part and might result in such holder being taxed on an
amount of income that exceeds the amount of cash actually distributed to such
holder over the life of the Partnership Trust Fund.
Discount income or premium amortization with respect to each Mortgage Loan
would be calculated in a manner similar to the description above under
"--Grantor Trust Funds--Standard Securities--General" and "--Premium and
Discount." Notwithstanding such description, it is intended that the Partnership
Trust Fund will make all tax calculations relating to income and allocations to
Securityholders on an aggregate basis with respect to all Mortgage Loans held by
the Partnership Trust Fund rather than on a Mortgage Loan-by-Mortgage Loan
basis. If the IRS were to require that such calculations be made separately for
each Mortgage Loan, the Partnership Trust Fund might be required to incur
additional expense, but it is believed that there would not be a material
adverse effect on Securityholders.
Discount and Premium
Unless indicated otherwise in the applicable Prospectus Supplement, it is
not anticipated that the Mortgage Loans will have been issued with original
issue discount and, therefore, the Partnership Trust Fund should not have
original issue discount income. However, the purchase price paid by the
Partnership Trust Fund for the Mortgage Loans may be greater or less than the
remaining principal balance of the Mortgage Loans at the time of purchase. If
so, the Mortgage Loans will have been acquired at a premium or discount, as the
case may be. See "--Grantor Trust Funds--Standard Securities--Premium and
Discount." (As indicated above, the Partnership Trust Fund will make this
calculation on an aggregate basis, but might be required to recompute it on a
Mortgage Loan-by-Mortgage Loan basis).
If the Partnership Trust Fund acquires the Mortgage Loans at a market
discount or premium, the Partnership Trust Fund will elect to include any such
discount in income currently as it accrues over the life of the Mortgage Loans
or to offset any such premium against interest income on the Mortgage Loans. As
indicated above, a portion of such market discount income or premium deduction
may be allocated to Securityholders.
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Section 708 Termination
Under Section 708 of the Code, the Partnership Trust Fund will be deemed to
terminate for federal income tax purposes if 50% or more of the capital and
profits interests in the Partnership Trust Fund are sold or exchanged within a
12-month period. If such a termination occurs, it would cause a deemed
contribution of the assets of a Partnership Trust Fund (the "old partnership")
to a new Partnership Trust Fund (the "new partnership") in exchange for
interests in the new partnership. Such interests would be deemed distributed to
the partners of the old partnership in liquidation thereof, which would not
constitute a sale or exchange. The Partnership Trust Fund will not comply with
certain technical requirements that might apply when such a constructive
termination occurs. As a result, the Partnership Trust Fund may be subject to
certain tax penalties and may incur additional expenses if it is required to
comply with those requirements. Furthermore, the Partnership Trust Fund might
not be able to comply due to lack of data.
Disposition of Securities
Generally, capital gain or loss will be recognized on a sale of Partnership
Securities in an amount equal to the difference between the amount realized and
the seller's tax basis in the Partnership Securities sold. A Securityholder's
tax basis in an Partnership Security will generally equal the holder's cost
increased by the holder's share of Partnership Trust Fund income (includable in
income) and decreased by any distributions received with respect to such
Partnership Security. In addition, both the tax basis in the Partnership
Securities and the amount realized on a sale of an Partnership Security would
include the holder's share of the Debt Securities and other liabilities of the
Partnership Trust Fund. A holder acquiring Partnership Securities at different
prices may be required to maintain a single aggregate adjusted tax basis in such
Partnership Securities, and, upon sale or other disposition of some of the
Partnership Securities, allocate a portion of such aggregate tax basis to the
Partnership Securities sold (rather than maintaining a separate tax basis in
each Partnership Security for purposes of computing gain or loss on a sale of
that Partnership Security).
Any gain on the sale of an Partnership Security attributable to the
holder's share of unrecognized accrued market discount on the Mortgage Loans
would generally be treated as ordinary income to the holder and would give rise
to special tax reporting requirements. The Partnership Trust Fund does not
expect to have any other assets that would give rise to such special reporting
considerations. Thus, to avoid those special reporting requirements, the
Partnership Trust Fund will elect to include market discount in income as it
accrues.
If a Securityholder is required to recognize an aggregate amount of income
(not including income attributable to disallowed itemized deductions described
above) over the life of the Partnership Securities that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Partnership Securities.
Allocations Between Transferors and Transferees
In general, the Partnership Trust Fund's taxable income and losses will be
determined each Due Period and the tax items for a particular Due Period will be
apportioned among the Securityholders in proportion to the principal amount of
Partnership Securities owned by them as of the close of the last day of such Due
Period. As a result, a holder purchasing Partnership Securities may be allocated
tax items (which will affect its tax liability and tax basis) attributable to
periods before the actual transaction.
The use of such a Due Period convention may not be permitted by existing
regulations. If a Due Period convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Partnership Trust Fund might be reallocated among the Securityholders.
The Depositor will be authorized to revise the Partnership Trust Fund's method
of allocation between transferors and transferees to conform to a method
permitted by future regulations.
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Section 731 Distributions
In the case of any distribution to a Securityholder, no gain will be
recognized to that Securityholder to the extent that the amount of any money
distributed with respect to such Security exceeds the adjusted basis of such
Securityholder's interest in the Security. To the extent that the amount of
money distributed exceeds such Securityholder's adjusted basis, gain will be
currently recognized. In the case of any distribution to a Securityholder, no
loss will be recognized except upon a distribution in liquidation of a
Securityholder's interest. Any gain or loss recognized by a Securityholder will
be capital gain or loss.
Section 754 Election
In the event that a Securityholder sells its Partnership Securities at a
profit (loss), the purchasing Securityholder will have a higher (lower) basis in
the Partnership Securities than the selling Securityholder had. The tax basis of
the Partnership Trust Fund's assets would not be adjusted to reflect that higher
(or lower) basis unless the Partnership Trust Fund were to file an election
under Section 754 of the Code. In order to avoid the administrative complexities
that would be involved in keeping accurate accounting records, as well as
potentially onerous information reporting requirements, the Partnership Trust
Fund will not make such an election. As a result, Securityholder might be
allocated a greater or lesser amount of Partnership Trust Fund income than would
be appropriate based on their own purchase price for Partnership Securities.
Administrative Matters
The Trustee is required to keep or have kept complete and accurate books of
the Partnership Trust Fund. Such books will be maintained for financial
reporting and tax purposes on an accrual basis and the fiscal year of the
Partnership Trust Fund will be the calendar year. The Trustee will file a
partnership information return (IRS Form 1065) with the IRS for each taxable
year of the Partnership Trust Fund and will report each Securityholder's
allocable share of items of Partnership Trust Fund income and expense to holders
and the IRS on Schedule K-1. The Trustee will provide the Schedule K-1
information to nominees that fail to provide the Partnership Trust Fund with the
information statement described below and such nominees will be required to
forward such information to the beneficial owners of the Partnership Securities.
Generally, holders must file tax returns that are consistent with the
information return filed by the Partnership Trust Fund or be subject to
penalties unless the holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Partnership
Securities as a nominee at any time during a calendar year is required to
furnish the Partnership Trust Fund with a statement containing certain
information on the nominee, the beneficial owners and the Partnership Securities
so held. Such information includes (i) the name, address and taxpayer
identification number of the nominee and (ii) as to each beneficial owner (x)
the name, address and identification number of such person, (y) whether such
person is a United States person, a tax-exempt entity or a foreign government,
an international organization, or any wholly-owned agency or instrumentality of
either of the foregoing, and (z) certain information on Partnership Securities
that were held, bought or sold on behalf of such person throughout the year. In
addition, brokers and financial institutions that hold Partnership Securities
through a nominee are required to furnish directly to the Trustee information as
to themselves and their ownership of Partnership Securities. A clearing agency
registered under Section 17A of the Exchange Act is not required to furnish any
such information statement to the Partnership Trust Fund. The information
referred to above for any calendar year must be furnished to the Partnership
Trust Fund on or before the following January 31. Nominees, brokers and
financial institutions that fail to provide the Partnership Trust Fund with the
information described above may be subject to penalties.
The Depositor will be designated as the tax matters partner in the Pooling
and Servicing Agreement and, as such, will be responsible for representing the
Securityholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire until three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Partnership Trust Fund by the appropriate taxing
authorities could result in an adjustment of the returns of the Securityholders,
and, under certain circumstances, a Securityholder may be precluded from
separately litigating a proposed adjustment to the items of the Partnership
Trust Fund. An adjustment could also result in an audit of a Securityholder's
returns and adjustments of items not related to the income and losses of the
Partnership Trust Fund.
109
Tax Consequences to Foreign Securityholders
It is not clear whether the Partnership Trust Fund would be considered to
be engaged in a trade or business in the United States for purposes of federal
withholding taxes with respect to Non-U.S. Persons, because there is no clear
authority dealing with that issue under facts substantially similar to those
described herein. Although it is not expected that the Partnership Trust Fund
would be engaged in a trade or business in the United States for such purposes,
if so specified in the applicable Prospectus Supplement, the Partnership Trust
Fund may withhold as if it were so engaged in order to protect the Partnership
Trust Fund from possible adverse consequences of a failure to withhold. The
Partnership Trust Fund may withhold on the portion of its taxable income that is
allocable to Securityholders who are Non-U.S. Persons pursuant to Section 1446
of the Code, as if such income were effectively connected to a U.S. trade or
business, at a rate of 35% for Non-U.S. Persons that are taxable as corporations
and 39.6% for all other foreign holders. Amounts withheld will be deemed
distributed to the Non-U.S. Person Securityholders. Subsequent adoption of
Treasury regulations or the issuance of other administrative pronouncements may
require the Partnership Trust Fund to change its withholding procedures. In
determining a holder's withholding status, the Partnership Trust Fund may rely
on IRS Form W-8, IRS Form W-9 or the holder's certification of nonforeign status
signed under penalties of perjury.
To the extent specified in the applicable Prospectus Supplement, (i) each
Non-U.S. Person holder might be required to file a U.S. individual or corporate
income tax return (including, in the case of a corporation, the branch profits
tax) on its share of the Partnership Trust Fund's income; (ii) each Non-U.S.
Person holder must obtain a taxpayer identification number from the IRS and
submit that number to the Partnership Trust Fund on Form W-8 in order to assure
appropriate crediting of the taxes withheld; and (iii) a Non-U.S. Person holder
generally would be entitled to file with the IRS a claim for refund with respect
to taxes withheld by the Partnership Trust Fund, taking the position that no
taxes were due because the Partnership Trust Fund was not engaged in a U.S.
trade or business. Notwithstanding the foregoing, interest payments made (or
accrued) to a Securityholder who is a Non-U.S. Person may be considered
guaranteed payments to the extent such payments are determined without regard to
the income of the Partnership Trust Fund. If these interest payments are
properly characterized as guaranteed payments, then the interest may not be
considered "portfolio interest." As a result, Securityholders who are Non-U.S.
Persons may be subject to United States federal income tax and withholding tax
at a rate of 30 percent, unless reduced or eliminated pursuant to an applicable
treaty. In such case, a Non-U.S. Person holder would only be entitled to claim a
refund for that portion of the taxes in excess of the taxes that should be
withheld with respect to the guaranteed payments.
Backup Withholding
Distributions made on the Partnership Securities and proceeds from the sale
of the Partnership Securities will be subject to a "backup" withholding tax of
30% (decreasing to 28% by 2006) if, in general, the Securityholder fails to
comply with certain identification procedures, unless the holder is an exempt
recipient under applicable provisions of the Code.
THE FEDERAL TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A SECURITYHOLDER'S
PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR TAX
ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP
AND DISPOSITION OF REMIC SECURITIES, GRANTOR TRUST SECURITIES, PARTNERSHIP
SECURITIES AND DEBT SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE,
LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL
OR OTHER TAX LAWS.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Federal
Income Tax Consequences," potential investors should consider the state and
local tax consequences of the acquisition, ownership, and disposition of the
Securities offered hereunder. State tax law may differ substantially from the
corresponding federal tax law, and the discussion above does not purport to
describe any aspect of the tax laws of any state or other jurisdiction.
Therefore, prospective investors should consult their own tax advisors with
respect to the various tax consequences of investments in the Securities offered
hereunder.
110
ERISA CONSIDERATIONS
ERISA and the Code impose certain requirements on employee benefit plans
and on certain other retirement plans and arrangements, including individual
retirement accounts, individual retirement annuities, Keogh plans and collective
investment funds and separate accounts in which such plans, accounts or
arrangements are invested, that are subject to Title I of ERISA and Section 4975
of the Code ("Plans") and on persons who are fiduciaries with respect to such
Plans in connection with the investment of Plan assets. Certain employee benefit
plans, such as governmental plans (as defined in ERISA Section 3(32)), and, if
no election has been made under Section 410(d) of the Code, church plans (as
defined in Section 3(33) of ERISA) are not subject to ERISA requirements.
However, such plans may be subject to the provisions of other applicable
federal, state and local law materially similar to the foregoing provisions of
ERISA and the Code. Any such plan which is qualified and exempt from taxation
under Sections 401(a) and 501(a) of the Code, however, is subject to the
prohibited transaction rules set forth in Section 503 of the Code.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan. In addition, ERISA and the Code prohibit a broad range of
transactions involving assets of a Plan and persons ("Parties in Interest") who
have certain specified relationships to the Plan unless a statutory or
administrative exemption is available. Certain Parties in Interest that
participate in a prohibited transaction may be subject to an excise tax imposed
pursuant to Section 4975 of the Code, unless a statutory or administrative
exemption is available. These prohibited transactions generally are set forth in
Sections 406 and 407 of ERISA and Section 4975 of the Code.
A Plan's investment in Securities may cause the Mortgage Loans, Contracts,
Unsecured Home Improvement Loans, Government Securities and other assets
included in a related Trust Fund to be deemed Plan assets. Section 2510.3-101 of
the regulations of the United States Department of Labor ("DOL") provides that
when a Plan acquires an equity interest in an entity, the Plan's assets include
both such equity interest and an undivided interest in each of the underlying
assets of the entity, unless certain exceptions not applicable here apply, or
unless the equity participation in the entity by "benefit plan investors" (i.e.,
Plans and certain employee benefit plans not subject to ERISA) is not
"significant", both as defined therein. For this purpose, in general, equity
participation by benefit plan investors will be "significant" on any date if 25%
or more of the value of any Class of equity interests in the entity is held by
benefit plan investors. To the extent the Securities are treated as equity
interests for purposes of DOL regulations section 2510.3-101, equity
participation in a Trust Fund will be significant on any date if immediately
after the most recent acquisition of any Security, 25% or more of any Class of
Securities is held by benefit plan investors.
Any person who has discretionary authority or control respecting the
management or disposition of Plan assets, and any person who provides investment
advice with respect to such assets for a fee, is a fiduciary of the investing
Plan. If the Mortgage Loans, Contracts, Unsecured Home Improvement Loans,
Government Securities and other assets included in a Trust Fund constitute Plan
assets, then any party exercising management or discretionary control regarding
those assets, such as the Servicer or Master Servicer, may be deemed to be a
Plan "fiduciary" and thus subject to the fiduciary responsibility provisions and
prohibited transaction provisions of ERISA and the Code with respect to the
investing Plan. In addition, if the Mortgage Loans, Contracts, Unsecured Home
Improvement Loans, Government Securities and other assets included in a Trust
Fund constitute Plan assets, the purchase of Securities by a Plan, as well as
the operation of the Trust Fund, may constitute or involve a prohibited
transaction under ERISA and the Code.
On May 14, 1993, the DOL granted to NationsBank Corporation, the
predecessor to Bank of America Corporation, the corporate parent of Banc of
America Securities LLC, an individual administrative exemption, Prohibited
Transaction Exemption ("PTE") 93-31, as amended by PTE 97-34 and PTE 2000-58
(the "Exemption"), which generally exempts from the application of the
prohibited transaction provisions of Sections 406(a) and 407 of ERISA, and the
excise taxes imposed on such prohibited transactions pursuant to Section 4975(a)
and (b) of the Code, certain transactions, among others, relating to the
servicing and operation of mortgage pools and the purchase, sale and holding of
Securities underwritten by an Underwriter (as hereinafter defined), that (a)
represent a beneficial ownership interest in the assets of a Trust Fund and
entitle the holder the pass-through payments of principal, interest and/or other
payments made with respect to the assets of the Trust Fund or (b) are
denominated as a debt instrument and represent an interest in a REMIC, provided
that certain conditions set forth in the Exemption are satisfied. For purposes
of this Section "ERISA Considerations," the term "Underwriter" shall include (a)
Bank of America Corporation, (b) any person directly or indirectly, through one
or more intermediaries, controlling, controlled by or under common control with
Bank of America Corporation, including Banc of America Securities LLC, and (c)
any member of the underwriting syndicate or selling group of which a person
described in (a) or (b) is a manager or co-manager with respect to a Class of
Securities.
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The Exemption sets forth five general conditions which must be satisfied
for a transaction involving the purchase, sale and holding of Securities to be
eligible for exemptive relief thereunder. First, the acquisition of Securities
by a Plan must be on terms that are at least as favorable to the Plan as they
would be in an arm's-length transaction with an unrelated party. Second, the
Securities at the time of acquisition by the Plan must be rated in one of the
four highest generic rating categories by Standard & Poor's ("S&P"), Moody's
Investors Service, Inc. ("Moody's") Fitch Ratings ("Fitch"). Third, the Trustee
cannot be an affiliate of any member of the "Restricted Group" which consists of
the Underwriter, the Depositor, the Trustee, the Master Servicer, any Servicer,
any insurer and any obligor with respect to Assets constituting more than 5% of
the aggregate unamortized principal balance of the Assets in the related Trust
Fund as of the date of initial issuance of the Securities. Fourth, the sum of
all payments made to and retained by the Underwriter(s) must represent not more
than reasonable compensation for underwriting the Securities; the sum of all
payments made to and retained by the Depositor pursuant to the assignment of the
Assets to the related Trust Fund must represent not more than the fair market
value of such obligations; and the sum of all payments made to and retained by
the Servicer must represent not more than reasonable compensation for such
person's services under the applicable Agreement and reimbursement of such
person's reasonable expenses in connection therewith. Fifth, the investing Plan
must be 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. In addition, the Trust Fund must meet the following requirements: (i)
the assets of the Trust Fund must consist solely of assets of the type that have
been included in other investment pools; (ii) securities evidencing interests in
such other investment pools must have been rated in one of the four highest
generic rating categories by S&P, Moody's or Fitch for at least one year prior
to the Plan's acquisition of the securities; and (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 the
Securities.
A fiduciary of a Plan contemplating purchasing a Security must make its own
determination that the general conditions set forth above will be satisfied with
respect to such Security. In addition, any Securities representing a beneficial
ownership interest in Unsecured Home Improvement Loans or Revolving Credit Line
Loans will not satisfy the general conditions of the Exemption.
If the general conditions of the Exemption are satisfied, the Exemption may
provide an exemption from the restrictions imposed by Sections 406(a) and 407 of
ERISA (as well as the excise taxes imposed by Sections 4975(a) and (b) of the
Code by reason of Sections 4975(c)(1)(A) through (D) of the Code) in connection
with the direct or indirect sale, exchange, transfer, holding or the direct or
indirect acquisition or disposition in the secondary market of Securities by
Plans. However, no exemption is provided from the restrictions of Sections
406(a)(1)(E), 406(a)(2) and 407 of ERISA for the acquisition or holding of a
Security on behalf of an "Excluded Plan" by any person who has discretionary
authority or renders investment advice with respect to the assets of such
Excluded Plan. For purposes of the Securities, an Excluded Plan is a Plan
sponsored by any member of the Restricted Group.
If certain specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(b)(1) and (b)(2) of ERISA and the taxes imposed by Sections 4975(a) and (b)
of the Code by reason of Section 4975(c)(1)(E) of the Code in connection with
(1) the direct or indirect sale, exchange or transfer of Securities in the
initial issuance of Securities between the Depositor or an Underwriter and a
Plan when the person who has discretionary authority or renders investment
advice with respect to the investment of Plan assets in the Securities is (a) an
obligor with respect to 5% or less of the fair market value of the Assets or (b)
an affiliate of such a person, (2) the direct or indirect acquisition or
disposition in the secondary market of Securities by a Plan and (3) the holding
of Securities by a Plan.
Further, if certain specific conditions of the Exemption are satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(a), 406(b) and 407 of ERISA, and the taxes imposed by Sections 4975(a) and
(b) of the Code by reason of Section 4975(c) of the Code for transactions in
connection with the servicing, management and operation of the Trust Fund. The
Depositor expects that the specific conditions of the Exemption required for
this purpose will be satisfied with respect to the Securities so that the
Exemption would provide an exemption from the restrictions imposed by Sections
406(a) and (b) of ERISA (as well as the excise taxes imposed by Sections 4975(a)
and (b) of the Code by reason of Section 4975(c) of the Code) for transactions
in connection with the servicing, management and operation of the Mortgage
Pools, provided that the general conditions of the Exemption are satisfied.
112
The Exemption also may provide an exemption from the restrictions imposed
by Sections 406(a) and 407(a) of ERISA, and the taxes imposed by Section 4975(a)
and (b) of the Code by reason of Sections 4975(c)(1)(A) through (D) of the Code
if such restrictions are deemed to otherwise apply merely because a person is
deemed to be a "party in interest" (within the meaning of Section 3(14) of
ERISA) or a "disqualified person" (within the meaning of Section 4975(e)(2) of
the Code) with respect to an investing Plan by virtue of providing services to
the Plan (or by virtue of having certain specified relationships to such a
person) solely as a result of the Plan's ownership of Securities.
The Exemption was amended by PTE 97-34, 62 Fed. Reg. 39021 (July 21, 1997),
which, among other changes, permits the inclusion of a pre-funding account in a
trust fund, provided that the following conditions are met: (a) the pre-funding
account may not exceed 25% of the total amount of certificates being offered;
(b) additional obligations purchased generally must meet the same terms and
conditions as those of the original obligations used to create the trust fund;
(c) the transfer of additional obligations to the trust during the pre-funding
period must not result in the certificates receiving a lower rating at the
termination of the pre-funding period than the rating that was obtained at the
time of the initial issuance of the certificates; (d) the weighted average
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 less than the weighted
average interest rate for the obligations which were transferred to the trust on
the closing date; (e) the characteristics of the additional obligations must be
monitored to confirm that they are substantially similar to those which were
acquired as of the closing date either by a credit support provider or insurance
provider independent of the sponsor or by an independent accountant retained by
the sponsor that confirms such conformance in writing; (f) the pre-funding
period must be described in the prospectus or private placement memorandum
provided to investing plans; and (g) the trustee of the trust must be a
substantial financial institution or trust company experienced in trust
activities and familiar with its duties, responsibilities and liabilities as a
fiduciary under ERISA.
Further, the pre-funding period must be a period beginning on the closing
date and ending no later than the earliest to occur of (x) the date the amount
on deposit in the pre-funding account is less than the minimum dollar amount
specified in the pooling and servicing agreement; (y) the date on which an event
of default occurs under the pooling and servicing agreement; or (z) the date
which is the later of three months or 90 days after the closing date. It is
expected that the Pre-Funding Account will meet all of these requirements.
113
To the extent the Securities are not treated as equity interests for
purposes of DOL regulations section 2510.3-101, a Plan's investment in such
Securities ("Non-Equity Securities") would not cause the assets included in a
related Trust Fund to be deemed Plan assets. However, the Depositor, the
Servicer, the Trustee, or Underwriter may be the sponsor of or investment
advisor with respect to one or more Plans. Because such parties may receive
certain benefits in connection with the sale of Non-Equity Securities, the
purchase of Non-Equity Securities using Plan assets over which any such parties
has investment authority might be deemed to be a violation of the prohibited
transaction rules of ERISA and the Code for which no exemption may be available.
Accordingly, Non-Equity Securities may not be purchased using the assets of any
Plan if any of the Depositor, the Servicer, the Trustee or Underwriter has
investment authority with respect to such assets.
In addition, certain affiliates of the Depositor might be considered or
might become Parties in Interest with respect to a Plan. Also, any holder of
Securities, because of its activities or the activities of its respective
affiliates, may be deemed to be a Party in Interest with respect to certain
Plans, including but not limited to Plans sponsored by such holder. In either
case, the acquisition or holding of Non-Equity Securities by or on behalf of
such a Plan could be considered to give rise to an indirect prohibited
transaction within the meaning of ERISA and the Code, unless it is subject to
one or more statutory or administrative exemptions such as Prohibited
Transaction Class Exemption ("PTCE") 84-14, which exempts certain transactions
effected on behalf of a Plan by a "qualified professional asset manager", PTCE
90-1, which exempts certain transactions involving insurance company pooled
separate accounts, PTCE 91-38, which exempts certain transactions involving bank
collective investment funds, PTCE 95-60, which exempts certain transactions
involving insurance company general accounts, or PTCE 96-23, which exempts
certain transactions effected on behalf of a Plan by certain "in-house" asset
managers. It should be noted, however, that even if the conditions specified in
one or more of these exemptions are met, the scope of relief provided by these
exemptions may not necessarily cover all acts that might be construed as
prohibited transactions.
114
Any Plan fiduciary which proposes to cause a Plan to purchase Securities
should consult with its counsel with respect to the potential applicability of
ERISA and the Code to such investment, the availability of the exemptive relief
provided in the Exemption and the potential applicability of any other
prohibited transaction exemption in connection therewith. In particular, a Plan
fiduciary which proposes to cause a Plan to purchase Securities representing a
beneficial ownership interest in a pool of single-family residential first
mortgage loans, a Plan fiduciary should consider the applicability of PTCE 83-1,
which provides exemptive relief for certain transactions involving mortgage pool
investment trusts. The Prospectus Supplement with respect to a Series of
Securities may contain additional information regarding the application of the
Exemption, PTCE 83-1 or any other exemption, with respect to the Securities
offered thereby. In addition, any Plan fiduciary that proposes to cause a Plan
to purchase Strip Securities should consider the federal income tax consequences
of such investment. Fiduciaries of plans not subject to ERISA or the Code, such
as government plans, should consider the application of any applicable federal,
state or local law materially similar to the provisions of ERISA or the Code, as
well as the need for and the availability of exemptive relief under such
applicable law.
Any Plan fiduciary considering whether to purchase a Security on behalf of
a Plan should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and the
Code to such investment.
The sale of Securities to a Plan is in no respect a representation by the
Depositor or the Underwriter that this investment meets all relevant legal
requirements with respect to investments by Plans generally or any particular
Plan, or that this investment is appropriate for Plans generally or any
particular Plan.
115
LEGAL INVESTMENT
Each Class of Offered Securities will be rated at the date of issuance in
one of the four highest rating categories by at least one Rating Agency. The
related Prospectus Supplement will specify which Classes of the Securities, if
any, will constitute "mortgage related securities" ("SMMEA Securities") for
purposes of SMMEA. Generally, only Classes of Offered Securities that (i) are
rated in one of the two highest rating categories by at least one Rating Agency,
and (ii) are part of a Series representing interests in a Trust Fund consisting
of Mortgage Loans originated by certain types of originators specified in SMMEA,
will be SMMEA Securities. SMMEA Securities will constitute legal investments for
persons, trusts, corporations, partnerships, associations, business trusts and
business entities (including, but not limited to, depository institutions,
insurance companies, trustees and pension funds) created pursuant to or existing
under the laws of the United States or of any state (including the District of
Columbia and Puerto Rico) whose authorized investments are subject to state
regulation to the same extent that, under applicable law, obligations issued by
or guaranteed as to principal and interest by the United States or any agency or
instrumentality thereof constitute legal investments for such entities. Pursuant
to SMMEA, a number of states enacted legislation on or before the October 3,
1991 cut-off for such enactments, limiting to varying extents the ability of
certain entities (in particular, insurance companies) to invest in "mortgage
related securities," in most cases by requiring the affected investors to rely
solely upon existing state law, and not SMMEA. Accordingly, the investors
affected by such legislation will be authorized to invest in the Offered
Securities only to the extent provided in such legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in "mortgage related
securities" without limitation as to the percentage of their assets represented
thereby, federal credit unions may invest in such securities, and national banks
may purchase such securities for their own account without regard to the
limitations generally applicable to investment securities set forth in 12 U.S.C.
Section 24 (Seventh), subject in each case to such regulations as the applicable
federal regulatory authority may prescribe. In this connection, the Office of
the Comptroller of the Currency (the "OCC") has amended 12 C.F.R. Part 1 to
authorize national banks to purchase and sell for their own account, without
limitation as to a percentage of the bank's capital and surplus (but subject to
compliance with certain general standards in 12 C.F.R. Section 1.5 concerning
"safety and soundness" and retention of credit information), certain "Type IV
securities," defined in 12 C.F.R. Section 1.2(1) to include certain "residential
mortgage-related securities." As so defined, "residential mortgage related
security" means, in relevant part, "mortgage-related security" within the
meaning of SMMEA. The National Credit Union Administration (the "NCUA") has
adopted rules, codified at 12 C.F.R. Part 703, which permit federal credit
unions to invest in "mortgage related securities" under certain limited
circumstances, other than stripped mortgage related securities, residual
interests in mortgage related securities, and commercial mortgage related
securities, unless the credit union has obtained written approval from the NCUA
to participate in the "investment pilot program" described in 12 C.F.R. Section
703.140. The Office of Thrift Supervision (the "OTS") has issued Thrift Bulletin
13a (December 1, 1998), "Management of Interest Rate Risk, Investment Securities
and Derivative Activities," which thrift institutions subject to the
jurisdiction of the OTS should consider before investing in any of the Offered
Securities.
All depository institutions considering an investment in the Offered
Securities should review the "Supervisory Policy Statement on Investment
Securities and End-User Derivatives Activities" (the "1998 Policy Statement") of
the Federal Financial Institutions Examination Council, which has been adopted
by the Board of Governors of the Federal Reserve System, the Federal Deposit
Insurance Corporation, the OCC and the OTS, effective May 26, 1998, and by the
NCUA, effective October 1, 1998. The 1998 Policy Statement sets forth general
guidelines which depository institutions must follow in managing risks
(including market, credit, liquidity, operational (transaction), and legal
risks) applicable to all securities (including mortgage pass-through securities
and mortgage-derivative products) used for investment purposes.
If specified in the related Prospectus Supplement, other Classes of Offered
Securities offered pursuant to this Prospectus will not constitute "mortgage
related securities" under SMMEA. The appropriate characterization of these
Offered Securities under various legal investment restrictions, and thus the
ability of investors subject to these restrictions to purchase such Offered
Securities, may be subject to significant interpretive uncertainties.
116
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by such authorities before purchasing the Offered
Securities, as certain Classes or subclasses may be deemed unsuitable
investments, or may otherwise be restricted, under such rules, policies or
guidelines (in certain instances irrespective of SMMEA).
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits, provisions which
may restrict or prohibit investment in securities which are not
"interest-bearing" or "income paying," and, with respect to any Offered
Securities issued in book-entry form, provisions which may restrict or prohibit
investments in securities which are issued in book-entry form.
Except as to the status of certain Classes of Offered Securities identified
in the Prospectus Supplement as SMMEA Securities, no representations will be
made as to the proper characterization of the Offered Securities for legal
investment or financial institution regulatory purposes, or as to the ability of
particular investors to purchase any Offered Securities under applicable legal
investment restrictions. The uncertainties described above (and any unfavorable
future determinations concerning legal investment or financial institution
regulatory characteristics of the Offered Securities) may adversely affect the
liquidity of the Offered Securities.
Accordingly, all investors whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities should consult with their own legal advisors in
determining whether and to what extent the Offered Securities of any Class
constitute legal investments for them or are subject to investment, capital or
other restrictions, and, if applicable, whether SMMEA has been overridden in any
jurisdiction relevant to such investor.
METHODS OF DISTRIBUTION
The Securities offered hereby and by the Supplements to this Prospectus
will be offered in Series. The distribution of the Securities may be effected
from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices to be
determined at the time of sale or at the time of commitment therefor. If so
specified in the related Prospectus Supplement, the Securities will be
distributed in a firm commitment underwriting, subject to the terms and
conditions of the underwriting agreement, by Banc of America Securities LLC
("Banc of America Securities") acting as underwriter with other underwriters, if
any, named therein. In such event, the Prospectus Supplement may also specify
that the underwriters will not be obligated to pay for any Securities agreed to
be purchased by purchasers pursuant to purchase agreements acceptable to the
Depositor. In connection with the sale of the Securities, underwriters may
receive compensation from the Depositor or from purchasers of the Securities in
the form of discounts, concessions or commissions. The Prospectus Supplement
will describe any such compensation paid by the Depositor.
Alternatively, the Prospectus Supplement may specify that the Securities
will be distributed by Banc of America Securities acting as agent or in some
cases as principal with respect to Securities which it has previously purchased
or agreed to purchase. If Banc of America Securities acts as agent in the sale
of Securities, Banc of America Securities will receive a selling commission with
respect to each Series of Securities, depending on market conditions, expressed
as a percentage of the aggregate principal balance of the related Mortgage Loans
as of the Cut-off Date. The exact percentage for each Series of Securities will
be disclosed in the related Prospectus Supplement. To the extent that Banc of
America Securities elects to purchase Securities as principal, Banc of America
Securities may realize losses or profits based upon the difference between its
purchase price and the sales price. The Prospectus Supplement with respect to
any Series offered other than through underwriters will contain information
regarding the nature of such offering and any agreements to be entered into
between the Depositor and purchasers of Securities of such Series.
Banc of America Securities is an affiliate of the Depositor. This
Prospectus may be used by Banc of America Securities, to the extent required, in
connection with market making transactions in the Securities. Banc of America
Securities may act as principal or agent in such transactions.
117
The Depositor will indemnify Banc of America Securities and any
underwriters against certain civil liabilities, including liabilities under the
Securities Act of 1933, or will contribute to payments Banc of America
Securities and any underwriters may be required to make in respect thereof.
In the ordinary course of business, Banc of America Securities and the
Depositor may engage in various securities and financing transactions, including
repurchase agreements to provide interim financing of the Depositor's mortgage
loans pending the sale of such mortgage loans or interests therein, including
the Securities.
The Depositor anticipates that the Securities will be sold primarily to
institutional investors. Purchasers of Securities, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933 in connection
with reoffers and sales by them of Securities. Securityholders should consult
with their legal advisors in this regard prior to any such reoffer or sale.
As to each Series of Securities, only those Classes rated in one of the
four highest rating categories by any Rating Agency will be offered hereby. Any
unrated Class may be initially retained by the Depositor, and may be sold by the
Depositor at any time to one or more institutional investors.
LEGAL MATTERS
Certain legal matters, including the federal income tax consequences to
Securityholders of an investment in the Securities of a Series, will be passed
upon for the Depositor by Cadwalader, Wickersham & Taft, Charlotte, North
Carolina or Hunton & Williams, Charlotte, North Carolina.
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.
RATING
It is a condition to the issuance of any Class of Offered Securities that
they shall have been rated not lower than investment grade, that is, in one of
the four highest rating categories, by a Rating Agency.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by Securityholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such certificates, the nature of the underlying assets and the
credit quality of the guarantor, if any. Ratings on mortgage pass-through
certificates and other asset backed securities do not represent any assessment
of the likelihood of principal prepayments by borrowers or of the degree by
which such prepayments might differ from those originally anticipated. As a
result, securityholders might suffer a lower than anticipated yield, and, in
addition, holders of stripped interest certificates in extreme cases might fail
to recoup their initial investments.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating.
WHERE YOU CAN FIND MORE INFORMATION
The Depositor filed a registration statement (the "Registration Statement")
relating to the Securities with the Commission or the "SEC". This Prospectus is
part of the Registration Statement, but the Registration Statement includes
additional information.
118
Copies of the Registration Statement may be obtained from the Public
Reference Section of the Commission, Washington, D.C. 20549 upon payment of the
prescribed charges, or may be examined free of charge at the Commission's
offices, 450 Fifth Street N.W., Washington, D.C. 20549 or at the regional
offices of the Commission located at 233 Broadway, New York, New York 10279 and
Suite 1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois
60661-2511. The Commission also maintains a site on the World Wide Web at
"http://www.sec.gov" at which you can view and download copies of reports, proxy
and information statements and other information filed electronically through
the Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system. The
Depositor has filed the Registration Statement, including all exhibits, through
the EDGAR system and therefore such materials should be available by logging
onto the Commission's Web site. The Commission maintains computer terminals
providing access to the EDGAR system at each of the offices referred to above.
Copies of any documents incorporated to this Prospectus by reference will be
provided to each person to whom a Prospectus is delivered upon written or oral
request directed to Asset Backed Funding Corporation, Bank of America Corporate
Center, 100 North Tryon Street, Charlotte, North Carolina 28255, telephone
number (704) 386-2400.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The SEC allows the Depositor to "incorporate by reference" information it
files with the SEC, which means that the Depositor can disclose important
information to you by referring you to those documents. The information
incorporated by reference is considered to be part of this Prospectus.
Information that the Depositor files later with the SEC will automatically
update the information in this Prospectus. In all cases, you should rely on the
later information rather than on any different information included in this
Prospectus or the accompanying Prospectus Supplement. The Depositor incorporates
by reference any future annual, monthly and special SEC reports filed by or on
behalf of the Trust until the termination of the offering of the Securities.
As a recipient of this Prospectus, you may request a copy of any document
the Depositor incorporates by reference, except exhibits to the documents
(unless the exhibits are specifically incorporated by reference) at no cost, by
writing or calling the Treasurer at Asset Backed Funding Corporation, Bank of
America Corporate Center, 100 North Tryon Street, Charlotte, North Carolina
28255, telephone number (704) 386-2400.
119
INDEX OF SIGNIFICANT DEFINITIONS
Terms Page
- ----- ----
1998 Policy Statement .................................................... 116
Accrual Period ........................................................... 23
Accrual Securities ....................................................... 28
Accrued Security Interest ................................................ 30
Adjustable Rate Assets ................................................... 17
Agreement ................................................................ 41
ARM Contracts ............................................................ 21
ARM Loans ................................................................ 19
ARM Unsecured Home Improvement Loans ..................................... 20
Asset Conservation Act ................................................... 71
Asset Group .............................................................. 28
Asset Seller ............................................................. 17
Assets ................................................................... 8
Available Distribution Amount ............................................ 29
Balloon Payment Assets ................................................... 14
Banc of America Securities ............................................... 117
Bankruptcy Code .......................................................... 67
Bankruptcy Commission .................................................... 69
Bi-weekly Assets ......................................................... 17
Book-Entry Securities .................................................... 29
Buy Down Assets .......................................................... 17
Buydown Funds ............................................................ 81
Buydown Mortgage Loans ................................................... 26
Buydown Period ........................................................... 26
Capitalized Interest Account ............................................. 22
Cash Flow Agreement ...................................................... 22
Cede ..................................................................... 38
CERCLA ................................................................... 70
Certificates ............................................................. 6
Class .................................................................... 6
Cleanup Costs ............................................................ 70
Clearstream .............................................................. 7
Clearstream Participants ................................................. 39
Closing Date ............................................................. 6
Code ..................................................................... 9
Collection Account ....................................................... 44
Commission ............................................................... 19
Companion Class .......................................................... 33
Component ................................................................ 31
contract borrower ........................................................ 63
Contract Lender .......................................................... 63
Contract Rate ............................................................ 21
Contracts ................................................................ 8
Convertible Assets ....................................................... 17
Cooperative Loans ........................................................ 62
Cooperatives ............................................................. 18
Covered Trust ............................................................ 58
CPR ...................................................................... 25
Credit Support ........................................................... 22
Cut-off Date ............................................................. 6
Debt Securities .......................................................... 79
Definitive Securities .................................................... 29
Deposit Trust Agreement .................................................. 41
Depositaries ............................................................. 40
Depositor ................................................................ 6
Determination Date ....................................................... 29
Disqualified Organization ................................................ 93
Distribution Date ........................................................ 6
DOL ...................................................................... 112
DTC ...................................................................... 7
DTC Participants ......................................................... 38
Due Period ............................................................... 29
EDGAR .................................................................... 119
electing large partnership ............................................... 93
ERISA .................................................................... 9
Euroclear ................................................................ 7
Euroclear Cooperative .................................................... 39
Euroclear Operator ....................................................... 39
Euroclear Participants ................................................... 39
excess servicing ......................................................... 101
Exchange Act ............................................................. 38
Excluded Plan ............................................................ 113
Exemption ................................................................ 112
FASIT .................................................................... 9
FASIT Securities ......................................................... 79
FDIC ..................................................................... 44
FHLMC .................................................................... 12
Fitch .................................................................... 113
FNMA ..................................................................... 12
GEM Assets ............................................................... 17
GPM Assets ............................................................... 17
Grantor Trust Fund ....................................................... 79
Grantor Trust Securities ................................................. 79
Home Equity Loans ........................................................ 18
Home Improvement Contracts ............................................... 18
HOPA ..................................................................... 74
Increasing Payment Assets ................................................ 17
Indenture ................................................................ 41
Indenture Servicing Agreement ............................................ 41
Indenture Trustee ........................................................ 6
Indirect Participants .................................................... 38
Insurance Proceeds ....................................................... 29
Interest Reduction Assets ................................................ 17
IRA ...................................................................... 9
IRS ...................................................................... 48
Issuer ................................................................... 6
Land Sale Contracts ...................................................... 18
Level Payment Assets ..................................................... 17
Liquidation Proceeds ..................................................... 29
Loan-to-Value Ratio ...................................................... 18
Lock-out Date ............................................................ 19
Lock-out Period .......................................................... 19
Manufactured Home ........................................................ 21
Mark to Market Regulations ............................................... 95
120
Terms Page
- ----- ----
Master Servicer .......................................................... 6
Moody's .................................................................. 113
Mortgage Loans ........................................................... 7
Mortgage Notes ........................................................... 18
Mortgage Rate ............................................................ 19
Mortgaged Properties ..................................................... 18
Mortgages ................................................................ 18
Mortgagor ................................................................ 12
Multifamily Mortgage Loan ................................................ 18
Multifamily Property ..................................................... 18
National Housing Act ..................................................... 19
NCUA ..................................................................... 116
new partnership .......................................................... 108
New Regulations .......................................................... 97
Non-Equity Securities .................................................... 114
Non-Pro Rata Security .................................................... 83
Nonrecoverable Advance ................................................... 35
Non-U.S. Person .......................................................... 97
Notes .................................................................... 6
OCC ...................................................................... 116
Offered Security ......................................................... 9
OID Regulations .......................................................... 79
old partnership .......................................................... 108
Originator ............................................................... 18
OTS ...................................................................... 116
PAC ...................................................................... 32
PAC I .................................................................... 32
PAC II ................................................................... 32
Parties in Interest ...................................................... 112
Partnership Securities ................................................... 79
Partnership Trust Fund ................................................... 79
Pass-Through Entity ...................................................... 93
Pass-Through Rate ........................................................ 30
PCBs ..................................................................... 70
Permitted Investments .................................................... 44
Plans .................................................................... 112
PMI ...................................................................... 74
Pooling and Servicing Agreement .......................................... 41
Pre-Funded Amount ........................................................ 21
Pre-Funding Account ...................................................... 21
Pre-Funding Period ....................................................... 21
Prepayment Assumption .................................................... 83
Prepayment Premium ....................................................... 19
Prospectus ............................................................... 6
Prospectus Supplement .................................................... 6
PTCE ..................................................................... 114
PTE ...................................................................... 112
Purchase Price ........................................................... 42
Rating Agency ............................................................ 9
RCRA ..................................................................... 71
Record Date .............................................................. 29
Refinance Loans .......................................................... 18
Registration Statement ................................................... 118
Regular Securities ....................................................... 80
Regular Securityholder ................................................... 82
Related Proceeds ......................................................... 35
Relief Act ............................................................... 74
REMIC .................................................................... 9
REMIC Pool ............................................................... 79
REMIC Provisions ......................................................... 79
REMIC Regulations ........................................................ 79
REMIC Securities ......................................................... 79
REO Property ............................................................. 36
Residual Holders ......................................................... 89
Residual Securities ...................................................... 80
Restricted Group ......................................................... 113
Retained Interest ........................................................ 51
Revenue Procedure ........................................................ 94
Revolving Credit Line Loans .............................................. 20
S&P ...................................................................... 113
SBJPA of 1996 ............................................................ 82
SEC ...................................................................... 118
secured-creditor exemption ............................................... 71
Securities ............................................................... 6
Security ................................................................. 41
Security Balance ......................................................... 25
Security Owners .......................................................... 38
Securityholder ........................................................... 23
Senior Liens ............................................................. 13
Senior Securities ........................................................ 28
Series ................................................................... 6
Servicer ................................................................. 6
Servicing Standard ....................................................... 47
Similar Law .............................................................. 9
Single Family Mortgage Loan .............................................. 18
Single Family Property ................................................... 18
SMMEA .................................................................... 9
SMMEA Securities ......................................................... 116
SPA ...................................................................... 25
Special Servicer ......................................................... 53
Standard Securities ...................................................... 99
Startup Day .............................................................. 80
Statistical Calculation Date ............................................. 6
Step-up Rate Assets ...................................................... 17
Strip Securities ......................................................... 28
Stripped Securities ...................................................... 102
Stripped Securityholder .................................................. 104
Subordinate Securities ................................................... 28
Sub-prime Mortgage Loan .................................................. 12
Subsequent Assets ........................................................ 21
Superliens ............................................................... 70
TAC ...................................................................... 33
Taxable Mortgage Pools ................................................... 79
Terms and Conditions ..................................................... 39
Texas Home Equity Laws ................................................... 74
Texas Home Equity Loans .................................................. 14
thrift institutions ...................................................... 92
Tiered REMICs ............................................................ 82
TILA Amendment ........................................................... 69
Title V .................................................................. 73
Title VIII ............................................................... 73
Trust .................................................................... 6
121
Terms Page
- ----- ----
Trust Fund ............................................................... 6
Trustee .................................................................. 6
U.S. Person .............................................................. 94
UCC ...................................................................... 38
Underlying Servicing Agreement ........................................... 41
Underwriter .............................................................. 113
Unsecured Home Improvement Loans ......................................... 8
UST ...................................................................... 71
Value .................................................................... 18
Voting Rights ............................................................ 53
Warranting Party ......................................................... 43
122