Filed Pursuant to Rule 424B5
PROSPECTUS SUPPLEMENT
(To Prospectus Dated April 17, 2003)
$286,339,321 (Approximate)
AEGIS ASSET BACKED SECURITIES TRUST
Mortgage Loan Asset Backed Certificates, Series 2003-1
[AEGIS MORTGAGE CORP. LOGO]
Aegis Asset Backed Securities Corporation Aegis Mortgage Corporation
Depositor Seller
Chase Manhattan Mortgage Corporation
Servicer
-------------------
The trust will issue certificates including the following classes offered
hereby:
o Two classes of senior certificates, including one class of interest-
only certificates.
o Three classes of subordinate certificates.
The classes of certificates offered by this prospectus supplement are
listed, together with their initial class principal amounts (or class notional
amounts) and interest rates, under "Summary of Terms--The Offered
Certificates" beginning on page S-2 of this prospectus supplement. This
prospectus supplement and the accompanying prospectus relate only to the
offering of the certificates listed in the table on page S-2 and not to the
other classes of certificates that will be issued by the trust fund as
described in this prospectus supplement.
The assets of the trust fund will primarily consist of a pool of
conventional, first lien, adjustable and fixed rate, fully amortizing and
balloon, residential mortgage loans. The mortgage loans were originated in
accordance with underwriting guidelines that are not as strict as Fannie Mae
and Freddie Mac guidelines. As a result, the mortgage loans may experience
higher rates of delinquency, foreclosure and bankruptcy than if they had been
underwritten in accordance with more restrictive standards.
Investing in the certificates involves risks. You should consider the
discussion under "Risk Factors" beginning on page S-7 of this prospectus
supplement and page 4 of the accompanying prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the 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 certificates offered by this prospectus supplement will be purchased by
the Underwriters from Aegis Asset Backed Securities Corporation, and are being
offered from time to time for sale to the public in negotiated transactions or
otherwise at varying prices to be determined at the time of sale. The
underwriters have the right to reject any order. Proceeds to Aegis Asset
Backed Securities Corporation from the sale of these certificates will be
approximately 100.42% of their initial total class principal amount before
deducting expenses.
On or about April 24, 2003, delivery of the certificates offered by this
prospectus supplement will be made through the book-entry facilities of The
Depository Trust Company, Clearstream Banking, societe anonyme, and the
Euroclear System.
LEHMAN BROTHERS COUNTRYWIDE SECURITIES CORPORATION
The date of this prospectus supplement is April 17, 2003.
Important notice about information presented in this
prospectus supplement and the accompanying prospectus:
We provide information to you about the certificates offered by this
prospectus supplement in two separate documents that progressively provide
more detail: (1) the accompanying prospectus, which provides general
information, some of which may not apply to your certificates and (2) this
prospectus supplement, which describes the specific terms of your
certificates.
If information varies between this prospectus supplement and the
accompanying prospectus, you should rely on the information in this prospectus
supplement.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We
have not authorized anyone to provide you with different information.
We are not offering the certificates 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 their
respective covers.
After the initial distribution of the certificates offered by this
prospectus supplement, this prospectus and prospectus supplement may be used
by the Underwriters, in connection with market making transactions in those
certificates. The Underwriters may act as principal or agent in these
transactions. These transactions will be at market prices at the time of sale
and not at the prices of the initial offering.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriter of the certificates and with respect to their unsold allotments or
subscriptions. In addition, all dealers selling the certificates will be
required to deliver a prospectus supplement and prospectus for ninety days
following the date of this prospectus supplement.
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following table of contents and the table of
contents included in the accompanying prospectus provide the pages on which
these captions are located
This prospectus supplement and the accompanying prospectus contain forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933. Specifically, forward-looking statements, together with related
qualifying language and assumptions, are found in the materials, including
tables, under the headings "Risk Factors" and "Prepayment and Yield
Considerations." Forward-looking statements are also found in other places
throughout this prospectus supplement and the prospectus, and may be
identified by accompanying language, including "expects," "intends,"
"anticipates," "estimates" or analogous expressions, or by qualifying language
or assumptions. These statements involve known and unknown risks,
uncertainties and other important factors that could cause the actual results
or performance to differ materially from the forward-looking statements. These
risks, uncertainties and other factors include, among others, general economic
and business conditions, competition, changes in political, social and
economic conditions, regulatory initiatives and compliance with governmental
regulations, customer preference and various other matters, many of which are
beyond the depositor's control. These forward-looking statements speak only as
of the date of this prospectus supplement. The depositor expressly disclaims
any obligation or undertaking to distribute any updates or revisions to any
forward-looking statements to reflect changes in the depositor's expectations
with regard to those statements or any change in events, conditions or
circumstances on which any forward-looking statement is based.
S-ii
Table of Contents
Prospectus Supplement
Page
----
Summary of Terms ................................................... S-1
The Offered Certificates ........................................... S-2
Risk Factors ....................................................... S-7
Description of the Certificates .................................... S-17
General ........................................................... S-17
Book-Entry Registration ........................................... S-18
Distributions of Interest ......................................... S-22
Determination of LIBOR ............................................ S-27
Distributions of Principal ........................................ S-27
Credit Enhancement ................................................ S-32
Final Scheduled Distribution Date ................................. S-35
Optional Purchase of Mortgage Loans ............................... S-35
The Trustee ....................................................... S-35
Description of the Mortgage Pool ................................... S-36
General ........................................................... S-36
Adjustable Rate Mortgage Loans .................................... S-37
The Index ......................................................... S-38
Primary Mortgage Insurance ........................................ S-38
Statistical Characteristics of the Mortgage Loans ................. S-40
Additional Information ............................................. S-50
Aegis Mortgage Corporation ......................................... S-50
Underwriting Standards ............................................. S-50
The Servicer ....................................................... S-57
Servicing of the Mortgage Loans .................................... S-59
General ........................................................... S-59
Servicing Compensation and Payment of Expenses .................... S-59
Prepayment Interest Shortfalls .................................... S-60
Advances, Servicing Advances ...................................... S-60
Primary Mortgage Insurance ........................................ S-61
Collection of Taxes, Assessments and Similar Items ................ S-61
Insurance Coverage ................................................ S-61
Evidence as to Compliance ......................................... S-61
Servicer Default .................................................. S-61
The Credit Risk Manager ........................................... S-61
Optional Repurchase of Distressed Mortgage Loans .................. S-62
Page
----
Special Servicer for Distressed Mortgage Loans .................... S-62
The Agreement ...................................................... S-62
Formation of the Trust ............................................ S-62
Reports to Certificateholders ..................................... S-63
Delivery and Substitution of Mortgage Loans ....................... S-64
The Trustee ....................................................... S-64
Voting Rights ..................................................... S-65
Termination ....................................................... S-65
Sale of Mortgage Loans ............................................ S-65
Events of Default ................................................. S-66
Governing Law ..................................................... S-66
Yield, Prepayment and Weighted Average Life ........................ S-67
General ........................................................... S-67
Overcollateralization ............................................. S-69
Subordination of the Offered Subordinate Certificates ............. S-69
Weighted Average Life ............................................. S-70
Material Federal Income Tax Considerations ......................... S-76
General ........................................................... S-76
Tax Treatment of the Class A-IO Certificates ...................... S-76
Tax Treatment of the Remaining Offered Certificates ............... S-76
Legal Investment Considerations .................................... S-78
ERISA Considerations ............................................... S-78
Use of Proceeds .................................................... S-79
Underwriting ....................................................... S-79
Legal Matters ...................................................... S-79
Ratings ............................................................ S-79
Index of Principal Terms ........................................... S-81
Annex A Global Clearance,
Settlement and Tax Documentation Procedures ..................... S-A-1
S-iii
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Summary of Terms
o This summary highlights selected information from this document and does
not contain all of the information that you need to consider in making
your investment decision. To understand all of the terms of the offering
of the certificates, it is necessary that you read carefully this entire
document and the accompanying prospectus.
o While this summary contains an overview of certain calculations, cash
flow priorities and other information to aid your understanding, you
should read carefully the full description of these calculations, cash
flow priorities and other information in this prospectus supplement and
the accompanying prospectus before making any investment decision.
o Some of the information that follows consists of forward-looking
statements relating to future economic performance or projections and
other financial items. Forward-looking statements are subject to a
variety of risks and uncertainties, such as general economic and business
conditions and regulatory initiatives and compliance, many of which are
beyond the control of the parties participating in this transaction.
Accordingly, what actually happens may be very different from the
projections included herein.
o Whenever we refer to a percentage of some or all of the mortgage loans in
the trust fund, that percentage has been calculated on the basis of the
total scheduled principal balance of those mortgage loans as of April 1,
2003, unless we specify otherwise. We explain in this prospectus
supplement under "Description of the Certificates--Distributions of
Principal" how the scheduled principal balance of a mortgage loan is
determined. Whenever we refer in this Summary of Terms or in the Risk
Factors section of this prospectus supplement to the total principal
balance of any mortgage loans, we mean the total of their scheduled
principal balances unless we specify otherwise.
Parties
Issuer
Aegis Asset Backed Securities Trust 2003-1.
Trustee
Wells Fargo Bank Minnesota, National Association.
Seller
Aegis Mortgage Corporation.
Depositor
Aegis Asset Backed Securities Corporation.
Servicer
Chase Manhattan Mortgage Corporation.
Credit Risk Manager
The Murrayhill Company will monitor and advise the servicer with respect
to default management of the mortgage loans.
PMI Insurer
Mortgage Guaranty Insurance Corporation will provide primary mortgage
insurance for approximately 75.71% of those mortgage loans with original
loan-to-value ratios in excess of 60%.
S-1
The Offered Certificates
Classes of Certificates
Aegis Asset Backed Securities Trust Mortgage Loan Asset-Backed Certificates,
Series 2003-1 consist of the classes of certificates listed in the table
below, together with the Class P, Class X and Class R Certificates. Only the
classes of certificates listed in the table are offered by this prospectus
supplement.
Class Interest CUSIP
Class Principal Amount(1) Rate Number
----- ------------------- ---- ------
A1....................... $249,115,000 (2) 00764M AA5
A-IO..................... (3) 6% 00764M AB3
M1....................... $ 16,464,000 (2) 00764M AC1
M2....................... $ 12,169,000 (2) 00764M AD9
B1....................... $ 8,591,321 (2) 00764M AE7
- ---------------
(1) These balances are approximate, as described in this prospectus
supplement.
(2) Interest will accrue on the Class A1, M1, M2 and B1 Certificates based on
one-month LIBOR plus a specified margin, subject to limitation, as
described in this prospectus supplement under "Description of the
Certificates--Distributions of Interest." The margins may adjust upwards
as described in "Description of Certificates--Distributions of Interest"
in this prospectus supplement.
(3) The Class A-IO Certificates are interest-only certificates; they will not
be entitled to payments of principal and will accrue interest on their
notional amounts, as described in this prospectus supplement. Interest
will not be payable on the Class A-IO Certificates after the distribution
date in April 2006.
S-2
The certificates offered by this prospectus supplement will be issued in
book-entry form.
See "Description of the Certificates--General" in this prospectus supplement
for a discussion of the minimum denominations and the incremental
denominations of each class of Offered Certificates.
The certificates represent ownership interests in a trust fund, the assets
of which will consist primarily of conventional, first lien, adjustable and
fixed rate, fully amortizing and balloon, residential mortgage loans having a
total principal balance as of April 1, 2003 (the "cut off date") of
approximately $286,339,321.
The rights of holders of the Class M1, M2 and B1 Certificates to payments of
principal and interest will be subordinate to the rights of the holders of
certificates having a senior priority of payment,
as described in this Summary of Terms under
"--Enhancement of Likelihood of Payment on the Certificates--Subordination of
Payments" below. We refer to those certificates as "subordinate" certificates,
and we refer to the Class A and A-IO Certificates as "senior" certificates.
The Class P Certificate will be entitled to all the cash flow arising from
Prepayment Premiums paid by the borrowers on certain voluntary, full and
partial prepayments of the mortgage loans. Accordingly, such amounts will not
be available for payment to the servicer or to holders of the Offered
Certificates.
The Offered Certificates (other than the Class A-IO Certificates) will have
an approximate total initial principal amount of $286,339,321. Any difference
between the total principal amount of the Offered Certificates on the date
they are issued and the approximate total principal amount of the Offered
Certificates as reflected in this prospectus supplement will not exceed 5%.
Distributions on the Certificates
Principal and interest on the certificates will be distributed on the 25th
day of each month, or if the 25th day is not a business day, on the next
business day thereafter, beginning May 27, 2003.
Interest Distributions
Interest will accrue on each class of Offered Certificates at the applicable
annual rates described in this prospectus supplement. No interest will accrue
on the Class A-IO Certificates after the accrual period relating to the
distribution date in April 2006.
See "Description of the Certificates--Distributions of Interest" in this
prospectus supplement.
Principal Distributions
The amount of principal distributable to the Offered Certificates (other
than the Class A-IO Certificates) will be determined by (1) formulas that
allocate portions of principal payments received on the mortgage loans among
the different certificate classes, (2) funds actually received on the mortgage
loans that are available to make principal distributions on the certificates
and (3) the application of excess interest to pay principal on the
certificates. Funds actually received on the mortgage loans may consist of
expected monthly scheduled payments, unexpected payments resulting from
prepayments or defaults by borrowers, liquidation of defaulted mortgage loans,
or repurchases of mortgage loans under the circumstances described in this
prospectus supplement.
The manner of allocating payments of principal on the mortgage loans will
differ, as described in this prospectus supplement, depending upon whether a
distribution date occurs before the distribution date in May 2006 or on or
after that date, and depending upon whether the delinquency and loss
performance of the mortgage loans is worse than certain levels set by the
rating agencies.
The Class A-IO Certificates are interest-only certificates and will not be
entitled to distributions of principal.
See "Description of the Certificates--Distributions of Principal" in this
prospectus supplement.
Limited Recourse
The only source of cash available to make interest and principal payments on
the certificates will be the assets of the trust fund. The trust fund will
have no source of cash other than collections and recoveries of the mortgage
loans through insurance or otherwise and amounts on deposit in reserve funds.
No other entity will be required or expected to make any payments on the
certificates.
Enhancement of Likelihood of Payment on the Certificates
The payment structure of this securitization includes excess interest,
overcollateralization, subordination, loss allocation and primary mortgage
S-3
insurance to enhance the likelihood that holders of more senior classes of
certificates will receive regular distributions of interest and principal. The
Class B1 Certificates are more likely to experience losses than the Class M2,
Class M1, Class A1 and Class AIO Certificates. The Class M2 Certificates are
more likely to experience losses than the Class M1, Class A1 and Class A-IO
Certificates; and the Class M1 Certificates are more likely to experience
losses than the Class A1 and Class A-IO Certificates.
See "Risk Factors--Potential Inadequacy of Credit Enhancement," and
"Description of the Certificates--Credit Enhancement" in this prospectus
supplement for a more detailed description of the excess interest,
overcollateralization, subordination, loss allocation and primary mortgage
insurance.
Subordination of Payments
Certificates with an "A" in their class designation will have a payment
priority as a group over other certificates. The Class M1 Certificates will
have a payment priority over the Class M2 and Class B1 Certificates; the Class
M2 Certificates will have a payment priority over the Class B1 Certificates.
Each class of Offered Certificates will have a payment priority over the Class
X and Class R Certificates but not the Class P Certificates.
See "Description of the Certificates--Credit Enhancement--Subordination" in
this prospectus supplement.
Allocation of Losses
As described in this prospectus supplement, amounts representing losses on
the mortgage loans (to the extent that such losses exceed excess interest and
any overcollateralization, as described herein) will be applied to reduce the
principal amount of the subordinate class of Offered Certificates still
outstanding that has the lowest payment priority, until the principal amount
of that class of certificates has been reduced to zero. For example, losses in
excess of overcollateralization will first be allocated in reduction of the
principal amount of the Class B1 Certificates until it is reduced to zero,
then in reduction of the principal amount of the Class M2 Certificates until
it is reduced to zero, and finally in reduction of the principal amount of the
Class M1 Certificates until it is reduced to zero. Losses will not reduce the
principal amount of the Class A1 Certificates. If a loss has been allocated to
reduce the principal amount of your subordinate certificate, it is unlikely
that you will receive any payment in respect of that reduction. If the
applicable subordination is insufficient to absorb losses, then holders of
senior certificates will incur losses and may never receive all of their
principal payments.
See "Description of the Certificates--Credit Enhancement--Application of
Realized Losses" in this prospectus supplement.
Excess Interest
The mortgage loans owned by the trust fund bear interest each month that, in
the aggregate, is expected to exceed the amount needed to pay monthly interest
on the Offered Certificates and certain fees and expenses of the trust fund.
This "excess interest" received from the mortgage loans each month will be
available to absorb realized losses on the mortgage loans and to maintain
overcollateralization at required levels.
See "Risk Factors--Potential Inadequacy of Credit Enhancement" and
"Description of the Certificates--Credit Enhancement--Excess Interest" in this
prospectus supplement.
Overcollateralization
To the extent described in this prospectus supplement, a portion of excess
interest will be applied to pay principal on the Class A1 Certificates,
thereby (1) reducing the principal balance of such class at a faster rate than
the principal balance of the mortgage loans is being reduced (such excess
amortization referred to as "overcollateralization") and (2) achieving and
maintaining the required level of overcollateralization. We cannot, however,
assure you that for all periods sufficient excess interest will be generated
by the mortgage loans to achieve or maintain the required level of
overcollateralization.
See "Risk Factors--Potential Inadequacy of Credit Enhancement" and
"Description of the Certificates--Credit Enhancement--Overcollateralization"
in this prospectus supplement.
See "Description of the Certificates--Distributions of Principal" in this
prospectus supplement.
Primary Mortgage Insurance
A loan-level primary mortgage insurance policy will be obtained on behalf of
the trust fund for approximately 75.71% of those mortgage loans with original
loan-to-value ratios in excess of 60%. However, such primary mortgage
insurance policy
S-4
will provide only limited protection against losses on defaulted mortgage
loans.
See "Description of the Mortgage Pool--Primary Mortgage Insurance" in this
prospectus supplement.
The NIMS Insurer
One or more insurance companies, referred to herein collectively as the NIMS
Insurer, may issue a financial guaranty insurance policy covering certain
payments to be made on net interest margin securities issued by a separate
trust and secured by all or a portion of the Class P and Class X Certificates,
in the event such net interest margin securities are issued. In such event,
the NIMS Insurer will be able to exercise rights which could adversely affect
certificateholders.
We refer you to "Risk Factors--Rights of the NIMS Insurer May Affect Offered
Certificates" in this prospectus supplement for additional information
concerning the NIMS Insurer.
The Mortgage Loans
As of the cut off date, the mortgage pool consisted primarily of
approximately 2,085 conventional, first lien, adjustable and fixed rate, fully
amortizing and balloon, residential mortgage loans with a total principal
balance of approximately $286,339,321. The mortgage loans will be secured by
mortgages, deeds of trust, or other security instruments, all of which are
referred to in this prospectus supplement as mortgages.
Approximately 11.65% of the mortgage loans are Fixed Rate Mortgage Loans.
Approximately 98.62% of the mortgage loans have original terms to stated
maturity of greater than 15 years and not greater than 30 years, and
approximately 1.38% of the mortgage loans have original terms to stated
maturity of not greater than 15 years.
The mortgage loans were generally originated or acquired in accordance with
underwriting guidelines that are less restrictive than Fannie Mae and Freddie
Mac guidelines. As a result, the mortgage loans are likely to experience
higher rates of delinquency, foreclosure and bankruptcy than mortgage loans
underwritten in accordance with higher standards.
The mortgage loans in the trust fund will not be insured or guaranteed by
any government agency.
Servicing of the Mortgage Loans
The mortgage loans will be serviced by Chase Manhattan Mortgage Corporation.
See "The Servicer" and "Servicing of the Mortgage Loans" in this prospectus
supplement.
Optional Purchase of the Mortgage Loans
The Class X owner and the NIMS Insurer, if any, may purchase the mortgage
loans on any distribution date following the month in which the total
principal balance of the mortgage loans declines to less than 10% of their
total principal balance as of April 1, 2003. If the Class X owner fails to
exercise such option, the NIMS Insurer, if any, will have the right to
exercise such option so long as it is insuring the net interest margin
securities or any amounts payable to the NIMS Insurer, if any, in respect of
the insurance remain unpaid.
If the mortgage loans are purchased, the certificateholders will be paid
accrued interest and principal in an amount not to exceed the purchase price.
If the option to purchase the mortgage loans is not exercised at the
earliest possible distribution date as described above, then, beginning with
the next succeeding distribution date and thereafter, the interest rates of
the Class A1, M1, M2 and B1 Certificates will be increased as described in
this prospectus supplement.
See "Description of the Certificates--Optional Purchase of Mortgage Loans"
in this prospectus supplement for a description of the purchase price to be
paid for the mortgage loans upon an optional purchase. See "Description of the
Certificates--Distributions of Interest" in this prospectus supplement for a
description of the increased interest rates to be paid on the Class A1, M1, M2
and B1 Certificates in the event that the purchase option with respect to the
mortgage loans is not exercised as described above.
Tax Status
The trustee will elect to treat all or a portion of the trust fund as
multiple REMICs for federal income tax purposes. Each of the Offered
Certificates, the Class P and the Class X Certificates will represent
ownership of "regular interests" in a REMIC. The Class R Certificate will be
designated as the sole class of "residual interest" in each of the REMICs.
S-5
The Class A-IO Certificates will be, and certain other of the Offered
Certificates may be, issued with original issue discount for federal income
tax purposes.
See "Material Federal Income Tax Considerations" in this prospectus
supplement and in the accompanying prospectus for additional information
concerning the application of federal income tax laws to the certificates.
ERISA Considerations
Generally, all of the certificates offered by this prospectus supplement may
be purchased by employee benefit plans or individual retirement accounts
subject to the Employee Retirement Income Security Act of 1974 or Section 4975
of the Internal Revenue Code of 1986. A fiduciary of an employee benefit plan
or an individual retirement account must determine that the purchase of a
certificate is consistent with its fiduciary duties under applicable law and
does not result in a nonexempt prohibited transaction under applicable law.
See "ERISA Considerations" in this prospectus supplement and in the
prospectus for a more complete discussion of these issues.
Legal Investment Considerations
The Class A1, A-IO and Class M1 Certificates will constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984, as described herein. None of the other Offered Certificates will
be "mortgage related securities."
There may be other restrictions on the ability of certain types of investors
to purchase the certificates that prospective investors should also consider.
See "Legal Investment Considerations" in this prospectus supplement and in
the prospectus.
Ratings of the Certificates
The certificates offered by this prospectus supplement will initially have
the following ratings from Moody's Investors Service, Inc., Standard and
Poor's Ratings Service, a division of The McGraw Hill Companies, Inc. and
Fitch Ratings.
Standard &
Moody's Poor's Fitch's
Class Rating Rating Rating
----- ------ ------ ------
A1 Aaa AAA AAA
A-IO Aaa AAA AAA
M1 Aa2 AA AA
M2 A2 A A
B1 Baa2 BBB BBB
o These ratings are not recommendations to buy, sell or hold these
certificates. A rating may be changed or withdrawn at any time by the
assigning rating agency.
o The ratings do not address the possibility that, as a result of principal
prepayments, the yield on your certificates, particularly the Class A-IO
Certificates, may be lower than anticipated.
o The ratings do not address the payment of any basis risk shortfalls with
respect to the Class A1, Class M1, Class M2 and Class B1 Certificates.
See "Ratings" in this prospectus supplement for a more complete discussion
of the certificate ratings.
S-6
Risk Factors
The following information, which you should carefully consider, identifies
certain significant sources of risk associated with an investment in the
Offered Certificates. You should also carefully consider the information set
forth under "Risk Factors" in the prospectus.
Higher Expected Delinquencies
of the Mortgage Loans . . . In general, the underwriting guidelines
applied to the mortgage loans to be included
in the trust fund are not as strict as Fannie
Mae or Freddie Mac guidelines, so the mortgage
loans are likely to experience rates of
delinquency, foreclosure and bankruptcy that
are higher, and that may be substantially
higher, than those experienced by mortgage
loans underwritten in accordance with higher
standards. The Seller's underwriting of the
mortgage loans generally consisted of
analyzing the creditworthiness of a mortgagor
based on both a credit score and mortgage
history, the income sufficiency of a
mortgagor's projected family income relative
to the mortgage payment and to other fixed
obligations, including in certain instances
rental income from investment property, and
the adequacy of the mortgaged property
expressed in terms of Loan-to-Value Ratio, to
serve as the collateral for a mortgage loan.
Changes in the values of mortgaged properties
related to the mortgage loans may have a
greater effect on the delinquency,
foreclosure, bankruptcy and loss experience of
the mortgage loans in the trust fund than on
mortgage loans originated under stricter
guidelines. We cannot assure you that the
values of the mortgaged properties have
remained or will remain at levels in effect on
the dates of origination of the related
mortgage loans.
See "Description of the Mortgage Pool--General"
in this prospectus supplement for a description
of the characteristics of the mortgage loans and
"Aegis Mortgage Corporation--Underwriting
Standards" for a general description of the
underwriting standards applied in originating
the mortgage loans.
Mortgage Loan Interest Rates
May Limit Interest Rates
on the Certificates . . . . The Class A1, M1, M2 and B1 Certificates will
accrue interest at an interest rate based on
the one-month LIBOR index plus a specified
margin, but such interest rates are subject to
limitations. The limit on the interest rate of
each of these certificates is based on the
weighted average interest rate of the mortgage
loans, net of interest payable on the Class A-
IO Certificates and certain allocable fees and
expenses of the trust fund. Substantially all
of the mortgage loans to be included in the
mortgage pool will have interest rates that
either are fixed or adjust based on a six-
month LIBOR index, as described in
"Description of the Mortgage Pool--The Index."
S-7
The adjustable rate mortgage loans may also
have periodic maximum and minimum limitations
on adjustments to their interest rates, and
substantially all of such adjustable rate
mortgage loans will have the first adjustment
to their interest rates two to five years
after their first payment dates. As a result,
the Class A1, M1, M2 and B1 Certificates may
accrue less interest than they would accrue if
their interest rate were based solely on the
one-month LIBOR index plus the specified
margin. A variety of factors could limit the
interest rates and adversely affect the yield
to maturity on the Class A1, M1, M2 and B1
Certificates. Some of these factors are
described below.
o The interest rates for the Class A1, M1, M2
and B1 Certificates adjust monthly, while
the interest rates on the mortgage loans to
be included in the mortgage pool either
adjust less frequently or do not adjust at
all. Consequently, the limits on the
interest rates on these certificates may
prevent increases in the interest rates on
the related certificates for extended
periods in a rising interest rate
environment.
o The interest rates on the adjustable rate
mortgage loans to be included in the
mortgage pool may respond to economic and
market factors that differ from those that
affect one-month LIBOR. It is possible that
the interest rates on the adjustable rate
mortgage loans may decline while the
interest rates on the Class A1, M1, M2 and
B1 Certificates are stable or rising. It is
also possible that the interest rates on the
adjustable rate mortgage loans to be
included in the mortgage pool and the
interest rates on the Class A1, M1, M2 and
B1 Certificates may both decline or increase
during the same period, but that the
interest rate on such certificates may
decline or increase more slowly or rapidly.
If the interest rates on the Class A1, M1, M2
and B1 Certificates are limited for any
distribution date, the resulting basis risk
shortfalls may be recovered by the holders of
those certificates on such date or future
distribution dates, but only if there is
enough cashflow generated from excess interest
on the mortgage loans to fund such shortfalls.
See "Description of the
Certificates--Distributions of Interest" and
"--Credit Enhancement--Overcollateralization" in
this prospectus supplement. For a general
description of the interest rates of the
mortgage loans, see "Description of the Mortgage
Pool" in this prospectus supplement.
Potential Inadequacy of Credit
Enhancement . . . . . . . . The certificates are not insured by any
financial guaranty insurance policy. The
excess interest, overcollateralization,
subordination, loss allocation and primary
mortgage insurance features described in this
prospectus supplement are intended to enhance
the likelihood that holders of more senior
classes will receive regular
S-8
payments of interest and principal, but are
limited in nature and may be insufficient to
cover all losses on the mortgage loans.
Excess Interest and Overcollateralization. In
order to achieve and then to maintain
overcollateralization it will be necessary
that the mortgage loans generate more interest
than is needed to pay interest on the Offered
Certificates as well as fees and expenses of
the trust fund. We expect that the mortgage
loans will generate more interest than is
needed to pay interest accrued on the Offered
Certificates and the fees and expenses of the
trust fund, at least during certain periods,
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. Any
remaining interest generated by the mortgage
loans will be used to absorb losses on the
mortgage loans. After these financial
obligations of the trust fund are covered,
available excess interest generated by the
mortgage loans will be used to achieve and
maintain overcollateralization.
We cannot assure you, however, that the
mortgage loans will generate enough excess
interest in all periods to achieve and
maintain the overcollateralization level
required by the rating agencies. The following
factors will affect the amount of excess
interest that the mortgage loans will
generate:
o Prepayments. Every time a mortgage loan is
prepaid, total excess interest after the
date of prepayment will be reduced because
that mortgage loan will no longer be
outstanding and generating interest. The
effect on your certificates of this
reduction will be influenced by the amount
of prepaid loans and the characteristics of
the prepaid loans. Prepayment of a
disproportionately high number of high
interest rate mortgage loans would have a
greater negative effect on future excess
interest.
o Defaults, Delinquencies and Liquidations. If
the rates of delinquencies, defaults or
losses on the mortgage loans turn out to be
higher than expected, excess interest will
be reduced by the amount necessary to
compensate for any shortfalls in cash
available to pay certificateholders. Every
time a mortgage loan is liquidated or
written off, excess interest is reduced
because such mortgage loans will no longer
be outstanding and generating interest.
o Increases in LIBOR. Substantially all the
mortgage loans have either fixed interest
rates or interest rates that adjust based on
a six-month LIBOR index and not the one-
month LIBOR index used to determine the
interest rates on the Class A1, M1, M2 and
B1 Certificates. As a result of an increase
in one-month LIBOR, the interest rate on
such certificates may increase relative to
interest rates on the mortgage loans,
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requiring that more of the interest
generated by the mortgage loans be applied
to cover interest on such certificates.
See "Description of the Certificates--Credit
Enhancement--Overcollateralization" in this
prospectus supplement.
Subordination. If applicable subordination is
insufficient to absorb losses, then
certificateholders will likely incur losses
and may never receive all of their principal
payments. You should consider the following:
o if you buy a Class B1 Certificate and losses
on the mortgage loans exceed excess interest
and any overcollateralization that has been
created, the principal amount of your
certificate will be reduced proportionately
with the principal amounts of the other
Class B1 Certificates by the amount of that
excess;
o if you buy a Class M2 Certificate and losses
on the mortgage loans exceed excess interest
and any overcollateralization that has been
created, plus the total principal amount of
the Class B1 Certificates, the principal
amount of your certificate will be reduced
proportionately with the principal amounts
of the other Class M2 Certificates by the
amount of that excess; and
o if you buy a Class M1 Certificate and losses
on the mortgage loans exceed excess interest
and any overcollateralization that has been
created, plus the total principal amount of
the Class B1 and Class M2 Certificates, the
principal amount of your certificate will be
reduced proportionately with the principal
amounts of the other Class M1 Certificates
by the amount of that excess.
Losses on the mortgage loans will not reduce
the principal amount of the Class A1
Certificates.
If overcollateralization is maintained at the
required amount and the mortgage loans
generate interest in excess of the amount
needed to pay interest and principal on the
Offered Certificates and the fees and expenses
of the trust fund, then excess interest will
be used to pay you and other
certificateholders the amount of any reduction
in the principal balances of the certificates
caused by application of losses. These
payments will be made to the Class A1, M1, M2
and B1 Certificates in order of seniority. We
cannot assure you, however, that any excess
interest will be generated and, in any event,
no interest will be paid to you on the amount
by which your principal balance was reduced
because of the application of losses.
See "Description of the Certificates--Credit
Enhancement-- Subordination" and "--Application
of Realized Losses" in this prospectus
supplement.
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Primary Mortgage Insurance. Approximately
94.05% of the mortgage loans have original
loan-to-value ratios greater than 60%,
calculated as described under "Description of
the Mortgage Pools--General." A loan-level
primary mortgage insurance policy from the PMI
Insurer, as described in this prospectus
supplement, will be acquired on behalf of the
trust fund, providing initial coverage for
approximately 75.71% of those mortgage loans,
with original loan-to-value ratios greater
than 60%. However, this policy is subject to
various other limitations and exclusions. As a
result, coverage may be limited or denied on
some mortgage loans. In addition, since the
amount of coverage depends on the loan-to-
value ratio of the related mortgaged property
at inception of the policy, a decline in the
value of the mortgaged property will not
result in increased coverage, and the trust
may still suffer a loss on a covered mortgage
loan. Accordingly, such policy will provide
only limited protection against losses on the
mortgage loans.
See "Description of the Mortgage Pool--Primary
Mortgage Insurance" in this prospectus
supplement.
Effect of Creditworthiness of
Primary Mortgage Insurer on
Ratings of Certificates . . The ratings assigned to the Offered
Certificates by the rating agencies will be
based in part on the credit ratings assigned
to the PMI Insurer which will provide loan-
level primary mortgage insurance coverage as
described above. The credit ratings assigned
to such insurance company could be qualified,
reduced or withdrawn at any time. Any
qualification, reduction or withdrawal of the
ratings assigned to such insurance company
could result in reduction of the ratings
assigned to the Offered Certificates, which
could in turn affect the liquidity and market
value of the Offered Certificates.
Unpredictability and Effect of
Prepayments . . . . . . . . The rate of prepayments on the mortgage loans
will be sensitive to prevailing interest
rates. Generally, if prevailing interest rates
decline, mortgage loan prepayments may
increase due to the availability of
refinancing at lower interest rates. If
prevailing interest rates rise, prepayments on
the mortgage loans may decrease.
Borrowers may prepay their mortgage loans in
whole or in part at any time; however,
approximately 85.07% of the mortgage loans to
be included in the mortgage pool require the
borrower to pay a Prepayment Premium in
connection with any voluntary prepayments in
full, and certain voluntary prepayments in
part, made during a stated period that ranges
from one year to five years after origination.
These Prepayment Premiums may discourage
borrowers from prepaying their mortgage loans
during the applicable period.
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The timing of prepayments of principal may
also be affected by liquidations of or
insurance payments on the mortgage loans. In
addition, the Seller of the mortgage loans to
the depositor may be required to repurchase
mortgage loans from the trust in the event
that certain breaches of representations and
warranties occur and are not cured. These
purchases will have the same effect on
certificateholders as prepayments of mortgage
loans.
A prepayment of a mortgage loan will usually
result in a payment of principal on the
Offered Certificates.
o If you purchase your certificates at a
discount and principal is repaid slower than
you anticipate, then your yield may be lower
than you anticipate.
o If you purchase your certificates at a
premium and principal is repaid faster than
you anticipate, then your yield may be lower
than you anticipate.
The prepayment experience of the mortgage
loans may differ significantly from that of
other first lien residential mortgage loans
included in Servicer's portfolios.
See "Yield, Prepayment, and Weighted Average
Life" in this prospectus supplement for a
description of factors that may influence the
rate and timing of prepayments on the mortgage
loans.
Delay in Receipt of Liquidation
Proceeds; Liquidation Proceeds
May Be Less Than Mortgage
Loan Balance . . . . . . . . Substantial delays could be encountered in
connection with the liquidation of delinquent
mortgage loans. Further, reimbursement of
advances made by the servicer and liquidation
expenses such as legal fees, real estate taxes
and maintenance and preservation expenses may
reduce the portion of liquidation proceeds
payable to certificateholders. If a mortgaged
property fails to provide adequate security
for the related mortgage loan, you could incur
a loss on your investment if the applicable
credit enhancement is insufficient to cover
the loss.
Geographic Concentration of
Mortgage Loans . . . . . . . Approximately 13.02%, 7.07%, 6.87%, 6.04%,
6.01% and 5.70% of the mortgage loans to be
included in the mortgage pool are secured by
properties located in California, New York,
Massachusetts, Ohio, Florida and Michigan. The
rate of delinquencies, defaults and losses on
the mortgage loans may be higher than if fewer
of the mortgage loans were concentrated in
that state because the following conditions
will have a disproportionate impact on the
mortgage loans in general:
o weak economic conditions, which may or may
not affect real property values, may affect
the ability of borrowers to repay their
loans on time.
S-12
o declines in the residential real estate
markets in these states may reduce the
values of properties located in those
states, which would result in an increase in
the loan-to-value ratios.
o properties in California may be more
susceptible than homes located in other
parts of the country to certain types of
uninsurable hazards, such as earthquakes,
hurricanes, as well as floods, wildfires,
mudslides and other natural disasters.
Natural disasters affect regions of the United
States from time to time, and may result in
increased losses on mortgage loans in those
regions, or in insurance payments that will
constitute prepayments of principal of those
mortgage loans.
For additional information regarding the
geographic concentration of the mortgage loans
to be included in the mortgage pool, see the
geographic distribution table under
"Description of the Mortgage Pool" in this
prospectus supplement.
Limited Ability to Resell
Certificates . . . . . . . . The underwriters are not required to assist in
resales of the Offered Certificates, although
they may do so. A secondary market for any
class of Offered Certificates may not develop.
If a secondary market does develop, it might
not continue or it might not be sufficiently
liquid to allow you to resell any of your
certificates.
Special Risks for the Class
A-IO Certificates . . . . . . Interest will accrue on the Class A-IO
Certificates on a declining scheduled notional
amount described in this prospectus
supplement. After the distribution date in
April, 2006, the notional amount of the Class
A-IO Certificates will be zero and, therefore,
current interest will no longer be payable on
the Class A-IO Certificates. In the event that
the mortgage loans prepay at an extremely
rapid rate resulting in their prepayment in
full or the exercise of an optional purchase
while the Class A-IO Certificates remain
outstanding, investors in the Class A-IO
Certificates could fail to recover their
initial investments.
Rights of the NIMS Insurer May
Affect Offered Certificates One or more insurance companies, referred to
herein as the "NIMS Insurer," may be requested
to issue a financial guaranty insurance policy
covering certain payments to be made on net
interest margin securities to be issued by a
separate trust and to be secured by all or a
portion of the Class P and Class X
Certificates, in the event such net interest
margin securities are issued. If such an
insurance policy is issued, the Pooling and
Servicing Agreement for this transaction will
provide that, unless there exists a
continuance of any failure by the NIMS Insurer
to make a required payment under the policy
insuring the net interest margin securities or
there exists an insolvency proceeding by or
against the NIMS Insurer, the NIMS Insurer, if
any, will be entitled to exercise, among
others, the following rights, without the
consent of the holders of the
S-13
Offered Certificates, and the holders of the
Offered Certificates may exercise such rights
only with the prior written consent of the
NIMS Insurer: (i) 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 in the event of a
default by servicer; (ii) the right to remove
the trustee or any co-trustee pursuant to the
Pooling and Servicing Agreement; and (iii) 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 defaults or
there exists an insolvency proceeding as
described above, the NIMS Insurer's consent
will be required prior to, among other things,
(i) the waiver of any default by the servicer
or the trustee, (ii) the appointment of any
successor thereto or any co-trustee or (iii)
any amendment to the Pooling and Servicing
Agreement. The NIMS Insurer will also have
additional rights in the Pooling and Servicing
Agreement.
Investors in the Offered Certificates should
note that any insurance policy issued by the
NIMS Insurer will not cover, and will not
benefit in any manner whatsoever, the Offered
Certificates. Furthermore, the rights granted
to the NIMS Insurer, if any, may be extensive
and the interests of the NIMS Insurer may be
inconsistent with, and adverse to, the
interests of the holders of the Offered
Certificates. The NIMS Insurer has no
obligation or duty to consider the interests
of the holders of the Offered Certificates in
connection with the exercise or non-exercise
of the NIMS Insurer's rights.
The NIMS Insurer's exercise of the rights and
consents set forth above 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.
Terrorist Attacks and Military
Action . . . . . . . . . . . The effects that military action by U.S.
forces in Iraq or other regions, or terrorist
attacks in the United States or other
incidents and related military action may have
on the performance of the mortgage loans or on
the values of mortgaged properties cannot be
determined at this time. Investors should
consider the possible effects on delinquency,
default and prepayment experience of the
mortgage loans. Federal agencies and non-
government lenders have and may continue to
defer, reduce or forgive payments and delay
foreclosure proceedings in respect of loans to
borrowers affected in some way by recent and
possible future events. In addition,
activation of a substantial number of U.S.
military reservists or members of the National
Guard may significantly increase the
proportion of mortgage loans whose mortgage
rates
S-14
are reduced by application of the Soldiers'
and Sailors' Civil Relief Act of 1940 or
similar state laws. The interest distributable
to holders of the senior and subordinate
certificates will be reduced on a
proportionate basis by any reductions in the
amount of interest collectible as a result of
application of the Relief Act and neither the
servicer nor any other party will be required
to fund any interest shortfall caused by any
such reduction. In addition, certain persons
not covered by the Relief Act may be eligible
for similar loan payment relief under
applicable state laws.
Violation of Various Federal
and State Laws May Result
in Losses on the Mortgage
Loans . . . . . . . . . . . Applicable state laws generally regulate
interest rates and other charges, require
certain disclosure, and require licensing of
the Seller. In addition, other state laws,
public policy and general principles of equity
relating to the protection of consumers,
unfair and deceptive practices and debt
collection practices may apply to the
origination, servicing and collection of the
mortgage loans.
The mortgage loans are also subject to federal
laws, including:
o the federal Truth-in-Lending Act and
Regulation Z promulgated thereunder, which
require certain disclosures to the
mortgagors regarding the terms of the
mortgage loans;
o the Equal Credit Opportunity Act and
Regulation B promulgated thereunder, 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; and
o the Fair Credit Reporting Act, which
regulates the use and reporting of
information related to the mortgagor's
credit experience.
Violations of certain provisions of these
federal laws may limit the ability of the
servicer to collect all or part of the
principal of or interest on the mortgage loans
and in addition could subject the trust to
damages and administrative enforcement.
The Seller will represent that as of the
closing date, each mortgage loan originated by
it is in compliance with applicable federal
and/or state laws and regulations. In the
event of a breach of such representation, the
Seller will be obligated to cure such breach
or repurchase or replace the affected mortgage
loan in the manner described under "The
Agreement--Sale of Mortgage Loans" in this
prospectus supplement.
High Cost Loans . . . . . . . None of the mortgage loans are "High Cost
Loans" within the meaning of the federal
Truth-in-Lending Act by the Home Ownership and
Equity Protection Act of 1994 (the
"Homeownership Act").
S-15
In addition to the Homeownership Act, however,
a number of legislative proposals have been
introduced at both the federal and state level
that are designed to discourage predatory
lending practices. Some states have enacted,
or may enact, laws or regulations that
prohibit inclusion of some provisions in
mortgage loans that have mortgage rates or
origination costs in excess of prescribed
levels, and require that borrowers be given
certain disclosures prior to the consummation
of such mortgage loans. In some cases, state
law may impose requirements and restrictions
greater than those in the Homeownership Act.
The Seller's failure to comply with these laws
could subject the trust, and other assignees
of the mortgage loans, to monetary penalties
and could result in the borrowers rescinding
such mortgage loans against either the trust
or subsequent holders of the mortgage loans.
Lawsuits have been brought in various states
making claims against assignees of High Cost
Loans for violations of state law. Named
defendants in these cases include numerous
participants within the secondary mortgage
market, including some securitization trusts.
None of the mortgage loans were originated in
Georgia.
S-16
Description of the Certificates
General
The Series 2003-1 Mortgage Loan Asset Backed Certificates issued by Aegis
Asset Backed Securities Trust (the "Certificates") will consist of the Class
A1, Class A-IO, Class M1, Class M2, Class B1, Class P, Class X and Class R
Certificates. The Class A1 and Class A-IO Certificates are referred to herein
as the "Senior Certificates;" the Class M1, Class M2 and Class B1 Certificates
are collectively referred to herein as the "Offered Subordinate Certificates;"
and the Offered Subordinate Certificates, together with the Class X and Class
R Certificates, are sometimes collectively referred to herein as the
"Subordinate Certificates." Only the Senior Certificates and the Offered
Subordinate Certificates (collectively, the "Offered Certificates") are
offered hereby. The Class A-IO Certificates are sometimes referred to herein
as the "Interest-only Certificates." The Class A1, Class M1, Class M2 and
Class B1 Certificates are also sometimes collectively referred to herein as
the "LIBOR Certificates." The Class R Certificate is also referred to as the
"Residual Certificate."
The Certificates represent beneficial ownership interests in a trust fund
(the "Trust Fund"), the assets of which consist primarily of (1) a pool (a
"Mortgage Pool") of conventional, adjustable and fixed rate, fully amortizing
and balloon, first lien residential mortgage loans (the "Mortgage Loans"), (2)
such assets as from time to time are deposited in respect of the Mortgage
Loans in a certificate account maintained by the Trustee (the "Certificate
Account"), (3) property acquired by foreclosure of Mortgage Loans or deed in
lieu of foreclosure, (4) the primary mortgage and other insurance policies
covering certain of the mortgage loans or the related mortgaged properties,
(5) the rights of the Depositor under the Sale and Assignment Agreement, as
described under "The Agreement--Sale of Mortgage Loans," (6) the Basis Risk
Reserve Fund, as described under "--Distributions of Interest--Basis Risk
Shortfalls," and (7) all proceeds of the foregoing.
Each class of Offered Certificates (other than the Class A-IO Certificates)
will be issued in the respective approximate initial total principal amount (a
"Class Principal Amount") specified in the table on page S-2. The Class R
Certificates will be issued without principal or notional amounts or interest
rates, and will be entitled only to such amounts as are described herein. The
Class A-IO Certificates will be issued in an initial aggregate notional amount
(the "Class Notional Amount") described under "--Distributions of Interest."
The Class X Certificate will be issued with an initial principal amount equal
to the excess of (x) the cut off date balance of the Mortgage Loans over (y)
the initial Class Principal Amount of all the certificates (other than the
Class X Certificate). The initial total Certificate Principal Amount (as
defined herein) of the Offered Certificates may be increased or decreased by
up to five percent to the extent that the cut off date Balance of the Mortgage
Loans is correspondingly increased or decreased as described under
"Description of the Mortgage Pool" herein. The date on which the Certificates
are issued is referred to herein as the "Closing Date".
The Class X Certificates will be entitled to monthly excess cashflow
remaining after required distributions are made to the Offered Certificates.
The Class P Certificates will be entitled to receive all Prepayment Premiums
received in respect of the Mortgage Loans and, accordingly, such amounts will
not be available for distribution to the holders of the other classes of
Certificates. The Class X and Class R Certificates will represent the
remaining interest in the assets of the Trust Fund after the required
distributions are made to all other Classes of Certificates. The Class R
Certificate evidences the residual interest in the REMICs.
An affiliate of the Seller will initially hold the Class P and Class X
Certificates and may place such Certificates into a separate trust and issue
securities backed by all or a portion of such Certificates (the "NIMS
Transaction"). The net interest margin securities (hereinafter, "NIMS
Securities") issued in the NIMS Transaction may be insured by one or more
financial guaranty insurance companies (such entities,
S-17
collectively, the "NIMS Insurer"). If the NIMS Securities are so insured, the
NIMS Insurer will have certain rights under the Pooling and Servicing
Agreement as described herein.
Distributions on the Certificates will be made on the 25th day of each month
or, if the 25th day is not a Business Day, on the next succeeding Business
Day, beginning in May 2003 (each, a "Distribution Date"), to
Certificateholders of record on the applicable Record Date. The "Record Date"
for the Offered Certificates and each Distribution Date will be the close of
business on the Business Day immediately preceding such Distribution Date. A
"Business Day" is generally any day other than a Saturday or Sunday or a day
on which banks in New York, Colorado, Minnesota, Maryland (or, as to the
Servicer, such other states as are specified in the Pooling and Servicing
Agreement) are closed.
Distributions on the Offered Certificates will be made to each registered
holder entitled thereto, by wire transfer in immediately available funds;
provided, that the final distribution in respect of any Certificate will be
made only upon presentation and surrender of such Certificate at the Corporate
Trust Office (as defined herein) of the Trustee. See "--The Trustee" herein.
The Offered Certificates will be issued, maintained and transferred on the
book-entry records of The Depository Trust Company ("DTC") and its
Participants (as defined herein) and for such purpose are referred to as
"Book-Entry Certificates." The Class A1 Certificates will be issued in minimum
denominations in principal amount of $25,000 and integral multiples of $1 in
excess thereof. The Class A-IO Certificates will be issued in minimum
denominations of $500,000 in Notional Amount (as defined herein) and integral
multiples of $1 in excess thereof. The Offered Subordinate Certificates will
be issued in minimum denominations in principal amount of $100,000 and
integral multiples of $1 in excess thereof.
Each class of Book-Entry Certificates will be represented by one or more
global certificates that equal in the aggregate the initial Class Principal
Amount of the related Class registered in the name of the nominee of DTC.
Aegis Asset Backed Securities Corporation (the "Depositor") has been informed
by DTC that DTC's nominee will be Cede & Co. No person acquiring an interest
in a Book-Entry Certificate (each, a "Beneficial Owner") will be entitled to
receive a physical certificate representing such person's interest (a
"Definitive Certificate"), except as set forth below under "--Book-Entry
Registration--Definitive Certificates." Unless and until Definitive
Certificates are issued for the Book-Entry Certificates under the limited
circumstances described herein, all references to actions by
Certificateholders with respect to the Book-Entry Certificates shall refer to
actions taken by DTC upon instructions from its Participants, and all
references herein to distributions, notices, reports and statements to
Certificateholders with respect to the Book-Entry Certificates shall refer to
distributions, notices, reports and statements to DTC or Cede & Co., as the
registered holder of the Book-Entry Certificates, for distribution to
Beneficial Owners by DTC in accordance with DTC procedures.
Book-Entry Registration
General. Beneficial Owners will hold their Certificates through DTC in the
United States, or Clearstream Banking, societe anonyme (formerly Cedelbank)
(hereafter, "Clearstream Luxembourg") or the Euroclear System ("Euroclear") in
Europe if they are participants of such systems, or indirectly through
organizations which are participants in such systems. Clearstream Luxembourg
and Euroclear will hold omnibus positions on behalf of their participants
through customers' securities accounts in Clearstream Luxembourg's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the depositaries
names on the books of DTC. Citibank, N.A. will act as depositary for
Clearstream Luxembourg and JPMorgan Chase Bank will act as depositary for
Euroclear (in such capacities, individually the "Relevant Depositary" and
collectively, the "European Depositaries"). Except as described below, no
Beneficial Owner will be entitled to receive a physical certificate
representing such Certificate. Unless and until Definitive
S-18
Certificates are issued, it is anticipated that the only "Certificateholder"
of the Offered Certificates will be Cede & Co., as nominee of DTC. Beneficial
Owners will not be Certificateholders as that term is used in the Agreement.
Beneficial Owners are only permitted to exercise their rights indirectly
through Participants and DTC.
The Beneficial Owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or
other financial intermediary (each, a "Financial Intermediary") that maintains
the Beneficial Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on
the records of DTC (or of a participating firm (a "Participant") that acts as
agent for the Financial Intermediary, whose interest will in turn be recorded
on the records of DTC, if the Beneficial Owner's Financial Intermediary is not
a DTC participant and on the records of Clearstream Luxembourg or Euroclear,
as appropriate).
Beneficial Owners will receive all distributions of principal of, and
interest on, the Offered Certificates from the Trustee through DTC and DTC
participants. While the Offered 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 Offered Certificates and is required to receive and transmit
distributions of principal of, and interest on, the Offered Certificates.
Participants and indirect participants with whom Beneficial Owners have
accounts with respect to Offered Certificates are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Beneficial Owners. Accordingly, although Beneficial Owners
will not possess certificates, the Rules provide a mechanism by which
Beneficial Owners will receive distributions and will be able to transfer
their interest.
Beneficial Owners will not receive or be entitled to receive certificates
representing their respective interests in the Offered Certificates, except
under the limited circumstances described below. Unless and until Definitive
Certificates are issued, Beneficial Owners who are not Participants may
transfer ownership of Offered Certificates only through Participants and
indirect participants by instructing such Participants and indirect
participants to transfer Offered Certificates, by book-entry transfer, through
DTC for the account of the purchasers of such Offered Certificates, which
account is maintained with their respective Participants. Under the Rules and
in accordance with DTC's normal procedures, transfer of ownership of Book-
Entry 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
Beneficial Owners.
Because of time zone differences, credits of securities received in
Clearstream Luxembourg or Euroclear as a result of a transaction with a
Participant will be made during subsequent securities settlement processing
and dated the business day following the DTC settlement date. Such credits or
any transactions in such securities settled during such processing will be
reported to the relevant Euroclear or Clearstream Luxembourg Participants on
such business day. Cash received in Clearstream Luxembourg or Euroclear as a
result of sales of securities by or through a Clearstream Luxembourg
Participant (as defined below) or Euroclear Participant (as defined below) to
a DTC Participant will be received with value on the DTC settlement date but
will be available in the relevant Clearstream Luxembourg or Euroclear cash
account only as of the business day following settlement in DTC. For
information with respect to tax documentation procedures relating to the
Certificates, see "Material Federal Income Tax Consequences--Taxation of
Securities Treated as Debt Instruments" in the Prospectus and "Global
Clearance, Settlement and Tax Documentation Procedures--Certain U.S. Federal
Income Tax Documentation Requirements" in Annex A hereto.
S-19
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Clearstream Luxembourg Participants and Euroclear
Participants will occur in accordance with their respective rules and
operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream
Luxembourg Participants or Euroclear Participants, on the other, will be
effected in DTC in accordance with the DTC rules on behalf of the relevant
European international clearing system by the Relevant Depositary; however,
such cross market transactions will require delivery of instructions to the
relevant European international clearing system by the counterparty in such
system in accordance with its rules and procedures and within its established
deadlines (European time). The relevant European international clearing system
will, if the transaction meets its settlement requirements, deliver
instructions to the Relevant Depositary to take action to effect final
settlement on its behalf by delivering or receiving securities in DTC, and
making or receiving payment in accordance with normal procedures for same day
funds settlement applicable to DTC. Clearstream Luxembourg Participants and
Euroclear Participants may not deliver instructions directly to the European
Depositaries.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives)
own DTC. In accordance with its normal procedures, DTC is expected to record
the positions held by each DTC participant in the Book-Entry Certificates,
whether held for its own account or as a nominee for another person. In
general, beneficial ownership of Book-Entry Certificates will be subject to
the rules, regulations and procedures governing DTC and DTC participants as in
effect from time to time.
Clearstream Luxembourg is incorporated under the laws of Luxembourg as a
professional depository. Clearstream Luxembourg holds securities for its
participating organizations ("Clearstream Luxembourg Participants") and
facilitates the clearance and settlement of securities transactions between
Clearstream Luxembourg Participants through electronic book-entry changes in
accounts of Clearstream Luxembourg Participants, thereby eliminating the need
for physical movement of certificates. Transactions may be settled in
Clearstream Luxembourg in any of various currencies, including United States
dollars. Clearstream Luxembourg provides to its Clearstream Luxembourg
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally-traded securities and securities
lending and borrowing. Clearstream Luxembourg interfaces with domestic markets
in several countries. As a professional depository, Clearstream Luxembourg is
subject to regulation by the Luxembourg Monetary Institute. Clearstream
Luxembourg participants are recognized financial institutions around the
world, including underwriters, securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations. Indirect
access to Clearstream Luxembourg is also available to others, such as banks,
brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Clearstream Luxembourg Participant, either
directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities
and cash. Transactions may be settled in any of various currencies, including
United States dollars. Euroclear includes various other services, including
securities lending and borrowing, and interfaces with domestic markets in
several countries generally similar to the arrangements for cross-market
transfers with DTC described above. Euroclear is operated by the Brussels,
Belgium office of JPMorgan Chase Bank (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
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policy for Euroclear on behalf of Euroclear Participants. Euroclear
Participants include banks (including central banks), securities brokers and
dealers and other professional financial intermediaries. Indirect access to
Euroclear is also available to other firms that clear through or maintain a
custodial relationship with a Euroclear Participant, either directly or
indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions
govern transfers of securities and cash within Euroclear, withdrawals of
securities and cash from Euroclear, and receipts of payments with respect to
securities in Euroclear. All securities in Euroclear are held on a fungible
basis without attribution of specific certificates to specific securities
clearance accounts. The Euroclear Operator acts under the Terms and Conditions
only on behalf of Euroclear Participants, and has no record of or relationship
with persons holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable DTC participants
in accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payment 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 Luxembourg or Euroclear will be credited
to the cash accounts of Clearstream Luxembourg Participants or Euroclear
Participants in accordance with the relevant system's rules and procedures, to
the extent received by the Relevant Depositary. Such distributions will be
subject to tax reporting in accordance with relevant United States tax laws
and regulations. See "Material Federal Income Tax Consequences--Taxation of
Securities Treated as Debt Instruments--Foreign Persons" and "--Information
Reporting" in the Prospectus.
Because DTC can only act on behalf of Financial Intermediaries, the ability
of a Beneficial Owner to pledge Book-Entry Certificates to persons or entities
that do not participate in the Depository system, or otherwise take actions in
respect of such Book-Entry Certificates, may be limited due to the lack of
physical certificates for such Book-Entry Certificates. In addition, issuance
of the Book-Entry Certificates in book-entry form may reduce the liquidity of
such Certificates in the secondary market since certain potential investors
may be unwilling to purchase Certificates for which they cannot obtain
physical certificates.
Monthly and annual reports will be provided to Cede & Co., as nominee of
DTC, and may be made available by Cede & Co. to Beneficial Owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry 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 permitted to be taken by the holders of
the Book-Entry Certificates under the Agreement only at the direction of one
or more Financial Intermediaries to whose DTC accounts the Book-Entry
S-21
Certificates are credited, to the extent that such actions are taken on behalf
of Financial Intermediaries whose holdings include such Book-Entry
Certificates. Clearstream Luxembourg or the Euroclear Operator, as the case
may be, will take any other action permitted to be taken by a
Certificateholder under the Agreement on behalf of a Clearstream Luxembourg
Participant or Euroclear Participant only in accordance with its relevant
rules and procedures and subject to the ability of the Relevant Depositary to
effect such actions on its behalf through DTC. DTC may take actions, at the
direction of the related Participants, with respect to some Book-Entry
Certificates which conflict with actions taken with respect to other Offered
Certificates.
Although DTC, Clearstream Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of Book-Entry
Certificates among participants of DTC, Clearstream Luxembourg and Euroclear,
they are under no obligation to perform or continue to perform such procedures
and such procedures may be discontinued at any time.
None of the Depositor, the Seller, the Servicer or the Trustee (as such
terms are defined herein) 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.
Definitive Certificates. Definitive Certificates will be issued to
Beneficial Owners or their nominees, respectively, rather than to DTC or its
nominee, only under the limited conditions set forth in the Prospectus under
"Description of the Securities--Book-Entry Registration of Securities." Upon
the occurrence of an event described in the penultimate paragraph thereunder,
the Trustee is required to direct DTC to notify Participants that have
ownership of Book-Entry Certificates as indicated on the records of DTC of the
availability of Definitive Certificates for their Book-Entry Certificates.
Upon surrender by DTC of the Definitive Certificates representing the Book-
Entry Certificates and upon receipt of instructions from DTC for re-
registration, the Trustee will re-issue the Book-Entry Certificates as
Definitive Certificates in the respective principal amounts owned by
individual Beneficial Owners, and thereafter the Trustee will recognize the
holders of such Definitive Certificates as Certificateholders under the
Pooling and Servicing Agreement.
Distributions of Interest
Calculation of Interest. The amount of interest distributable on each
Distribution Date in respect of each class of Offered Certificates will equal
the sum of (1) Current Interest (as defined herein) for such class on such
date and (2) any Carryforward Interest (as defined herein) for such class and
for such date. Interest will accrue on the LIBOR Certificates on the basis of
a 360-day year and the actual number of days elapsed in each Accrual Period
(as defined below). Interest will accrue on the Class A-IO Certificates on the
basis of a 360-day year consisting of twelve 30-day months.
o "Current Interest" with respect to any class of Offered Certificates and
any Distribution Date will equal the aggregate amount of interest accrued
at the applicable Interest Rate (as defined below) during the related
Accrual Period on the Class Principal Amount (or Class Notional Amount,
in the case of the Class A-IO Certificates) of such class immediately
prior to such Distribution Date.
o "Carryforward Interest" with respect to any class of Offered Certificates
and any Distribution Date will equal the sum of (1) the amount, if any,
by which (x) the sum of (A) Current Interest for such class for the
immediately preceding Distribution Date and (B) any unpaid Carryforward
Interest from previous Distribution Dates exceeds (y) the amount
distributed in respect of interest on such class on such immediately
preceding Distribution Date and (2) interest on such amount for the
related Accrual Period at the applicable Interest Rate.
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o The "Accrual Period" applicable to the Offered Certificates, other than
the Class A-IO Certificates, with respect to each Distribution Date will
be the period beginning on the immediately preceding Distribution Date
(or on the Closing Date, in the case of the first Accrual Period) and
ending on the day immediately preceding the related Distribution Date.
The Accrual Period applicable to the Class A-IO Certificates with respect
to each Distribution Date will be the prior calendar month.
The "Interest Rates" for the Offered Certificates will be the applicable
annual rates described below:
o Class A1 Certificates: the lesser of (i) LIBOR plus 0.40% (the "A1
Spread") and (ii) the Net Funds Cap (as defined below).
o Class A-IO Certificates: a fixed interest rate of 6.00% per annum for
each Accrual Period related to a Distribution Date on or prior to the
Distribution Date in April 2006. Thereafter, the Class A-IO Certificates
will not accrue interest and will not be entitled to any interest
payments.
o Class M1 Certificates: the lesser of (i) LIBOR plus 1.05% (the "M1
Spread") and (ii) the Net Funds Cap.
o Class M2 Certificates: the lesser of (i) LIBOR plus 2.25% (the "M2
Spread") and (ii) the Net Funds Cap.
o Class B1 Certificates: the lesser of (i) LIBOR plus 3.50% (the "B1
Spread") and (ii) the Net Funds Cap.
If the option to purchase the Mortgage Loans is not exercised on the Initial
Purchase Date by the Class X owner or the NIMS Insurer, if any, as described
under "--Optional Purchase of Mortgage Loans" herein, then with respect to the
next following Distribution Date and each succeeding Distribution Date
thereafter, the A1 Spread will be increased to 0.80%, the M1 Spread will be
increased to 1.575%, the M2 Spread will be increased to 3.375% and the B1
Spread will be increased to 5.25%.
Definitions Relating to Interest Payment Priorities.
o The "Class Principal Amount" is the aggregate of the Certificate
Principal Amounts of all certificates of a class.
o The "Certificate Principal Amount" of any LIBOR Certificate as of any
Distribution Date will be its Certificate Principal Amount as of the
Closing Date as reduced by all amounts previously distributed on that
Certificate in respect of principal prior to such Distribution Date, and
in the case of any Offered Subordinate Certificate, as reduced by any
Applied Loss Amount (as defined at "--Credit Enhancement--Application of
Realized Losses") previously allocated thereto.
o The "Notional Amount" of each Class A-IO Certificate as of any
Distribution Date will equal that Certificate's Percentage Interest of
the Class Notional Amount of the Class A-IO Certificates for that date.
o The "Class Notional Amount" of the Class A-IO Certificates for any
Distribution Date will be the lesser of (x) the Pool Balance as of the
immediately preceding Distribution Date (or as of the cut off date in the
case of the first Distribution Date) and (y) the following amounts:
o for any Distribution Date falling within the period May 2003 through
July 2003 the Class Notional Amount will equal approximately
$19,277,910;
o for any Distribution Date falling within the period August 2003 through
October 2003 the Class Notional Amount will equal approximately
$17,900,000;
S-23
o for any Distribution Date falling within the period November 2003
through January 2004 the Class Notional Amount will equal approximately
$16,100,000;
o for any Distribution Date falling within the period February 2004
through April 2004 the Class Notional Amount will equal approximately
$14,900,000;
o for any Distribution Date falling within the period May 2004 through
July 2004 the Class Notional Amount will equal approximately
$14,050,000;
o for any Distribution Date falling within the period August 2004 through
October 2004 the Class Notional Amount will equal approximately
$13,050,000;
o for any Distribution Date falling within the period November 2004
through April 2006 the Class Notional Amount will equal approximately
$11,700,000; and
o for any Distribution Date after April 2006 the Class Notional Amount
will equal zero.
o The "Net Funds Cap" with respect to each Distribution Date will be an
annual rate equal to (a) a fraction, expressed as a percentage, the
numerator of which is the product of (1) the Optimal Interest Remittance
Amount (as defined below) for such date and (2) 12, and the denominator
of which is the Pool Balance (as defined below) for the immediately
preceding Distribution Date, multiplied by (b) a fraction, the numerator
of which is 30 and the denominator of which is the actual number of days
in the Accrual Period related to such Distribution Date.
o The "Optimal Interest Remittance Amount" with respect to each
Distribution Date will be equal to the amount, if any, by which (1) the
product of (A) (x) the weighted average of the Net Mortgage Rates (as
defined below) of the Mortgage Loans as of the first day of the related
Collection Period (as defined at "--Distributions of Principal" below)
divided by (y) 12 and (B) the Pool Balance for the immediately preceding
Distribution Date exceeds (2) in the case of the first 36 Distribution
Dates only, an amount equal to the product of (x) 0.50% and (y) the Class
Notional Amount of the Class A-IO Certificates immediately before such
Distribution Date and (B) thereafter, zero.
o The "Net Mortgage Rate" for any Mortgage Loan at any time equals the
Mortgage Rate thereof minus the Aggregate Expense Rate.
o The "Aggregate Expense Rate" for any Mortgage Loan equals the sum of the
related Servicing Fee Rate (as described at "Servicing of the Mortgage
Loans--Servicing Compensation and Payment of Expenses"), the Trustee Fee
Rate (as described at "-- The Trustee" below) and the applicable
Insurance Fee Rate (as described at "Description of the Mortgage
Pool--General" below).
o The "Mortgage Rate" for any Mortgage Loan is its applicable interest rate
as determined in the related mortgage note as reduced by any application
of the Soldiers' and Sailors' Relief Act.
o The "Pool Balance" as of any date of determination will be equal to the
aggregate of the Scheduled Principal Balances (as defined at
"--Distributions of Principal") of the Mortgage Loans as of such date.
Interest Payment Priorities. On each Distribution Date, the Interest
Remittance Amount (as defined below) for such date will be distributed in the
following order of priority:
(i) concurrently to the Class A1 Certificates and the Class A-IO
Certificates, Current Interest (taking into account the Net Funds Cap, if
applicable) and any Carryforward Interest for such class for such
Distribution Date;
S-24
(ii) to the Class M1 Certificates, Current Interest (taking into account
the Net Funds Cap, if applicable) and any Carryforward Interest for such
class for such Distribution Date;
(iii) to the Class M2 Certificates, Current Interest (taking into account
the Net Funds Cap, if applicable) and any Carryforward Interest for such
class for such Distribution Date;
(iv) to the Class B1 Certificates, Current Interest (taking into account
the Net Funds Cap, if applicable) and any Carryforward Interest for such
class for such Distribution Date;
(v) to the Credit Risk Manager, the Credit Risk Manager's Fee;
(vi) to the Trustee and the Servicer, any previously unreimbursed
extraordinary costs, liabilities and expenses to the extent provided in the
Pooling and Servicing Agreement; and
(vii) for application as part of Monthly Excess Cashflow for such
Distribution Date, as described at "--Credit Enhancement--Application of
Monthly Excess Cashflow" below, any such Interest Remittance Amount
remaining after application pursuant to clauses (i) through (v) (such
amount, the "Monthly Excess Interest" for such Distribution Date).
The "Interest Remittance Amount" with respect to any Distribution Date will
equal (a) the sum of (1) all interest collected (other than Payaheads (as
defined herein)) or advanced in respect of Scheduled Payments (as defined
herein) on the Mortgage Loans during the related Collection Period (as defined
herein) by the Servicer or the Trustee, minus (x) the Servicing Fee and the
Trustee Fee with respect to such Mortgage Loans, (y) previously unreimbursed
Advances (as defined at "Servicing of the Mortgage Loans--Advances") and other
amounts due to the Servicer or the Trustee with respect to the Mortgage Loans,
to the extent allocable to interest and previously unreimbursed Servicing
Advances and (z) certain primary mortgage insurance premiums paid with respect
to certain of the Mortgage Loans (and certain state taxes imposed on such
premiums) as described at "Description of the Mortgage Pool --General", (2)
all Compensating Interest (as defined herein) paid by the Servicer with
respect to the Mortgage Loans with respect to the related Prepayment Period
(as defined herein), (3) the portion of any Purchase Price (as defined herein)
or Substitution Amount (as defined herein) paid with respect to the Mortgage
Loans during the related Prepayment Period allocable to interest, and (4) all
Net Liquidation Proceeds (as defined herein), Insurance Proceeds (as defined
herein) and any other recoveries collected with respect to the Mortgage Loans
during the related Prepayment Period, to the extent allocable to interest, as
reduced by (b) other costs, expenses or liabilities reimbursable to the
Servicer or the Trustee to the extent provided in the Pooling and Servicing
Agreement.
o A "Payahead" is generally any Scheduled Payment intended by the related
borrower to be applied in a Collection Period subsequent to the
Collection Period in which such payment was received.
o The "Substitution Amount" will be generally equal to the amount, if any,
by which the Scheduled Principal Balance of a Mortgage Loan required to
be removed from the Mortgage Pool due to a breach of a representation or
warranty or defective documentation exceeds the principal balance of the
related substitute Mortgage Loan, plus unpaid interest accrued thereon,
and any unpaid Advances or Servicing Advances, unpaid Servicing Fees, and
interest with respect thereto.
Basis Risk Shortfalls. With respect to each Distribution Date and any class
of LIBOR Certificates, to the extent that (a) the amount calculated under
clause (i) of the definition of "Interest Rate" for such class exceeds (b) the
Net Funds Cap (such excess, a "Basis Risk Shortfall"), such class will be
entitled to the amount of such Basis Risk Shortfall or Unpaid Basis Risk
Shortfall (as defined below) with interest thereon at the applicable Interest
Rate (calculated without regard to the Net Funds Cap) before the holders of
the Class X and Class R Certificates are entitled to any distributions. Such
class of LIBOR Certificates will be entitled to the amount of such Basis Risk
Shortfall or Unpaid Basis Risk Shortfall from Monthly Excess Cashflow (as
described below) for the related Distribution Date, treated as paid
S-25
from and to the extent such funds are on deposit in a reserve fund (the "Basis
Risk Reserve Fund"). See "--Credit Enhancement--Application of Monthly Excess
Cashflow" below. The source of funds on deposit in the Basis Risk Reserve Fund
will be limited to (i) an initial deposit of $1,000 by Depositor and (ii)
certain amounts that would otherwise be distributed to the Class X
Certificates. Notwithstanding the foregoing, the amount of any Basis Risk
Shortfall for any class of LIBOR Certificates in respect of any Distribution
Date may not exceed the amount, if any, by which (x) the amount payable at the
applicable Maximum Interest Rate (as defined below) exceeds (y) the amount
payable at the Net Funds Cap.
o The "Unpaid Basis Risk Shortfall" for any class of LIBOR Certificates on
any Distribution Date will equal the aggregate of all Basis Risk
Shortfalls for such class remaining unpaid from all previous Distribution
Dates, together with interest thereon at the applicable Interest Rate,
computed without regard to the Net Funds Cap, but limited to a rate no
greater than the Maximum Interest Rate.
o The "Maximum Interest Rate" with respect to any Distribution Date will be
an annual rate equal to the product of (x) the amount, if any, by which
(1) the weighted average of the maximum lifetime Mortgage Rates specified
in the related mortgage notes for the mortgage loans exceeds (2)(I) in
the case of the first 36 Distribution Dates only, the sum of the (A)
Aggregate Expense Rate and (B) the product of (x) 0.50% and (y) a
fraction, the numerator of which is the Class Notional Amount of the
Class A-IO Certificates and the denominator of which is the Pool Balance
for that Distribution Date and (II) thereafter, the Aggregate Expense
Rate and (y) a fraction, the numerator of which is 30 and the denominator
of which is the actual number of days in the Accrual Period related to
such Distribution Date.
o The amount of Monthly Excess Cashflow distributable with respect to the
Class X Certificates on any Distribution Date will be reduced by the
amount of any Basis Risk Payment not satisfied from amounts, if any, on
deposit in the Basis Risk Reserve Fund. The "Basis Risk Payment" for any
Distribution Date will be the sum of (1) any Basis Risk Shortfall for
such Distribution Date, (2) any Unpaid Basis Risk Shortfall for such
Distribution Date, and (3) any Required Reserve Fund Deposit (as
specified in the Pooling and Servicing Agreement) for such Distribution
Date. The amount of the Basis Risk Payment for any Distribution Date
cannot exceed the amount of Monthly Excess Cash Flow otherwise
distributable in respect of the Class X Certificates.
Prepayment Interest Shortfalls. When a principal prepayment in full or in
part is made on a Mortgage Loan, the borrower is charged interest only to the
date of such prepayment, instead of for a full month, with a resulting
reduction in interest payable for the month during which the prepayment is
made. Prepayments in full or in part are generally applied as of the date of
receipt. Full or partial prepayments (or proceeds of other liquidations)
received in any Prepayment Period will be distributed to holders of the
Offered Certificates on the Distribution Date following that Prepayment
Period. To the extent that, as a result of a full or partial prepayment, a
borrower is not required to pay a full month's interest on the amount prepaid,
a shortfall in the amount available to make distributions of interest on the
Certificates could result. The amount by which one month's interest at the
Mortgage Rate (as reduced by the related Servicing Fee Rate) on a Mortgage
Loan as to which a voluntary prepayment has been made exceeds the amount of
interest actually received in connection with such prepayment is a "Prepayment
Interest Shortfall."
With respect to prepayments in full and in part received from a borrower
during the period from the 16th to the last day of each calendar month, the
Servicer will be obligated to fund any resulting Prepayment Interest
Shortfalls (such payment obligation being limited to the aggregate of the
Servicing Fees received on the Mortgage Loans serviced by it for the
applicable Distribution Date). The Servicer is obligated to reduce its
servicing compensation for the related Distribution Date to the extent
necessary to
S-26
fund any Prepayment Interest Shortfalls required to be paid but not otherwise
paid by the Servicer. See "Servicing of the Mortgage Loans--Prepayment
Interest Shortfalls" herein. Any such payment by the Servicer is referred to
herein as "Compensating Interest." Any Prepayment Interest Shortfalls not
funded by the Servicer ("Net Prepayment Interest Shortfalls") will reduce the
Interest Remittance Amount available for distribution on the related
Distribution Date.
Determination of LIBOR
On the second LIBOR Business Day (as defined below) preceding the
commencement of each Accrual Period (each such date, a "LIBOR Determination
Date"), the Trustee will determine LIBOR based on the "Interest Settlement
Rate" for U.S. dollar deposits of one-month maturity set by the British
Bankers' Association (the "BBA") as of 11:00 a.m. (London time) on the LIBOR
Determination Date ("LIBOR").
The BBA's Interest Settlement Rates are currently displayed on the Dow Jones
Telerate Service page 3750 (such page, or such other page as may replace page
3750 on that service or such other service as may be nominated by the BBA as
the information vendor for the purpose of displaying the BBA's Interest
Settlement Rates for deposits in U.S. dollars, the "Designated Telerate
Page"). Such Interest Settlement Rates are also currently available on Reuters
Monitor Money Rates Service page "LIBOR01" and Bloomberg L.P. page "BBAM." The
BBA's Interest Settlement Rates currently are rounded to five decimal places.
A "LIBOR Business Day" is any day on which banks in London and New York are
open for conducting transactions in foreign currency and exchange.
With respect to any LIBOR Determination Date, if the BBA's Interest
Settlement Rate does not appear on the Designated Telerate Page as of 11:00
a.m. (London time) on such date, or if the Designated Telerate Page is not
available on such date, the Trustee will obtain such rate from the Reuters or
Bloomberg page. If such rate is not published for such LIBOR Determination
Date, LIBOR for such date will be the most recently published Interest
Settlement Rate. In the event that the BBA no longer sets an Interest
Settlement Rate, the Trustee will designate an alternative index that has
performed, or that the Trustee expects to perform, in a manner substantially
similar to the BBA's Interest Settlement Rate. The Trustee will select a
particular index as the alternative index only if it receives an opinion of
counsel (furnished at the Trust Fund's expense) that the selection of such
index will not cause any of the REMICs to lose their classification as REMICs
for federal income tax purposes.
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 LIBOR
Certificates for the related Accrual Period will (in the absence of manifest
error) be final and binding.
LIBOR for the first Accrual Period will be 1.32%.
Distributions of Principal
General Definitions. Distributions of principal on the Offered Certificates
(other than Class A-IO Certificates) will be made from the Principal
Distribution Amount and from Monthly Excess Cashflow, to the extent of such
excess available funds, as described under "--Credit Enhancement--Application
of Monthly Excess Cashflow" below.
o The "Principal Distribution Amount" for any Distribution Date will be
equal to the Principal Remittance Amount for such date minus the
Aggregate Overcollateralization Release Amount (as defined under
"--Definitions Relating to Principal Payment Priorities" below), if any,
for such Distribution Date.
S-27
o The "Principal Remittance Amount" for any Distribution Date will be equal
to (a) the sum of (1) all principal collected (other than Payaheads) or
advanced in respect of Scheduled Payments on the Mortgage Loans during
the related Collection Period by the Servicer or the Trustee (less
unreimbursed Advances due to the Servicer or the Trustee with respect to
such Mortgage Loans, to the extent allocable to principal), (2) all
prepayments in full or in part received on the Mortgage Loans during the
related Prepayment Period (exclusive of any related Prepayment Premiums),
(3) the outstanding principal balance of each Mortgage Loan that was
repurchased by the Seller during the related Prepayment Period, (4) the
principal portion of any Substitution Amount paid with respect to any
replaced Mortgage Loans during the related Prepayment Period allocable to
principal, and (5) all Net Liquidation Proceeds, Insurance Proceeds and
any other recoveries collected with respect to the Mortgage Loans during
the related Prepayment Period, to the extent allocable to principal,
minus (b) any other costs, expenses or liabilities reimbursable to the
Servicer or the Trustee from the Interest Remittance Amount described in
clause (b) of the definition thereof and not reimbursed therefrom or
otherwise.
o The "Collection Period" with respect to any Distribution Date is the one-
month period beginning on the second day of the calendar month
immediately preceding the month in which such Distribution Date occurs
and ending on the first day of the month in which such Distribution Date
occurs.
o "Insurance Proceeds" means any amounts paid by an insurer under a primary
mortgage insurance policy, any standard hazard insurance policy, flood
insurance policy or any other insurance policy relating to the Mortgage
Loans or related mortgaged properties other than amounts to cover
expenses incurred by the Servicer in connection with procuring such
proceeds, applied to the restoration and repair of the related mortgaged
property or to be paid to the borrower pursuant to the mortgage note or
state law.
o "Net Liquidation Proceeds" means all amounts, net of (1) unreimbursed
expenses and (2) unreimbursed Advances and Servicing Advances, received
and retained in connection with the liquidation of defaulted Mortgage
Loans, through insurance or condemnation proceeds, by foreclosure or
otherwise, together with any net proceeds received on a monthly basis
with respect to any properties acquired by foreclosure or deed in lieu of
foreclosure.
o The "Prepayment Period" with respect to each Distribution Date is the
period beginning on the 16th day of the calendar month immediately
preceding the month in which such Distribution Date occurs and ending on
the 15th day of the calendar month in which such Distribution Date
occurs.
o A "Scheduled Payment" is the monthly scheduled payment of interest and
principal specified in the related mortgage note for the Mortgage Loan.
o The "Scheduled Principal Balance" of any Mortgage Loan as of any date of
determination will be generally equal to its outstanding principal
balance as of the cut off date, after giving effect to Scheduled Payments
due on or before such date, whether or not received, reduced by (i) the
principal portion of all Scheduled Payments due on or before the due date
in the Collection Period immediately preceding such date of
determination, whether or not received, and (ii) all amounts allocable to
unscheduled principal payments received on or before the last day of the
Collection Period immediately preceding such date of determination.
Principal Payment Priorities. The Principal Distribution Amount will be
distributed on each Distribution Date as follows:
On each Distribution Date (a) prior to the Stepdown Date or (b) with respect
to which a Trigger Event is in effect, the Principal Distribution Amount will
be distributed in the following order of priority:
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(i) to the Class A1 Certificates, until the Class Principal Amount of
such class has been reduced to zero;
(ii) to the Class M1 Certificates, until the Class Principal Amount of
such class has been reduced to zero;
(iii) to the Class M2 Certificates, until the Class Principal Amount of
such class has been reduced to zero;
(iv) to the Class B1 Certificates, until the Class Principal Amount of
such class has been reduced to zero; and
(v) for application as part of Monthly Excess Cashflow for such
Distribution Date, as described under "--Credit Enhancement--Application of
Monthly Excess Cashflow" below, any such Principal Distribution Amount
remaining after application pursuant to clauses (i) through (iv) above.
On each Distribution Date prior to the Stepdown Date or with respect to
which a Trigger Event is in effect, once the aggregate Certificate Principal
Amount of the Class A1, Class M1, Class M2 and Class B1 Certificates equals
the Target Amount for such Distribution Date, the remaining Principal
Distribution Amount will be distributed as part of Monthly Excess Cashflow for
such Distribution Date, as described under "--Credit Enhancement--Application
of Monthly Excess Cashflow" below.
On each Distribution Date (a) on or after the Stepdown Date and (b) with
respect to which a Trigger Event is not in effect, the Principal Distribution
Amount will be distributed in the following order of priority:
(i) so long as the Class M1, Class M2 or Class B1 Certificates are
outstanding, to the Class A1 Certificates, an amount equal to the lesser of
(x) the Principal Distribution Amount for such Distribution Date and (y) the
Senior Principal Distribution Amount for such Distribution Date, until the
Class Principal Amount of such class has been reduced to zero; otherwise to
the Class A1 Certificates, the Principal Distribution Amount for such
Distribution Date, until the Class Principal Amount of such class has been
reduced to zero;
(ii) to the Class M1 Certificates, an amount equal to the lesser of (x)
the excess of (a) the Principal Distribution Amount for such Distribution
Date over (b) the amount distributed to the Class A1 Certificates on such
Distribution Date pursuant to clause (i) above, and (y) the M1 Principal
Distribution Amount for such Distribution Date, until the Class Principal
Amount of such class has been reduced to zero;
(iii) to the Class M2 Certificates, an amount equal to the lesser of (x)
the excess of (a) the Principal Distribution Amount for such Distribution
Date over (b) the amount distributed to the Class A1 and Class M1
Certificates on such Distribution Date pursuant to clauses (i) and (ii)
above, respectively, and (y) the M2 Principal Distribution Amount for such
Distribution Date, until the Class Principal Amount of such class has been
reduced to zero;
(iv) to the Class B1 Certificates, an amount equal to the lesser of (x)
the excess of (a) the Principal Distribution Amount for such Distribution
Date over (b) the amount distributed to the Class A1, Class M1 and Class M2
Certificates on such Distribution Date pursuant to clauses (i), (ii) and
(iii) above, respectively, and (y) the B1 Principal Distribution Amount for
such Distribution Date, until the Class Principal Amount of such class has
been reduced to zero; and
(v) for application as part of Monthly Excess Cashflow for such
Distribution Date, as described under "--Credit Enhancement--Application of
Monthly Excess Cashflow" below, any such Principal Distribution Amount
remaining after application pursuant to clauses (i) through (iv) above.
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Notwithstanding the foregoing, on any Distribution Date on which the Class
Principal Amount of each class of Offered Certificates having a higher
priority of distribution has been reduced to zero, any remaining Principal
Distribution Amount will be distributed to the remaining Offered Certificates,
in the order of priority set forth above, until the Class Principal Amount of
each such class has been reduced to zero.
Definitions Relating to Principal Payment Priorities.
o The "Target Amount" for any Distribution Date will be equal to the Pool
Balance as of such Distribution Date minus the Targeted
Overcollateralization Amount for such Distribution Date.
o A "Trigger Event" is in effect with respect to any Distribution Date if
(i) a Delinquency Event has occurred for such Distribution Date or (ii)
if an Overcollateralization Cumulative Loss Trigger Event has occurred
for such Distribution Date.
o The "Rolling Three Month Delinquency Rate" with respect to any
Distribution Date will be the average of the Delinquency Rates for each
of the three (or one and two, in the case of the first and second
Distribution Dates) immediately preceding months.
o A "Delinquency Event" shall occur with respect to any Distribution Date,
if the Rolling Three Month Delinquency Rate as of the last day of the
immediately preceding calendar month equals or exceeds 50% of the Senior
Enhancement Percentage for such Distribution Date.
o The "Delinquency Rate" for any month will be the fraction, expressed as a
percentage, the numerator of which is the aggregate outstanding principal
balance of all Mortgage Loans 60 or more days delinquent (including all
foreclosures, bankruptcies and REO Properties) as of the close of
business on the last day of such month, and the denominator of which is
the Pool Balance as of the close of business on the last day of such
month.
o An "Overcollateralization Cumulative Loss Trigger Event" shall have
occurred with respect to any Distribution Date, if the fraction,
expressed as a percentage, obtained by dividing (x) the aggregate amount
of cumulative Realized Losses incurred on the Mortgage Loans from the cut
off date through the last day of the related Collection Period by (y) the
cut off date Pool Balance, exceeds the applicable percentages described
below with respect to such Distribution Date:
Distribution Date Loss Percentage
----------------- ---------------
May 2006 through April 2007 ................. 2.25%
May 2007 through April 2008 ................. 3.50%
May 2008 through April 2009 ................. 4.75%
May 2009 and thereafter ...................... 5.25%
o The "Stepdown Date" is the later to occur of (x) the Distribution Date in
May 2006, and (y) the first Distribution Date on which the Senior
Enhancement Percentage has increased to not less than twice the Senior
Enhancement Percentage as of the Closing Date.
o The "Senior Principal Distribution Amount" for any Distribution Date will
be equal to (a) prior to the Stepdown Date or if a Trigger Event is in
effect with respect to such Distribution Date, 100% of the Principal
Distribution Amount and (b) on or after the Stepdown Date and as long as
a Trigger Event is not in effect with respect to such Distribution Date
the amount, if any, by which (x) the aggregate Class Principal Amount of
the Class A1 Certificates immediately prior to that Distribution Date
exceeds (y) the Senior Target Amount (as defined below).
o The "M1 Principal Distribution Amount" for any Distribution Date will be
equal, on or after the Stepdown Date and as long as a Trigger Event is
not in effect with respect to such Distribution Date, to the amount, if
any, by which (x) the sum of (i) the Class Principal Amount of the Class
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A1 Certificates after giving effect to distributions on such Distribution
Date and (ii) the Class Principal Amount of the Class M1 Certificates
immediately prior to such Distribution Date exceeds (y) the M1 Target
Amount (as defined below).
o The "M2 Principal Distribution Amount" for any Distribution Date will be
equal, on or after the Stepdown Date and as long as a Trigger Event is
not in effect with respect to such Distribution Date, to the amount, if
any, by which (x) the sum of (i) the aggregate Class Principal Amounts of
the Class A1 and Class M1 Certificates, in each case, after giving effect
to distributions on such Distribution Date and (ii) the Class Principal
Amount of the Class M2 Certificates immediately prior to such
Distribution Date exceeds (y) the M2 Target Amount (as defined below).
o The "B1 Principal Distribution Amount" for any Distribution Date will be
equal, on or after the Stepdown Date and as long as a Trigger Event is
not in effect with respect to such Distribution Date, to the amount, if
any, by which (x) the sum of (i) the aggregate Class Principal Amounts of
the Class A1, Class M1 and Class M2 Certificates, in each case, after
giving effect to distributions on such Distribution Date and (ii) the
Class Principal Amount of the Class B1 Certificates immediately prior to
such Distribution Date exceeds (y) the B1 Target Amount (as defined
below).
o The "Overcollateralization Amount" with respect to any Distribution Date
will be equal to the amount, if any, by which (x) the Pool Balance for
such Distribution Date exceeds (y) the aggregate Class Principal Amounts
of the Class A1, Class M1, Class M2 and Class B1 Certificates after
giving effect to distributions on such Distribution Date.
o The "Overcollateralization Deficiency" with respect to any Distribution
Date will be equal to the amount, if any, by which (x) the Targeted
Overcollateralization Amount for such Distribution Date exceeds (y) the
Overcollateralization Amount for such Distribution Date, calculated for
this purpose after giving effect to the reduction on such Distribution
Date of the Certificate Principal Amounts of the Offered Certificates
resulting from the distribution of the Principal Remittance Amount on
such Distribution Date, but prior to allocation of any Applied Loss
Amount on such Distribution Date.
o The "Aggregate Overcollateralization Release Amount" with respect to any
Distribution Date will be equal to the lesser of (x) the Principal
Remittance Amount for such Distribution Date and (y) the amount, if any,
by which (1) the Overcollateralization Amount for such date (calculated
for this purpose on the basis of the assumption that 100% of the
Principal Remittance Amount for such date is applied on such date in
reduction of the aggregate of the Certificate Principal Amounts of the
Offered Certificates) exceeds (2) the Targeted Overcollateralization
Amount for such date.
o The "Senior Enhancement Percentage" with respect to any Distribution Date
will be the fraction, expressed as a percentage, the numerator of which
is the sum of the aggregate Class Principal Amounts of the Offered
Subordinate Certificates and the Overcollateralization Amount (which, for
purposes of this definition only, shall not be less than zero) and the
denominator of which is the Pool Balance for such Distribution Date, in
each case after giving effect to distributions on such Distribution Date.
o The "Targeted Overcollateralization Amount" with respect to any
Distribution Date (x) prior to the Stepdown Date, will be equal to
approximately $3,006,562, (y) on or after the Stepdown Date and provided
a Trigger Event is not in effect, will be equal to the greater of (1)
approximately 0.50% of the cut off date Balance and (2) the lesser of (i)
approximately 1.05% of the cut off date Balance and (ii) approximately
2.10% of the Pool Balance after giving effect to distributions on such
Distribution Date, and (z) on or after the Stepdown Date and provided a
Trigger Event is in
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effect, will be equal to the Targeted Overcollaterization Amount for the
immediately preceding Distribution Date.
o The "Senior Target Amount" for any Distribution Date will be equal to the
lesser of (a) the product of (i) approximately 71.90% and (ii) the Pool
Balance for such Distribution Date and (b) the amount, if any, by which
(i) the Pool Balance for such Distribution Date exceeds (ii)
approximately 0.50% of the cut off date Pool Balance.
o The "M1 Target Amount" for any Distribution Date will be equal to the
lesser of (a) the product of (i) approximately 83.40% and (ii) the Pool
Balance for such Distribution Date and (b) the amount, if any, by which
(i) the Pool Balance for such Distribution Date exceeds (ii)
approximately 0.50% of the cut off date Pool Balance.
o The "M2 Target Amount" for any Distribution Date will be equal to the
lesser of (a) the product of (i) approximately 91.90% and (ii) the Pool
Balance for such Distribution Date and (b) the amount, if any, by which
(i) the Pool Balance for such Distribution Date exceeds (ii)
approximately 0.50% of the cut off date Pool Balance.
o The "B1 Target Amount" for any Distribution Date will be equal to the
lesser of (a) the product of (i) approximately 97.90% and (ii) the Pool
Balance for such Distribution Date and (b) the amount, if any, by which
(i) the Pool Balance for such Distribution Date exceeds (ii)
approximately 0.50% of the cut off date Pool Balance.
Credit Enhancement
Credit enhancement for the Offered Certificates consists of the
subordination of the Subordinate Certificates, the priority of application of
Realized Losses (as defined herein), excess interest and overcollateralization
and primary mortgage insurance, in each case as described herein.
Subordination. The rights of holders of the Offered Subordinate
Certificates to receive distributions with respect to the Mortgage Loans will
be subordinated, to the extent described herein, to such rights of holders of
each class of Offered Certificates having a higher priority of distribution,
as described under "--Distributions of Interest" and "--Distributions of
Principal." This subordination is intended to enhance the likelihood of
regular receipt by holders of Offered Certificates having a higher priority of
distribution of the full amount of interest and principal distributable
thereon, and to afford such Certificateholders limited protection against
Realized Losses incurred with respect to the Mortgage Loans.
The limited protection afforded to holders of Class A1, Class M1, Class M2,
and Class B1 Certificates by means of the subordination of Subordinate
Certificates having a lower priority of distribution will be accomplished by
the preferential right of holders of Offered Certificates to receive, prior to
any distribution in respect of interest or principal, respectively, being made
on any Distribution Date in respect of Certificates having a lower priority of
distribution, the amounts of interest due them and principal available for
distribution, respectively, on such Distribution Date.
Application of Realized Losses. If a Mortgage Loan becomes a Liquidated
Mortgage Loan during any Collection Period, the related Net Liquidation
Proceeds, to the extent allocable to principal, may be less than the
outstanding principal balance of that Mortgage Loan. The amount of such
insufficiency is a "Realized Loss." Realized Losses on Mortgage Loans will
have the effect of reducing amounts distributable in respect of, first, the
Class X Certificates (both through the application of Monthly Excess Interest
to fund such deficiency and through a reduction in the Overcollateralization
Amount for the related Distribution Date); second, the Class B1 Certificates;
third, the Class M2 Certificates; and fourth, the Class M1 Certificates,
before reducing amounts distributable in respect of the Senior Certificates. A
"Liquidated Mortgage Loan" is, in general, a defaulted Mortgage Loan as to
which the Servicer has
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determined that all amounts that it expects to recover in respect of such
Mortgage Loan have been recovered (exclusive of any possibility of a
deficiency judgment).
To the extent that Realized Losses are incurred, those Realized Losses will
reduce the Pool Balance, and thus may reduce the Overcollateralization Amount.
As described herein, the Overcollateralization Amount is increased and
maintained by application of Monthly Excess Cashflow to make distributions of
principal on the Offered Certificates.
If on any Distribution Date after giving effect to all Realized Losses
incurred with respect to the Mortgage Loans during the related Collection
Period and distributions of principal on such Distribution Date, the total
Certificate Principal Amount of the Offered Certificates exceeds the Pool
Balance for such Distribution Date (such excess, an "Applied Loss Amount"),
the Certificate Principal Amounts of the Offered Subordinate Certificates will
be reduced in inverse order of priority of distribution. Applied Loss Amounts
will be allocated in reduction of the Class Principal Amount of first, the
Class B1 Certificates, until their Class Principal Amount has been reduced to
zero; second, the Class M2 Certificates, until their Class Principal Amount
has been reduced to zero; and third, the Class M1 Certificates, until their
Class Principal Amount has been reduced to zero. The Certificate Principal
Amounts of the Class A1 Certificates will not be reduced by allocation of
Applied Loss Amounts.
Holders of Offered Subordinate Certificates will not receive any
distributions in respect of Applied Loss Amounts, except to the extent of
available Monthly Excess Cashflow as described below.
Excess Interest. The Mortgage Loans bear interest each month that in the
aggregate is expected to exceed the amount needed to pay monthly interest on
the related Offered Certificates and the fees and expenses of the Servicer and
the Trustee. Such excess interest from the Mortgage Loans each month will be
available to absorb Realized Losses (as defined above at "--Application of
Realized Losses") on the Mortgage Loans and to achieve and maintain
overcollateralization at the required levels.
Overcollateralization. The weighted average of the Net Mortgage Rates of
the Mortgage Loans is currently, and generally in the future is expected to
be, higher than the weighted average interest rate on the Offered
Certificates. As described below, the application of interest collections as
distributions of principal will cause the aggregate Certificate Principal
Amounts of the Offered Certificates to amortize more rapidly than the Pool
Balance, thus maintaining overcollaterization (i.e., the excess of the Pool
Balance over the aggregate Class Principal Amount of the Offered
Certificates). However, Realized Losses with respect to Mortgage Loans will
reduce overcollateralization, and could result in an Overcollateralization
Deficiency.
As described herein, on and after the Stepdown Date, to the extent that the
Overcollateralization Amount exceeds the related Targeted
Overcollateralization Amount, a portion of the Principal Distribution Amount
will not be applied in reduction of the Certificate Principal Amounts of the
Offered Certificates, but will instead be applied as described below.
Application of Monthly Excess Cashflow. The sum of Monthly Excess Interest
(see "--Distributions of Interest--Interest Payment Priorities") and the
Aggregate Overcollateralization Release Amount for a Distribution Date will
constitute the "Monthly Excess Cashflow" for such Distribution Date, which
will, on each Distribution Date (except as noted in (1) below), be distributed
in the following order of priority:
(1) For each Distribution Date occurring (a) before the Stepdown Date or (b)
on or after the Stepdown Date but for which a Trigger Event is in effect, then
until the aggregate Certificate Principal Amount equals the Pool Balance for
such Distribution Date minus the Targeted Overcollateralization Amount for
such Distribution Date, in the following order of priority:
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(a) to the Class A1 Certificates, in reduction of their Class
Principal Amount, until the Class Principal Amount of such class has been
reduced to zero;
(b) to the Class M1 Certificates, in reduction of their Class
Principal Amount, until the Class Principal Amount of such class has been
reduced to zero;
(c) to the Class M2 Certificates, in reduction of their Class
Principal Amount, until the Class Principal Amount of such class has been
reduced to zero; and
(d) to the Class B1 Certificates, in reduction of their Class
Principal Amount, until the Class Principal Amount of such class has been
reduced to zero.
(2) for each Distribution Date occurring on or after the Stepdown Date and
for which a Trigger Event is not in effect, in the following order of
priority:
(a) to the Class A1 Certificates, in reduction of their Class
Principal Amount, until the aggregate Class Principal Amount of the
Senior Certificates, after giving effect to distributions on such
Distribution Date, equals the Senior Target Amount;
(b) to the Class M1 Certificates, in reduction of their Class
Principal Amount, until the aggregate Class Principal Amount of the Class
A1 and Class M1 Certificates, after giving effect to distributions on
such Distribution Date, equals the M1 Target Amount;
(c) to the Class M2 Certificates, in reduction of their Class
Principal Amount, until the aggregate Class Principal Amount of the Class
A1, Class M1 and Class M2 Certificates, after giving effect to
distributions on such Distribution Date, equals the M2 Target Amount; and
(d) to the Class B1 Certificates, in reduction of their Class
Principal Amount, until the aggregate Class Principal Amount of the Class
A1, Class M1, Class M2 and Class B1 Certificates, after giving effect to
distributions on such Distribution Date, equals the B1 Target Amount.
(3) to the Basis Risk Reserve Fund, the amount of any Basis Risk Payment,
and then from the Basis Risk Reserve Fund, in the following order of priority:
(a) to the Class A1 Certificates, any applicable Basis Risk Shortfall
and Unpaid Basis Risk Shortfall for such class and such Distribution
Date;
(b) to the Class M1 Certificates, any applicable Basis Risk Shortfall
and Unpaid Basis Risk Shortfall for such class and for such Distribution
Date;
(c) to the Class M2 Certificates, any applicable Basis Risk Shortfall
and Unpaid Basis Risk Shortfall for such class and for such Distribution
Date;
(d) to the Class B1 Certificates, any applicable Basis Risk Shortfall
and Unpaid Basis Risk Shortfall for such class and for such Distribution
Date; and
(e) for addition to amounts distributable pursuant to priority (7)
below, to the Class X Certificates, any amounts remaining in the Basis
Risk Reserve Fund in excess of amounts required to be on deposit therein
after satisfying priorities 3(a) through (d) for that Distribution Date;
(4) to the Class M1 Certificates, any Deferred Amount (as defined below) for
such class and such date;
(5) to the Class M2 Certificates, any Deferred Amount for such class and
such date;
(6) to the Class B1 Certificates, any Deferred Amount for such class and
such date;
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(7) to the Class X Certificate, the amount distributable thereon under the
Pooling and Servicing Agreement; and
(8) to the Class R Certificate, any remaining amount.
With respect to each Distribution Date, the "Deferred Amount" for each class
of Offered Subordinate Certificates will be equal to the amount by which (x)
the aggregate of Applied Loss Amounts (as defined at "--Application of
Realized Losses") previously applied in reduction of the Class Principal
Amount thereof exceeds (y) the aggregate of amounts previously distributed in
reimbursement thereof.
Final Scheduled Distribution Date
The Final Scheduled Distribution Date for the LIBOR Certificates has been
determined to be the Distribution Date in May 2033 based upon the second
Distribution Date after the date of the last Scheduled Payment of the latest
maturity Mortgage Loan. The Final Scheduled Distribution Date for the Class A-
IO Certificates occurs on the Distribution Date in April 2006. As to each
class, the actual final Distribution Date may be earlier or later (other than
the Class A-IO Certificates), and could be substantially earlier, than such
class's Final Scheduled Distribution Date.
Optional Purchase of Mortgage Loans
On any Distribution Date following the month in which the Pool Balance is
less than 10% of the cut off date Pool Balance (such date the "Initial
Purchase Date"), the Class X owner will, with the prior written consent of the
NIMS Insurer, if any (which consent shall not be unreasonably withheld), have
the option to purchase the Mortgage Loans, any REO Property and any other
property remaining in the Trust Fund for a price equal to the sum of (a) 100%
of the aggregate outstanding principal balance of the Mortgage Loans plus
accrued interest thereon at the applicable Mortgage Rate plus any unreimbursed
Advances and Servicing Advances and (b) the fair market value of all other
property being purchased (the "Purchase Price"). If the Class X owner fails to
exercise such option, the NIMS Insurer, if any, will have the right to
exercise such option so long as it is insuring the NIMS Securities or is owed
any amounts in connection with such guaranty of the NIMS Securities. If such
option is exercised, the Trust Fund will be terminated (such event, an
"Optional Termination"). If the Class X owner or the NIMS Insurer, if any,
fail to exercise such option on the Initial Purchase Date, the applicable
Spread of each class of LIBOR Certificates will be increased as described
under "--Distributions of Interest" herein.
Furthermore, on any Distribution Date, the Class X owner will have the
option to purchase, at any one time, 1% (and, in any case, not less than 5
Mortgage Loans) of the Mortgage Loans, by Pool Balance as of such date. The
Mortgage Loans so purchased will be selected by the Class X owner in its sole
discretion and will be purchased at a price not less than the oustanding
principal balance of such Mortgage Loans.
The Trustee
Wells Fargo Bank Minnesota, National Association will be the trustee (the
"Trustee") under the Pooling and Servicing Agreement. The Trustee will be paid
a monthly fee with respect to each Mortgage Loan calculated at 0.0125%
annually (the "Trustee Fee Rate") on the outstanding principal balance of each
Mortgage Loan as of the first day of the related Collection Period. The
Trustee will be entitled to reimbursement for certain expenses prior to
distribution of any amounts to Certificateholders. The Trustee's "Corporate
Trust Office" for purposes of presentment and surrender of the Offered
Certificates for the final distribution thereon is located at Sixth Street and
Marquette Avenue, Minneapolis, Minnesota 55479, Attention: Aegis 2003-1, and
for all other purposes is P.O. Box 98, Columbia, Maryland 21046, Attention:
Aegis 2003-1 (or for overnight delivery at 9062 Old Annapolis Road, Columbia,
Maryland
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21045-1951, Attention: Client Manager AEGIS 2003-1) or any other address that
the Trustee may designate from time to time by notice to the
Certificateholders, the Depositor and the Servicer.
Description of the Mortgage Pool
General
As of the cut off date, the Mortgage Loans consisted of approximately 2,085
conventional, adjustable and fixed rate, fully-amortizing and balloon, first
lien residential Mortgage Loans, substantially all of which have original
terms to maturity from the first due date of the Scheduled Payment of not more
than 30 years, and which have an aggregate principal balance (after giving
effect to Scheduled Payments due on such date) of approximately $286,339,321.
The underwriting guidelines generally applied by the Seller in originating
the Mortgage Loans are described at "Underwriting Standards" below. Because,
in general, such underwriting guidelines do not conform to Fannie Mae or
Freddie Mac guidelines, the Mortgage Loans are likely to experience higher
rates of delinquency, foreclosure and bankruptcy than if they had been
underwritten to a more restrictive standard. The Mortgage Loans will be
acquired by the Depositor from the Seller and the Depositor will, in turn,
convey such Mortgage Loans to the Trust Fund. See "The Agreement--Assignment
of Mortgage Loans."
As of the cut off date, approximately 254 (or 11.65%) of the Mortgage Loans
in the Trust Fund are Fixed Rate Mortgage Loans and approximately 1,831 (or
88.35%) are Adjustable Rate Mortgage Loans, as described in more detail under
"--Adjustable Rate Mortgage Loans" below. Interest on the Mortgage Loans
accrues on the basis of a 360-day year consisting of twelve 30-day months.
Pursuant to its terms, each Mortgage Loan, other than a loan secured by a
condominium unit, is required to be covered by a standard hazard insurance
policy in an amount equal to the lower of the unpaid principal amount thereof
or the replacement value of the improvements on the Mortgaged Property.
Generally, a condominium association is responsible for maintaining hazard
insurance covering the entire building
As of the cut off date, approximately 94.05% of the Mortgage Loans have
original Loan-to-Value Ratios in excess of 60% ("60+LTV Loans"). The "Loan-to-
Value Ratio" of a Mortgage Loan at any time is the ratio of the principal
balance of such Mortgage Loan at the date of determination to (a) in the case
of a purchase, the lesser of the sale price of the Mortgaged Property and its
appraised value at the time of sale or (b) in the case of a refinancing or
modification, the appraised value of the Mortgaged Property at the time of the
refinancing or modification
With respect to approximately 75.71% of the 60+ LTV Loans, the Seller has
acquired initial primary mortgage insurance coverage through Mortgage Guaranty
Insurance Corporation as described under "--Primary Mortgage Insurance" below.
As of the cut off date, all of the Mortgage Loans that are Adjustable Rate
Mortgage Loans and approximately 99.30% of the Mortgage Loans that are Fixed
Rate Mortgage Loans are fully amortizing. However, approximately 0.70% of such
Fixed Rate Mortgage Loans will have original terms to maturity that are
shorter than their amortization schedules, leaving final payments ("Balloon
Payments") due on their maturity dates that are significantly larger than
other monthly payments (such loans, "Balloon Loans"). The Balloon Loans are
generally expected to have original terms to maturity of 15 years. The ability
of the borrower to repay a Balloon Loan at maturity frequently will depend on
such borrower's ability to refinance the loan. Any loss on a Balloon Loan as a
result of the borrower's inability to refinance the loan will be borne by
Certificateholders, to the extent not covered by the applicable credit
S-36
enhancement. Neither the Servicer nor the Trustee will make any Advances with
respect to delinquent Balloon Payments.
As of the cut off date, approximately 85.07% of the Mortgage Loans provide
for payment by the borrower of a prepayment premium (each, a "Prepayment
Premium") in connection with certain full or partial prepayments of principal.
Generally, each such Mortgage Loan provides for payment of a Prepayment
Premium in connection with certain voluntary, full or partial prepayments made
within the period of time specified in the related Mortgage Note, ranging from
one year to five years from the date of origination of such Mortgage Loan (the
"Penalty Period"), as described herein. The amount of the applicable
Prepayment Premium, to the extent permitted under applicable state law, is as
provided in the related Mortgage Note; generally, this amount is equal to six
months' interest on any amounts prepaid in excess of 20% of the original
principal balance or, in some cases, the current principal balance of the
related Mortgage Loan during any 12-month period during the applicable Penalty
Period. Prepayment Premiums will not be part of available funds applied to pay
interest or principal on the Offered Certificates, but rather will be
distributed to the holders of the Class P Certificates. The Servicer may waive
(or permit a subservicer to waive) a Prepayment Premium without the consent of
the Trustee (and without reimbursing the Trust Fund from its own funds for any
foregone Prepayment Premium) only if the prepayment is not the result of a
refinancing by the Servicer or its affiliates and such waiver (i) relates to a
default or a reasonably foreseeable default and, in the reasonable judgment of
the Servicer, such waiver would maximize recovery of total proceeds from the
Mortgage Loan, taking into account the value of the Prepayment Premium and the
related Mortgage Loan or, (ii) relates to a Prepayment Premium the collection
of which would, in the reasonable judgment of the Servicer, be in violation of
law. The Servicer will be obligated to deposit with the Trustee from its own
funds the amount of any Prepayment Premium to the extent not collected from a
borrower (except with respect to a waiver of any such Prepayment Premium as
described above).
It is expected that none of the Mortgage Loans in the Trust Fund will be
subject to the Home Ownership and Equity Protection Act of 1994 and, as of the
date of origination, none of the Mortgage Loans were subject to any comparable
state law, including the Georgia Fair Lending Act.
On the Closing Date, a loan level primary mortgage insurance policy will be
acquired from Mortgage Guaranty Insurance Corporation for approximately 75.71%
of the Mortgage Loans in the Mortgage Pool with original loan-to-value ratios
in excess of 60%. The premiums payable with respect to such policy will be
paid by the Trustee in arrears from interest collections on the Mortgage Loans
as described under "Description of the Certificates -- Distributions of
Interest." The premiums are calculated as an annual percentage of 1.75% (the
"Insurance Fee Rate") of the Scheduled Principal Balance of the covered
Mortgage Loans.
Adjustable Rate Mortgage Loans
As of the cut off date, all of the Mortgage Loans that are Adjustable Rate
Mortgage Loans provide for semi-annual adjustment of the related Mortgage Rate
based on the Six-Month LIBOR Index as described at "--The Index" below. In the
case of those Mortgage Loans that are Adjustable Rate Mortgage Loans based on
the Six-Month LIBOR Index (the "LIBOR Mortgage Loans"), there will be
corresponding adjustments to the monthly payment amount, in each case on each
adjustment date applicable thereto (each such date, an "Adjustment Date");
provided that the first such adjustment for approximately 55.07% of the LIBOR
Mortgage Loans will occur after an initial period of approximately two years
following origination; and in the case of approximately 44.93% of the LIBOR
Mortgage Loans, approximately three years following origination. On each
Adjustment Date for a LIBOR Mortgage Loan, the Mortgage Rate will be adjusted
to equal the sum, rounded generally to the next highest or nearest multiple of
1/8%, of the Six-Month LIBOR Index and a fixed percentage amount (the "Gross
Margin"), provided that the Mortgage Rate on each such LIBOR Mortgage Loan
will not increase or
S-37
decrease by more than a fixed percentage of 1% as specified in the related
Mortgage Note (the "Periodic Cap") on any related Adjustment Date and will not
exceed a specified maximum Mortgage Rate over the life of such Mortgage Loan
(the "Maximum Rate") or be less than a specified minimum Mortgage Rate over
the life of such Mortgage Loan (the "Minimum Rate"). The Mortgage Rate
generally will not increase or decrease on the first Adjustment Date by more
than a fixed percentage specified in the related Mortgage Note (the "Initial
Cap"); the Initial Caps of 3% for all of the LIBOR Mortgage Loans. Effective
with the first monthly payment due on each LIBOR 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 Rate as so adjusted. Due to the application of the Initial Caps,
Periodic Caps and Maximum Rates, the Mortgage Rate on each such LIBOR Mortgage
Loan, as adjusted on any related Adjustment Date, may be less than the sum of
the Six-Month LIBOR Index and the related Gross Margin, rounded as described
herein. See "--The Index" below.
The Adjustable Rate Mortgage Loans generally do not permit the related
borrower to convert the adjustable Mortgage Rate to a fixed Mortgage Rate.
The Index
As indicated above, the index applicable to the determination of the
Mortgage Rates for substantially all the Mortgage Loans that are Adjustable
Rate Mortgage Loans will be the average of the interbank offered rates for
six-month United States dollar deposits in the London market, calculated as
provided in the related Mortgage Note (the "Six-Month LIBOR Index") and as
most recently available either as of (1) the first business day a specified
period of time prior to such Adjustment Date, (2) the first business day of
the month preceding the month of such Adjustment Date or (3) the last business
day of the second month preceding the month in which such Adjustment Date
occurs, as specified in the related Mortgage Note. In the event that the Six-
Month LIBOR Index becomes unavailable or otherwise unpublished, the Servicer
will select a comparable alternative index over which it has no direct control
and which is readily verifiable.
Primary Mortgage Insurance
As of the cut off date, approximately 94.05% of the Mortgage Loans are 60+
LTV Loans. See "Description of the Mortgage Pools--General." The Seller
expects to acquire, on behalf of the Trust, a loan-level primary mortgage
insurance policy from Mortgage Guaranty Insurance Corporation ("MGIC")
covering approximately 75.71%, of the 60+ LTV Loans.
The following is a brief description of MGIC (the "PMI Insurer") and such
primary insurance policy (the "PMI Policy").
MGIC is a wholly-owned subsidiary of MGIC Investment Corporation. As of the
date of this Prospectus Supplement, MGIC had insurer financial strength
ratings of "AA+" from S&P and "Aa2" from Moody's. The rating agency issuing
the insurer financial strength rating can withdraw or change its rating at any
time.
For further information regarding MGIC, investors are directed to MGIC
Investment Corporation's periodic reports filed with the Securities and
Exchange Commission, which are publicly available.
The PMI Policy does not cover any Mortgage Loan in default at the cut off
date or any Mortgage Loan otherwise insured under the terms of a traditional
mortgage guaranty insurance policy. Each Mortgage Loan covered by the PMI
Policy is covered by such PMI Policy for losses up to the policy limits;
provided, however, that such PMI Policy will not cover special hazard,
bankruptcy or fraud losses or certain other types of losses as provided in
such PMI Policy. Claims on insured Mortgage Loans will
S-38
reduce uninsured exposure to an amount equal to 60% of the lesser of the
appraised value as of the origination date or the purchase price, as the case
may be, of the related Mortgaged Property, subject to exceptions and
exclusions.
The PMI Policy is required to remain in force with respect to each Mortgage
Loan covered thereunder until (i) the principal balance of the Mortgage Loan
is paid in full; (ii) the principal balance of the Mortgage Loan has amortized
down to a level that results in a loan-to-value ratio for the Mortgage Loan of
55% or less (provided, however, that no coverage of any Mortgage Loan under
the PMI Policy is required where prohibited by applicable law); or (iii) any
event specified in the PMI Policy occurs that allows for the termination of
the PMI Policy by the PMI Insurer.
The PMI Policy may not be assigned or transferred without the prior written
consent of the PMI Insurer and the Rating Agencies; provided, however that the
PMI Insurer has previously provided written consent to (i) the assignment of
coverage on individual Mortgage Loans from the Trustee to the Seller in
connection with any Mortgage Loan repurchased or substituted for by the Seller
and (ii) the assignment of coverage on all Mortage Loans from the Trustee to
any successor Trustee, provided that, in each case, prompt notice of such
assignment is provided to the PMI Insurer.
The PMI Policy generally requires that delinquencies on any Mortgage Loan
insured thereunder must be reported to the PMI Insurer within four months of
default and appropriate proceedings to obtain title to the property securing
such Mortgage Loan must be commenced within six months of default. The PMI
Policy generally contains provisions substantially as follows: (i) for the
insured to present a claim, the insured must have acquired, and tendered to
the PMI Insurer, good and merchantable title to the property securing the
Mortgage Loan, free and clear of all liens and encumbrances, including, but
not limited to, any right of redemption by the mortgagor unless such
acquisition of good and merchantable title is excused under the terms of such
PMI Policy; (ii) a claim generally includes unpaid principal, accrued interest
to the date of such tender to the PMI Insurer by the insured, and certain
expenses; (iii) when a claim is presented, the PMI Insurer will have the
option of either (A) paying the claim in full and taking title to the property
securing the Mortgage Loan or (B) paying the insured a percentage of the claim
and with the insured retaining title to the property securing such Mortgage
Loan; (iv) claims generally must be filed within 60 days after the insured has
acquired good and merchantable title to the property securing the Mortgage
Loan and (v) a claim generally must be paid within 60 days after the claim is
filed by the insured. No payment for a loss will be made under the PMI Policy
unless the property securing the Mortgage Loan is in the same physical
condition as when such Mortgage Loan was originally insured, except for
reasonable wear and tear and unless premiums on the standard homeowner's
insurance policy, real estate taxes and foreclosure protection and
preservation expenses have been advanced by or on behalf of the insured.
Unless approved in writing by the PMI Insurer, no changes may be made to the
terms of the Mortgage Loan, including the borrowed amount, interest rate, term
or amortization schedule, except as specifically permitted by terms of the
Mortgage Loan; nor may the Lender make any change in the property or other
collateral securing the Mortgage Loan, nor release any mortgagor under the
Mortgage Loan from liability. If a Mortgage Loan is assumed with the insured's
approval, the PMI Insurer's liability for coverage of the Mortgage Loan under
the PMI Policy generally will terminate as of the date of such assumption
unless the PMI Insurer approves the assumption in writing. The PMI Policy
excludes coverage of: (1) any claim resulting from a default existing at the
inception of coverage or occurring after lapse or cancellation of coverage;
(2) certain claims where there is an environmental condition which existed on
the property securing the Mortgage Loan (whether or not known by the person or
persons submitting an application for coverage of the Mortgage Loan) as of the
effective date of coverage; (3) any claim involving a Mortgage Loan which is
for the purchase of the mortgaged property, and for which the mortgagor did
not make a down payment as described in the application for coverage;
S-39
(4) any claim, if the mortgage, deed of trust or other similar instrument did
not provide the insured at origination with a first lien on the property
securing the Mortgage Loan; (5) certain claims involving or arising out of any
breach by the insured of its obligations under, or its failure to comply with
the terms of, the PMI Policy or of its obligations as imposed by operation of
law; and (6) any claim arising from the failure of the borrower under a PMI
Mortgage Loan to make any balloon payment, if applicable, under the PMI
Mortgage Loan.
In issuing the PMI Policy, the PMI Insurer has relied upon certain
information and data regarding the Mortgage Loans furnished to the PMI Insurer
by the Seller. The PMI Policy will not insure against a loss sustained by
reason of a default arising from or involving certain matters, including (i)
fraud or negligence in origination or servicing of the Mortgage Loan,
including, but not limited to, misrepresentation by the borrower, lender or
other persons involved in the origination of such Mortgage Loan or the
application for insurance; (ii) failure to construct a property securing a
Mortgage Loan in accordance with specified plans or (iii) physical damage to a
property securing a mortgage loan.
The preceding description of the PMI Policy is only a brief outline and does
not purport to summarize or describe the provisions, terms and conditions of
the PMI Policy. For a more complete description of these provisions, terms and
conditions, reference is made to the PMI Policy, a copy of which is available
upon request from the Trustee.
The PMI Policy is subject to various limitations and exclusions as described
above and as provided in the PMI Policy, and will provide only limited
protection against losses on defaulted Mortgage Loans.
Statistical Characteristics of the Mortgage Loans
The Mortgage Loans are expected to have the following approximate aggregate
characteristics as of the cut off date. Prior to the issuance of the
Certificates, Mortgage Loans may be removed from the Mortgage Pool as a result
of incomplete documentation or otherwise, if the Depositor deems such removal
necessary or appropriate.
Number of Mortgage Loans ..................................... 2,085
Number of Fixed Rate Mortgage Loans .......................... 254
Number of Adjustable Rate Mortgage Loans ..................... 1,831
Total Scheduled Principal Balance ............................ 286,339,321
Mortgage Rates:
Weighted Average............................................ 8.372
Range....................................................... 5.750 to 12.210
Weighted Average Remaining Term to Maturity (months) ......... 354
The Scheduled Principal Balances of the Mortgage Loans range from
approximately $34,148 to $649,020. The Mortgage Loans have an average
Scheduled Principal Balance of approximately $137,333.
The weighted average Loan-to-Value Ratio at origination of the Mortgage
Loans is approximately 82.819%, and approximately 61.01% of such Mortgage
Loans have a Loan-to-Value Ratio at origination exceeding 80%.
No more than approximately 0.40% of the Mortgage Loans are secured by
Mortgaged Properties located in any one zip code area.
The following tables set forth as of the cut off date, the number, total
Scheduled Principal Balance and percentage of the Mortgage Loans having the
stated characteristics shown in the tables in each range. (The sum of the
amounts of the aggregate Scheduled Principal Balances and the percentages in
the following tables may not equal the totals due to rounding.)
S-40
Cut Off Date Scheduled Principal Balances -- Mortgage Loans
Percentage of
Aggregate Mortgage Loans
Scheduled by Aggregate
Range of Scheduled Number of Principal Scheduled
Principal Balances ($) Mortgage Loans Balance Principal Balance
---------------------- -------------- ------- -----------------
0.01 to 50,000.00 ................. 133 $ 5,765,059.89 2.01%
50,000.01 to 100,000.00 ................. 699 52,611,624.58 18.37
100,000.01 to 150,000.00 ................. 563 69,748,135.18 24.36
150,000.01 to 200,000.00 ................. 332 57,503,953.22 20.08
200,000.01 to 250,000.00 ................. 161 35,755,481.15 12.49
250,000.01 to 300,000.00 ................. 92 25,205,741.91 8.80
300,000.01 to 350,000.00 ................. 54 17,473,683.23 6.10
350,000.01 to 400,000.00 ................. 27 10,256,990.50 3.58
400,000.01 to 450,000.00 ................. 11 4,736,889.55 1.65
450,000.01 to 500,000.00 ................. 1 452,274.06 0.16
500,000.01 to 550,000.00 ................. 5 2,621,469.75 0.92
550,000.01 to 600,000.00 ................. 5 2,911,268.56 1.02
600,000.01 to 650,000.00 ................. 2 1,296,749.90 0.45
----- --------------- ------
Total ................................. 2,085 $286,339,321.48 100.00%
===== =============== ======
The average cut off date Scheduled Principal Balance is approximately
$137,333.01.
S-41
Mortgage Rates -- Mortgage Loans
Percentage of
Aggregate Mortgage Loans
Scheduled by Aggregate
Range of Number of Principal Scheduled
Mortgage Rate (%) Mortgage Loans Balance Principal Balance
----------------- -------------- ------- -----------------
5.501 to 6.000 ......................... 10 $ 2,229,549.78 0.78%
6.001 to 6.500 ......................... 31 6,796,814.98 2.37
6.501 to 7.000 ......................... 93 20,361,574.81 7.11
7.001 to 7.500 ......................... 178 32,028,291.02 11.19
7.501 to 8.000 ......................... 327 51,143,162.13 17.86
8.001 to 8.500 ......................... 303 43,476,850.59 15.18
8.501 to 9.000 ......................... 413 56,259,474.33 19.65
9.001 to 9.500 ......................... 314 36,456,116.08 12.73
9.501 to 10.000 ......................... 219 22,512,262.31 7.86
10.001 to 10.500 ......................... 112 9,092,054.40 3.18
10.501 to 11.000 ......................... 54 4,282,645.13 1.50
11.001 to 11.500 ......................... 17 845,671.05 0.30
11.501 to 12.000 ......................... 11 716,781.92 0.25
12.001 to 12.500 ......................... 3 138,072.95 0.05
----- --------------- ------
Total ................................. 2,085 $286,339,321.48 100.00%
===== =============== ======
The weighted average Mortgage Rate is approximately 8.372%.
Loan Type -- Mortgage Loans
Percentage of
Aggregate Mortgage Loans
Scheduled by Aggregate
Number of Principal Scheduled
Loan Type Mortgage Loans Balance Principal Balance
--------- -------------- ------- -----------------
2/28 ARM (LIBOR) ......................... 959 $139,312,605.30 48.65%
3/27 ARM (LIBOR) ......................... 872 113,661,341.37 39.69
Fixed Rate ............................... 251 33,131,570.71 11.57
Balloon .................................. 3 233,804.10 0.08
----- --------------- ------
Total ................................. 2,085 $286,339,321.48 100.00%
===== =============== ======
S-42
Original Terms to Maturity -- Mortgage Loans
Percentage of
Aggregate Mortgage Loans
Scheduled by Aggregate
Range of Number of Principal Scheduled
Maturities (months) Mortgage Loans Balance Principal Balance
------------------- -------------- ------- -----------------
60 to 180 ............................... 45 $ 3,937,381.04 1.38%
181 to 240 ............................... 19 1,940,772.28 0.68
241 to 300 ............................... 1 154,502.18 0.05
301 to 360 ............................... 2,020 280,306,665.98 97.89
----- --------------- ------
Total ................................. 2,085 $286,339,321.48 100.00%
===== =============== ======
The weighted average original term to maturity is approximately 357 months.
Remaining Terms to Maturity -- Mortgage Loans
Percentage of
Aggregate Mortgage Loans
Scheduled by Aggregate
Range of Number of Principal Scheduled
Maturities (months) Mortgage Loans Balance Principal Balance
------------------- -------------- ------- -----------------
60 to 180 ............................... 45 $ 3,937,381.04 1.38%
181 to 240 ............................... 19 1,940,772.28 0.68
241 to 300 ............................... 1 154,502.18 0.05
301 to 360 ............................... 2,020 280,306,665.98 97.89
----- --------------- ------
Total ................................. 2,085 $286,339,321.48 100.00%
===== =============== ======
The weighted average remaining term to maturity is approximately 354 months.
Original Loan-to-Value Ratios -- Mortgage Loans
Percentage of
Aggregate Mortgage Loans
Scheduled by Aggregate
Range of Number of Principal Scheduled
Loan-to-Value Ratios (%) Mortgage Loans Balance Principal Balance
------------------------- -------------- ------- -----------------
10.001 to 20.000 ........................ 3 $ 152,920.66 0.05%
20.001 to 30.000 ........................ 10 554,347.80 0.19
30.001 to 40.000 ........................ 25 1,692,970.39 0.59
40.001 to 50.000 ........................ 35 3,895,139.63 1.36
50.001 to 60.000 ........................ 85 10,729,009.90 3.75
60.001 to 70.000 ........................ 160 21,396,638.77 7.47
70.001 to 80.000 ........................ 570 73,221,413.19 25.57
80.001 to 90.000 ........................ 805 118,059,223.01 41.23
90.001 to 100.000 ........................ 392 56,637,658.13 19.78
----- --------------- ------
Total ................................. 2,085 $286,339,321.48 100.00%
===== =============== ======
The weighted average original loan-to-value is approximately 82.819%.
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Geographic Distribution -- Mortgage Loans
Percentage of
Aggregate Mortgage Loans
Scheduled by Aggregate
Number of Principal Scheduled
Geographic Distribution Mortgage Loans Balance Principal Balance
----------------------- -------------- ------- -----------------
Arizona .................................. 33 $ 3,823,793.46 1.34%
Arkansas ................................. 16 1,408,212.07 0.49
California ............................... 183 37,269,858.25 13.02
Colorado ................................. 34 6,725,442.47 2.35
Connecticut .............................. 67 9,573,005.79 3.34
Delaware ................................. 17 2,439,807.03 0.85
Florida .................................. 146 17,210,497.69 6.01
Idaho .................................... 9 1,091,877.22 0.38
Illinois ................................. 48 7,683,456.49 2.68
Indiana .................................. 59 7,193,592.63 2.51
Iowa ..................................... 38 3,593,994.78 1.26
Kansas ................................... 5 692,153.63 0.24
Kentucky ................................. 40 4,740,616.11 1.66
Louisiana ................................ 71 7,370,614.08 2.57
Maine .................................... 45 4,545,223.42 1.59
Maryland ................................. 24 3,637,129.65 1.27
Massachusetts ............................ 104 19,664,898.70 6.87
Michigan ................................. 133 16,324,959.67 5.70
Minnesota ................................ 85 13,987,616.01 4.88
Mississippi .............................. 4 369,036.88 0.13
Missouri ................................. 33 3,008,158.48 1.05
Nebraska ................................. 10 922,925.38 0.32
Nevada ................................... 25 4,103,148.87 1.43
New Hampshire ............................ 65 8,288,684.68 2.89
New Jersey ............................... 79 12,481,975.13 4.36
New Mexico ............................... 13 1,297,689.09 0.45
New York ................................. 111 20,231,030.00 7.07
North Carolina ........................... 59 6,344,114.47 2.22
Ohio ..................................... 177 17,289,458.45 6.04
Oklahoma ................................. 12 1,003,090.79 0.35
Oregon ................................... 7 1,285,883.14 0.45
Pennsylvania ............................. 70 8,284,227.45 2.89
Rhode Island ............................. 48 6,727,734.60 2.35
South Carolina ........................... 17 2,044,218.29 0.71
South Dakota ............................. 2 149,629.86 0.05
Tennessee ................................ 26 2,271,332.68 0.79
Texas .................................... 23 2,578,806.82 0.90
Utah ..................................... 12 1,740,854.98 0.61
Vermont .................................. 23 2,186,915.74 0.76
Virginia ................................. 66 9,283,931.27 3.24
Washington ............................... 23 3,294,546.36 1.15
West Virginia ............................ 9 705,721.55 0.25
Wisconsin ................................ 12 1,282,718.56 0.45
Wyoming .................................. 2 186,738.81 0.07
----- --------------- ------
Total ................................. 2,085 $286,339,321.48 100.00%
===== =============== ======
S-44
Property Type -- Mortgage Loans
Percentage of
Aggregate Mortgage Loans
Scheduled by Aggregate
Number of Principal Scheduled
Property Type Mortgage Loans Balance Principal Balance
------------- -------------- ------- -----------------
Single Family ............................ 1,734 $229,840,006.66 80.27%
2-4 Family ............................... 140 22,689,919.62 7.92
PUD ...................................... 108 19,933,843.84 6.96
Condo .................................... 79 11,033,435.29 3.85
Townhouse ................................ 17 2,016,404.45 0.70
Row House ................................ 4 635,295.47 0.22
Modular Home ............................. 3 190,416.15 0.07
----- --------------- ------
Total ................................. 2,085 $286,339,321.48 100.00%
===== =============== ======
Loan Purpose -- Mortgage Loans
Percentage of
Aggregate Mortgage Loans
Scheduled by Aggregate
Number of Principal Scheduled
Loan Purpose Mortgage Loans Balance Principal Balance
------------ -------------- ------- -----------------
Cash Out Refinance ....................... 1,743 $241,770,911.26 84.44%
Purchase ................................. 248 33,163,517.14 11.58
Rate/Term Refinance ...................... 94 11,404,893.08 3.98
----- --------------- ------
Total ................................. 2,085 $286,339,321.48 100.00%
===== =============== ======
Occupancy Status -- Mortgage Loans
Percentage of
Aggregate Mortgage Loans
Scheduled by Aggregate
Number of Principal Scheduled
Occupancy Status Mortgage Loans Balance Principal Balance
---------------- -------------- ------- -----------------
Primary Home ............................. 1,930 $269,159,429.82 94.00%
Investment ............................... 155 17,179,891.66 6.00
----- --------------- ------
Total ................................. 2,085 $286,339,321.48 100.00%
===== =============== ======
Loan Documentation -- Mortgage Loans
Percentage of
Aggregate Mortgage Loans
Scheduled by Aggregate
Number of Principal Scheduled
Loan Documentation Mortgage Loans Balance Principal Balance
------------------ -------------- ------- -----------------
Full ..................................... 1,620 $209,371,629.88 73.12%
Stated ................................... 465 76,967,691.60 26.88
----- --------------- ------
Total ................................. 2,085 $286,339,321.48 100.00%
===== =============== ======
S-45
Prepayment Premium Years -- Mortgage Loans
Percentage of
Aggregate Mortgage Loans
Scheduled by Aggregate
Number of Principal Scheduled
Prepayment Premium (Years) Mortgage Loans Balance Principal Balance
-------------------------- -------------- ------- -----------------
No Premium ............................... 279 $ 42,759,783.36 14.93%
0.001 to 1.000 ........................... 129 19,500,394.61 6.81
1.001 to 2.000 ........................... 841 118,445,528.14 41.37
2.001 to 3.000 ........................... 781 99,936,367.22 34.90
4.001 to 5.000 ........................... 55 5,697,248.15 1.99
----- --------------- ------
Total ................................. 2,085 $286,339,321.48 100.00%
===== =============== ======
Rate Type -- Mortgage Loans
Percentage of
Aggregate Mortgage Loans
Scheduled by Aggregate
Number of Principal Scheduled
Rate Type Mortgage Loans Balance Principal Balance
--------- -------------- ------- -----------------
Fixed .................................... 254 $ 33,365,374.81 11.65%
Adjustable ............................... 1,831 252,973,946.67 88.35
----- --------------- ------
Total ................................. 2,085 $286,339,321.48 100.00%
===== =============== ======
Gross Margins of the Mortgage Loans -- Adjustable Rate Mortgage Loans
Percentage of
Adjustable Rate
Aggregate Mortgage Loans
Scheduled by Aggregate
Range of Gross Number of Principal Scheduled
Margin Rates (%) Mortgage Loans Balance Principal Balance
---------------- -------------- ------- -----------------
4.501 to 5.000 ......................... 1 $ 129,590.88 0.05%
5.001 to 5.500 ......................... 8 1,507,799.92 0.60
5.501 to 6.000 ......................... 24 4,680,499.92 1.85
6.001 to 6.500 ......................... 73 16,918,567.51 6.69
6.501 to 7.000 ......................... 160 27,798,465.98 10.99
7.001 to 7.500 ......................... 264 41,247,021.03 16.30
7.501 to 8.000 ......................... 294 42,780,756.73 16.91
8.001 to 8.500 ......................... 357 49,416,613.64 19.53
8.501 to 9.000 ......................... 300 35,740,286.94 14.13
9.001 to 9.500 ......................... 183 19,292,631.14 7.63
9.501 to 10.000 ......................... 104 8,911,086.83 3.52
10.001 to 10.500 ......................... 40 3,193,966.99 1.26
10.501 to 11.000 ......................... 14 773,940.67 0.31
11.001 to 11.500 ......................... 8 521,535.62 0.21
11.501 to 12.000 ......................... 1 61,182.87 0.02
----- --------------- ------
Total ................................. 1,831 $252,973,946.67 100.00%
===== =============== ======
The weighted average Gross Margin for Adjustable Rate Mortgage Loans is
approximately 7.873%.
S-46
Maximum Rates of the Mortgage Loans -- Adjustable Rate Mortgage Loans
Percentage of
Adjustable Rate
Aggregate Mortgage Loans
Scheduled by Aggregate
Range of Number of Principal Scheduled
Maximum Rates (%) Mortgage Loans Balance Principal Balance
----------------- -------------- ------- -----------------
11.501 to 12.000 ......................... 9 $ 1,885,965.79 0.75%
12.001 to 12.500 ......................... 26 5,984,520.55 2.37
12.501 to 13.000 ......................... 69 15,987,556.87 6.32
13.001 to 13.500 ......................... 159 28,072,390.55 11.10
13.501 to 14.000 ......................... 288 45,147,389.68 17.85
14.001 to 14.500 ......................... 280 39,816,152.86 15.74
14.501 to 15.000 ......................... 371 50,660,508.58 20.03
15.001 to 15.500 ......................... 280 33,124,331.01 13.09
15.501 to 16.000 ......................... 197 20,610,296.97 8.15
16.001 to 16.500 ......................... 93 7,366,533.93 2.91
16.501 to 17.000 ......................... 38 3,116,566.96 1.23
17.001 to 17.500 ......................... 12 592,358.29 0.23
17.501 to 18.000 ......................... 7 511,222.67 0.20
18.001 to 18.500 ......................... 2 98,151.96 0.04
----- --------------- ------
Total ................................. 1,831 $252,973,946.67 100.00%
===== =============== ======
The weighted average Maximum Rate for Adjustable Rate Mortgage Loans is
approximately 14.376%.
Minimum Rates of the Mortgage Loans -- Adjustable Rate Mortgage Loans
Percentage of
Adjustable Rate
Aggregate Mortgage Loans
Scheduled by Aggregate
Range of Number of Principal Scheduled
Minimum Rates (%) Mortgage Loans Balance Principal Balance
----------------- -------------- ------- -----------------
5.501 to 6.000 ......................... 8 $ 1,557,289.76 0.62%
6.001 to 6.500 ......................... 27 6,313,196.58 2.50
6.501 to 7.000 ......................... 69 15,987,556.87 6.32
7.001 to 7.500 ......................... 159 28,072,390.55 11.10
7.501 to 8.000 ......................... 288 45,147,389.68 17.85
8.001 to 8.500 ......................... 280 39,816,152.86 15.74
8.501 to 9.000 ......................... 371 50,660,508.58 20.03
9.001 to 9.500 ......................... 279 33,043,755.91 13.06
9.501 to 10.000 ......................... 198 20,690,872.07 8.18
10.001 to 10.500 ......................... 93 7,366,533.93 2.91
10.501 to 11.000 ......................... 38 3,116,566.96 1.23
11.001 to 11.500 ......................... 12 592,358.29 0.23
11.501 to 12.000 ......................... 7 511,222.67 0.20
12.001 to 12.500 ......................... 2 98,151.96 0.04
----- --------------- ------
Total ................................. 1,831 $252,973,946.67 100.00%
===== =============== ======
The weighted average Minimum Rate for Adjustable Rate Mortgage Loans is
approximately 8.376%.
S-47
Next Adjustment Date of the Mortgage Loans -- Adjustable Rate Mortgage Loans
Percentage of
Adjustable Rate
Aggregate Mortgage Loans
Scheduled by Aggregate
Number of Principal Scheduled
Next Adjustment Date Mortgage Loans Balance Principal Balance
-------------------- -------------- ------- -----------------
September 2004 ........................... 1 $ 154,243.86 0.06%
November 2004 ............................ 10 1,407,300.08 0.56
December 2004 ............................ 131 20,144,710.65 7.96
January 2005 ............................. 361 52,727,482.41 20.84
February 2005 ............................ 365 51,869,812.03 20.50
March 2005 ............................... 91 13,009,056.27 5.14
October 2005 ............................. 2 254,103.79 0.10
November 2005 ............................ 8 904,683.44 0.36
December 2005 ............................ 104 14,482,215.57 5.72
January 2006 ............................. 334 43,329,550.54 17.13
February 2006 ............................ 339 44,012,804.84 17.40
March 2006 ............................... 85 10,677,983.19 4.22
----- --------------- ------
Total ................................. 1,831 $252,973,946.67 100.00%
===== =============== ======
Initial Periodic Caps of the Mortgage Loans -- Adjustable Rate Mortgage Loans
Percentage of
Adjustable Rate
Aggregate Mortgage Loans
Scheduled by Aggregate
Number of Principal Scheduled
Initial Periodic Cap (%) Mortgage Loans Balance Principal Balance
------------------------ -------------- ------- -----------------
3.000 .................................... 1,831 $252,973,946.67 100.00%
----- --------------- ------
Total ................................. 1,831 $252,973,946.67 100.00%
===== =============== ======
Subsequent Periodic Caps of the Mortgage Loans -- Adjustable Rate Mortgage
Loans
Percentage of
Adjustable Rate
Aggregate Mortgage Loans
Scheduled by Aggregate
Number of Principal Scheduled
Subsequent Periodic Cap (%) Mortgage Loans Balance Principal Balance
--------------------------- -------------- ------- -----------------
1.000 .................................... 1,831 $252,973,946.67 100%
----- --------------- ---
Total ................................. 1,831 $252,973,946.67 100%
===== =============== ===
S-48
Credit Scores of the Mortgage Loans
Percentage
Aggregate of Aggregate
Principal Balance Principal Balance
Outstanding as of Outstanding as of
Credit Scores Number of Loans the Cut-Off Date the Cut-Off Date
------------- --------------- ---------------- ----------------
500 - 549 ................................ 171 $ 18,946,544.94 6.62%
550 - 599 ................................ 561 68,674,589.31 23.98
600 - 649 ................................ 997 143,445,049.56 50.10
650 - 699 ................................ 282 43,922,234.02 15.34
700 - 749 ................................ 56 8,851,322.13 3.09
750 - 799 ................................ 17 2,429,743.91 0.85
800 - 849 ................................ 1 69,837.61 0.02
----- --------------- ------
Total ................................. 2,085 $286,339,321.48 100.00%
===== =============== ======
The weighted average of the FICO scores of the Mortgage Loans is approximately
617.
Loan Programs of the Mortgage Loans
Percentage of
Aggregate Mortgage Loans
Scheduled by Aggregate
Number of Principal Scheduled
Loan Programs Mortgage Loans Balance Principal Balance
------------- -------------- ------- -----------------
A+ ....................................... 959 $ 146,592,293.11 51.20%
A ........................................ 134 18,575,186.95 6.49
B+ ....................................... 282 35,515,128.80 12.40
B ........................................ 309 37,536,539.51 13.11
C+ ....................................... 93 9,724,679.13 3.40
C ........................................ 42 4,702,643.65 1.64
100% LTV ................................. 31 3,598,182.11 1.26
Mortgage Only Tier 1 ..................... 101 11,034,272.58 3.85
Mortgage Only Tier 2 ..................... 20 2,259,366.89 0.79
Premier .................................. 114 16,801,028.75 5.87
----- ----------------- ------
Total ................................. 2,085 $ 286,339,321.48 100.00%
===== ================= ======
S-49
Additional Information
The description in this Prospectus Supplement of the Mortgage Pool and the
Mortgaged Properties is based upon the Mortgage Pool as constituted at the
close of business on the cut off date, as adjusted for Scheduled Payments due
on or before that date. A Current Report on Form 8-K will be filed, together
with the Pooling and Servicing Agreement and certain other transaction
documents, with the Securities and Exchange Commission within fifteen days
after the initial issuance of the Offered Certificates. In the event that
Mortgage Loans are removed from or added to the Mortgage Pool, such removal or
addition, to the extent material, will be noted in the Current Report on Form
8-K.
Pursuant to the Pooling and Servicing Agreement, the Trustee will, based
upon information received from the Servicer, prepare a monthly statement to
Certificateholders containing certain information regarding the Certificates
and the Mortgage Pool. The Trustee may make available each month, to any
interested party, the monthly statement to Certificateholders via the
Trustee's website. The Trustee's website will be located at www.ctslink.com
and assistance in using the website can be obtained by calling the Trustee's
customer service desk at (301) 815-6600. Parties that are unable to use the
above distribution option are entitled to have a paper copy mailed to them via
first class by notifying the Trustee at Wells Fargo Bank Minnesota, National
Association, 9062 Old Annapolis Road, Columbia, Maryland 21045-1951,
Attention: Client Manager--Aegis 2003-1. The Trustee will have the right to
change the way such reports are distributed in order to make such
distributions more convenient and/or more accessible, and the Trustee will
provide timely and adequate notification to such parties regarding any such
changes.
Aegis Mortgage Corporation
The information set forth in following paragraphs with regard to Aegis
Mortgage Corporation (referred to herein as "Aegis" and "Seller") and its
underwriting standards has been provided to the depositor or compiled from
information provided to the depositor by Aegis. None of the depositor, the
trustee, the underwriters or any of their respective affiliates has made any
independent investigation of this information or has made or will make any
representation as to the accuracy or completeness of this information.
Aegis is a privately held mortgage banking company that through its wholly
owned subsidiaries, Aegis Lending Corporation ("ALC") and Aegis Funding
Corporation ("AFC"), originates first lien and second lien residential
mortgage loans. ALC and AFC emphasize the origination of mortgage loans that
are commonly referred to as non-conforming "B&C" loans or subprime mortgage
loans. Aegis and its predecessors have been in the mortgage banking business
since March 1981. Aegis, ALC and AFC are Delaware corporations and are
headquartered in Houston, Texas. The depositor is a wholly owned subsidiary of
Aegis.
As of January 1, 2003, AFC, Aegis' non-conforming wholesale subsidiary,
operated through 45 wholesale sales offices in 28 states, and ALC, Aegis' non-
conforming retail subsidiary, operated through 120 retail sales offices in 36
states. As of January 1, 2003, Aegis, AFC and ALC, collectively, had over
1,200 employees. Aegis and the depositor maintain their principal offices at
3250 Briar Park, Suite 400, Houston, Texas 77042. Their telephone number is
(713) 787-0100.
Underwriting Standards
General Standards for First Lien Mortgage Loans. Aegis' underwriting
standards with respect to first lien mortgage loans will generally conform to
those published in the guide for Aegis' alternative documentation programs for
first lien mortgage loans (the "Guide"). The underwriting standards as set
S-50
forth in the Guide are continuously revised based on opportunities and
prevailing conditions in the residential mortgage market and the market for
the depositor's securities. Aegis and its affiliates originated all loans and
the underwriting standards described below will apply to the origination
process.
Aegis' underwriting standards, as well as any other underwriting standards
that may be applicable to any first lien mortgage loans, generally includes a
set of specific criteria pursuant to which the underwriting evaluation is
made. However, the application of those underwriting standards does not imply
that each specific criterion was satisfied individually. Rather, a mortgage
loan will be considered to be originated in accordance with a given set of
underwriting standards if, based on an overall qualitative evaluation, the
loan substantially complies with the underwriting standards. For example, a
mortgage loan may be considered to comply with a set of underwriting
standards, even if one or more specific criteria included in the underwriting
standards were not satisfied, if other factors compensated for the criteria
that were not satisfied or if the mortgage loan is considered to be in
substantial compliance with the underwriting standards.
All of the mortgage loans had features that generally distinguish those
loans from the more restrictive underwriting requirements used as standards
for Fannie Mae and Freddie Mac. Aegis' established loan programs by which it
could aggregate acceptable loans into groupings considered to have
substantially similar risk characteristics. A more detailed description of
those loan programs applicable to the mortgage loans is set forth below.
Aegis' underwriting of the mortgage loans generally consisted of analyzing the
following as standards applicable to the mortgage loans:
o the creditworthiness of a mortgagor based on both a credit score and
mortgage history,
o the income sufficiency of a mortgagor's projected family income relative
to the mortgage payment and to other fixed obligations, including in
certain instances rental income from investment property, and
o the adequacy of the mortgaged property expressed in terms of Loan-to-
Value Ratio, to serve as the collateral for a mortgage loan.
The underwriting criteria applicable to any loan program under which the
mortgage loans may be originated and reviewed may provide that qualification
for the loan, or the availability of specific loan features, such as maximum
loan amount, maximum Loan-to-Value Ratio, property type and use, and
documentation level, may depend on the borrower's credit score.
Guide Standards. The following is a brief description of the underwriting
standards set forth in the Guide. Initially, a prospective borrower is
required to fill out a detailed application providing pertinent credit
information. As part of the application, the borrower is required to provide a
current balance sheet describing assets and liabilities and a statement of
income and expenses, as well as an authorization for the lender to obtain for
a credit report that summarizes the borrower's credit history with merchants
and lenders and any record of bankruptcy. Salaried prospective borrowers
generally are required to submit pay stubs covering a consecutive 30-day
period and their W-2 form for the most recent year. In addition, Aegis
requires either a verbal or written verification of employment from the
prospective borrower's employer. If a prospective borrower is self-employed,
the borrower may be required to submit copies of signed tax returns or provide
bank statements.
Some of the mortgage loans have been originated under "stated income" or
"limited documentation" programs that require less documentation and
verification than do traditional "full documentation" programs. Under a
"stated income" program, some borrowers with acceptable payment histories will
not be required to provide any information regarding income and no other
investigation regarding the borrower's income, except verification of
employment, will be undertaken. Under a "limited documentation" program,
applicants usually are required to submit verification of stable income for at
least 12 months, such as 12 consecutive months of complete personal checking
account bank
S-51
statements. Generally, in order to be eligible for a "stated income" or
"limited documentation" program, the Loan-to-Value Ratio must meet applicable
guidelines, the borrower must have a good credit history and the borrower's
eligibility for this type of program may be determined by use of a credit
scoring model.
Generally, credit scoring models provide a means for evaluating the
information about a prospective borrower that is available from a credit
reporting agency. Credit scores are obtained from credit reports provided by
various credit reporting organizations, each of which may employ differing
computer models and methodologies. The credit score is designed to assess a
borrower's credit history at a single point in time, using objective
information currently on file for the borrower at a particular credit
reporting organization. Information utilized to create a credit score may
include, among other things, payment history, delinquencies on accounts,
levels of outstanding indebtedness, length of credit history, types of credit,
and bankruptcy experience. Credit scores range from approximately 350 to
approximately 840, with higher scores indicating an individual with a more
favorable credit history compared to an individual with a lower score.
However, a credit score purports only to be a measurement of the relative
degree of risk a borrower represents to a lender. For example, a borrower with
a higher credit score is statistically expected to be less likely to default
in payment than a borrower with a lower credit score.
In addition, it should be noted that credit scores were developed to
indicate a level of default probability over a two-year period, which does not
correspond to the life of a mortgage loan. Furthermore, credit scores were not
developed specifically for use in connection with mortgage loans, but for
consumer loans in general, and assess only the borrower's past credit history.
Therefore, a credit score does not take into consideration the differences
between mortgage loans and consumer loans generally, or the specific
characteristics of the related mortgage loan, such as the Loan-to-Value Ratio,
the collateral for the mortgage loan, or the debt to income ratio. There can
be no assurance that the credit scores of the mortgagors will be an accurate
predictor of the likelihood of repayment of the related mortgage loans or that
any mortgagor's credit score would not be lower if obtained as of the date of
this Prospectus Supplement.
In determining the adequacy of the Property as collateral, an appraisal is
made of each Property considered for financing. The appraiser is required to
verify that the Property is in good condition and that construction, if new,
has been completed. The appraisal is based on various factors, including the
market value of comparable homes and the cost of replacing the improvements.
Additionally, a risk analysis is ordered on each appraisal from a third party
vendor and all high risk appraisals are reviewed by staff appraisers.
Based on the data provided in the application, certain verifications and the
appraisal or other valuation of the mortgaged property, a determination was
made that the mortgagor's monthly income would be sufficient to enable the
mortgagor to meet its monthly obligations on the mortgage loan and other
expenses related to the property, including property taxes, utility costs,
standard hazard insurance and other fixed obligations other than housing
expenses. The Guidelines for mortgage loans generally specify that scheduled
payments on a mortgage loan during the first year of its term plus taxes and
insurance and all scheduled payments on obligations that extend beyond ten
months, including those mentioned above and other fixed obligations, equal no
more than specified percentages of the prospective mortgagor's gross income.
The amount of liquid assets available to the mortgagor after origination may
also have been considered in the underwriting process.
Loan Programs. The Loan Programs determined by Aegis as applicable to all
of the mortgage loans are expressed in this prospectus supplement are:
Premier, A+, A, B+, B, C+, C, Mortgage Only Tier 1 ("MO1"), Mortgage Only Tier
2 ("MO2") and 100% LTV. The following is general description of the Loan
Programs:
S-52
Loan Program Premier: The prospective mortgagor may have minor repayment
delinquencies related to installment or revolving debt, however, generally no
charge-off accounts, collections or judgments are allowed within the last two
years. No 30-day, 60-day or 90-day late payments are acceptable within the
last 24 months on an existing mortgage loan. The credit score will be 620 or
greater. The mortgaged property must be in average to good condition. A
maximum LTV ratio of 95% is permitted for a mortgage loan on a single family
owner-occupied property or 90% for a mortgage loan originated under a stated
income documentation program. Non-owner occupied property is not allowed. The
mortgagor's debt service-to-income ratio is 45% or less which, in the case of
adjustable-rate mortgage loans, will be based on the initial rate on the
mortgage loan. No Chapter 7 bankruptcies were discharged in the past 48 months
and no Chapter 13 bankruptcies were filed within the last 48 months. No
foreclosures on a mortgaged property are allowed within the last 48 months.
Loan Program A+: The prospective mortgagor may have minor repayment
delinquencies related to installment or revolving debt. As to non-mortgage
credit, some prior defaults may have occurred provided, open collections and
charge-offs in excess of $1,000 must be paid down to zero at closing unless
they are 2 years or older and do not affect the title or are medical related.
No 30-day, 60-day or 90-day late payments are acceptable within the last 12
months on an existing mortgage loan. The credit score will be 600 or greater.
The mortgaged property must be in average to good condition. A maximum LTV
ratio of 95% is permitted for a mortgage loan on a single family owner-
occupied property or 90% for a mortgage loan originated under a stated income
documentation program. A maximum LTV ratio of 85% is permitted for a mortgage
loan on a single family non-owner occupied property or 80% for a mortgage loan
originated under a stated income documentation program. The mortgagor's debt
service-to-income ratio is 50% or less which, in the case of adjustable-rate
mortgage loans, will be based on the initial rate on the mortgage loan. The
mortgagor's debt service-to-income ratio may be increased to 55% if the
mortgagor has a credit score 20 points above the minimum, $2,000 or more in
disposable income, 2 months payments in reserve or will not experience a
payment increase. No Chapter 7 bankruptcies were discharged in the past 36
months and no Chapter 13 bankruptcies were filed within the last 36 months.
Bankruptcy requirements may be reduced to greater than 1 day if 1) the credit
score is greater than or equal to 600, 2) the LTV is less than or equal to 80%
and 3) the bankruptcy is reported on the credit bureau. No foreclosures on a
mortgaged property are allowed within the last 36 months.
Loan Program A: The prospective mortgagor may have minor repayment
delinquencies related to installment or revolving debt. As to non-mortgage
credit, some prior defaults may have occurred provided, however, that open
collections and charge-offs in excess of $1,500 must be paid down to zero at
closing unless they are 2 years or older and do not affect the title or are
medical related. At most one 30-day late payment and no 60-day or 90-day late
payments are acceptable within the last 12 months on an existing mortgage
loan. The credit score will be 600 or greater. The mortgaged property must be
in average to good condition. A maximum LTV ratio of 95% is permitted for a
mortgage loan on a single family owner-occupied property or 90% for a mortgage
loan originated under a stated income documentation program. A maximum LTV
ratio of 85% is permitted for a mortgage loan on a single family non-owner
occupied property or 80% for a mortgage loan originated under a stated income
documentation program. The mortgagor's debt service-to-income ratio is 50% or
less which, in the case of adjustable-rate mortgage loans, will be based on
the initial rate on the mortgage loan. The mortgagor's debt service-to-income
ratio may be increased to 55% if the mortgagor has a credit score 20 points
above the minimum, $2,000 or more in disposable income, 2 months payments in
reserve or will not experience a payment increase. No Chapter 7 bankruptcies
were discharged in the past 24 months and no Chapter 13 bankruptcies were
filed within the last 24 months. Bankruptcy requirements may be reduced to
greater than 1 day if 1) the credit score is greater than or equal to 600, 2)
the LTV is less than or equal to 80% and 3) the bankruptcy is reported on the
credit bureau. No foreclosures on a mortgaged property are allowed within the
last 36 months.
S-53
Loan Program B+: The prospective mortgagor is required to have generally
repaid all previous or existing installment or revolving debt according to its
terms. As to non-mortgage credit, some prior defaults may have occurred
provided, however, that open collections and charge-offs in excess of $2,000
must be paid down to zero at closing unless they are 2 years or older and do
not affect the title or are medical related. At most two 30-day late payments
exclusive of rolling dates and no 60-day or 90-day late payments are
acceptable within the last 12 months on an existing mortgage loan. The credit
score will be 580 or greater. The mortgaged property must be in average to
good condition. A maximum LTV ratio of 90% is permitted for a mortgage loan on
a single family owner-occupied property or 85% for a mortgage loan originated
under a stated income documentation program. A maximum LTV ratio of 80% is
permitted for a mortgage loan on a single family non-owner occupied property
or 75% for a mortgage loan originated under a stated income documentation
program. The mortgagor's debt service-to-income ratio is 50% or less which, in
the case of adjustable-rate mortgage loans, will be based on the initial rate
on the mortgage loan. The mortgagor's debt service-to-income ratio may be
increased to 55% if the mortgagor has a credit score 20 points above the
minimum, $2,000 or more in disposable income, 2 months payments in reserve or
will not experience a payment increase. No Chapter 7 bankruptcies were
discharged in the past 12 months and no Chapter 13 bankruptcies were filed
within the last 12 months. Bankruptcy requirements may be reduced to greater
than 1 day if 1) the credit score is greater than or equal to 600, 2) the LTV
is less than or equal to 80% and 3) the bankruptcy is reported on the credit
bureau. No foreclosures on a mortgaged property are allowed within the last 24
months.
Loan Program B: The prospective mortgagor may not have paid all previous or
existing installment or revolving debt according to its terms, and may have
some charge-offs. As to non-mortgage credit, some prior defaults may have
occurred provided, however, that open collections and charge-offs in excess of
$2,500 must be paid down to zero at closing unless they are 2 years or older
and do not affect the title or are medical related. The mortgagor may have
made a late payment of 60-days within the last 12 months on an existing
mortgage loan. The credit score will be 560 or greater. The mortgaged property
must be in average to good condition. A maximum LTV ratio of 85% is permitted
for a mortgage loan on a single family owner-occupied property or 75% for a
mortgage loan originated under a stated income documentation program. A
maximum LTV ratio of 75% is permitted for a mortgage loan on a single family
non-owner occupied property or 65% for a mortgage loan originated under a
stated income documentation program. The mortgagor's debt service-to-income
ratio is 50% or less which, in the case of adjustable-rate mortgage loans,
will be based on the initial rate on the mortgage loan. The mortgagor's debt
service-to-income ratio may be increased to 55% if the mortgagor has a credit
score 20 points above the minimum, $2,000 or more in disposable income, 2
months payments in reserve or will not experience a payment increase. No
Chapter 7 bankruptcies were discharged in the past 12 months and no Chapter 13
bankruptcies were filed within the last 12 months. Bankruptcy requirements may
be reduced to greater than 1 day if 1) the credit score is greater than or
equal to 600, 2) the LTV is less than or equal to 80% and 3) the bankruptcy is
reported on the credit bureau. No foreclosures on a mortgaged property are
allowed within the last 24 months.
Loan Program C+: The prospective mortgagor may have experienced significant
credit problems in the past. As to mortgage credit, the mortgagor may have had
a history of being generally 30 to 60 days delinquent. As to non-mortgage
credit, significant prior defaults may have occurred provided, however, that
open collections and charge-offs in excess of $3,500 must be paid down to zero
at closing unless they are 2 years or older and do not effect the title or are
medical related. The mortgagor may have made multiple late payments of 30 or
60 days within the last 12 months on an existing mortgage loan. The credit
score will be 540 or greater. The mortgaged property must be in average to
good condition. A maximum LTV ratio of 80% is permitted for a mortgage loan on
a single family owner-occupied property or 70% for a mortgage loan originated
under a stated income documentation program. A maximum LTV ratio of 70% is
permitted for a mortgage loan on a single family non-owner occupied
S-54
property or 60% for a mortgage loan originated under a stated income
documentation program. The mortgagor's debt service-to-income ratio is 50% or
less which, in the case of adjustable-rate mortgage loans, will be based on
the initial rate on the mortgage loan. The mortgagor's debt service-to-income
ratio may be increased to 55% if the mortgagor has a credit score 20 points
above the minimum, $2,000 or more in disposable income, 2 months payments in
reserve or will not experience a payment increase. No Chapter 7 bankruptcies
were discharged in the past 12 months and no Chapter 13 bankruptcies were
filed within the last 12 months. Bankruptcy requirements may be reduced to
greater than 1 day if 1) the credit score is greater than or equal to 600, 2)
the LTV is less than or equal to 80% and 3) the bankruptcy is reported on the
credit bureau. No foreclosures on a mortgaged property are allowed within the
last 24 months.
Loan Program C: The prospective mortgagor may have experienced substantial
credit problems in the past. As to mortgage credit, the mortgagor may have had
a history of being generally 30 to 60 days delinquent, and a maximum of one
90-day late payment within the last 12 months is acceptable on an existing
mortgage loan. The prospective mortgagor's credit history is poor and a notice
of default may have been filed. As to non-mortgage credit, significant prior
defaults may have occurred provided, however, that open collections and
charge-offs in excess of $5,000 must be paid down to zero at closing unless
they are 2 years or older and do not affect the title or are medical related.
The credit score will be 520 or greater. The mortgaged property must be in
average to good condition. A maximum LTV ratio of 75% is permitted for a
mortgage loan on a single family owner-occupied property and the stated income
documentation program is not allowed. A maximum LTV ratio of 60% is permitted
for a mortgage loan on a single family non-owner occupied property. The
mortgagor's debt service-to-income ratio is 50% or less which, in the case of
adjustable-rate mortgage loans, will be based on the initial rate on the
mortgage loan. The mortgagor's debt service-to-income ratio may be increased
to 55% if the mortgagor has a credit score 20 points above the minimum, $2,000
or more in disposable income, 2 months payments in reserve or will not
experience a payment increase. No Chapter 7 bankruptcies were discharged in
the past 12 months and no Chapter 13 bankruptcies were filed within the last
12 months. Bankruptcy requirements may be reduced to greater than 1 day if 1)
the credit score is greater than or equal to 600, 2) the LTV is less than or
equal to 80% and 3) the bankruptcy is reported on the credit bureau. No
foreclosures on a mortgaged property are allowed within the last 12 months.
Loan Program MO1: The prospective mortgagor may have experienced
substantial credit problems in the past. As to mortgage credit, the mortgagor
has generally paid on time and may have been rolling 30-days delinquent in the
last 12 months. As to non-mortgage credit, significant prior defaults may have
occurred and are disregarded provided that they do not affect the title. The
credit score will be 500 or greater. The mortgaged property must be in average
to good condition. A maximum LTV ratio of 85% is permitted for a mortgage loan
on a single family owner-occupied property and the stated income documentation
program is not allowed. Non-owner occupied properties are not allowed. The
mortgagor's debt service-to-income ratio is 50% or less which, in the case of
adjustable-rate mortgage loans, will be based on the initial rate on the
mortgage loan. No Chapter 7 bankruptcies were discharged in the past 12 months
and no Chapter 13 bankruptcies were filed within the last 12 months. No
foreclosures on a mortgaged property are allowed within the last 24 months.
Loan Program MO2: The prospective mortgagor may have experienced
substantial credit problems in the past. As to mortgage credit, the mortgagor
has generally paid on time and may made multiple 30-day late payments in the
last 12 months. As to non-mortgage credit, significant prior defaults may have
occurred and are disregarded provided that they do not affect the title. The
credit score will be 500 or greater. The mortgaged property must be in average
to good condition. A maximum LTV ratio of 85% is permitted for a mortgage loan
on a single family owner-occupied property and the stated income documentation
program is not allowed. Non-owner occupied properties are not allowed. The
mortgagor's debt service-to-income ratio is 50% or less which, in the case of
adjustable-rate mortgage loans, will be
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based on the initial rate on the mortgage loan. No Chapter 7 bankruptcies were
discharged in the past 12 months and no Chapter 13 bankruptcies were filed
within the last 12 months. No foreclosures on a mortgaged property are allowed
within the last 24 months.
Loan Program 100% LTV: The prospective mortgagor may have minor repayment
delinquencies related to installment or revolving debt. As to non-mortgage
credit, some prior defaults may have occurred provided, open collections and
charge-offs in excess of $1,000 must be paid down to zero at closing unless
they are 2 years or older and do not affect the title or are medical related.
Rolling 30-day and no 60-day or 90-day late payments are acceptable within the
last 12 months on an existing mortgage loan. The credit score will be 620 or
greater. The mortgaged property must be in average to good condition. A
maximum LTV ratio of 100% is permitted for a mortgage loan on a single family
owner-occupied property and no stated income documentation program is allowed.
Non-owner occupied properties are not allowed. The mortgagor's debt service-
to-income ratio is 50% or less which, in the case of adjustable-rate mortgage
loans, will be based on the initial rate on the mortgage loan. The mortgagor's
debt service-to-income ratio may be increased to 55% if the mortgagor has a
credit score 20 points above the minimum, $2,000 or more in disposable income,
2 months payments in reserve or will not experience a payment increase. No
Chapter 7 bankruptcies were discharged in the past 36 months and no Chapter 13
bankruptcies were filed within the last 36 months. No foreclosures on a
mortgaged property are allowed within the last 36 months.
For all credit grade categories, non-mortgage credit may include prior
defaults, and different levels of major adverse credit. Major adverse credit
is defined as collection accounts, charge-off accounts, judgments, liens,
delinquent property taxes, repossessions, garnishments and accounts currently
90 days or more delinquent. Any adverse account affecting title must also be
paid down to zero at closing. Some adverse accounts may remain open after
closing, provided the borrower has adequate compensating factors.
As described above, the indicated underwriting standards applicable to the
mortgage loans include the foregoing categories and characteristics as
guidelines only. On a case-by-case basis, it may be determined that an
applicant warrants a debt service-to-income ratio exception, a pricing
exception, a loan-to-value ratio exception, an exception from certain
requirements of a particular risk category, etc. An exception may be allowed
if the application reflects compensating factors, such as: low loan-to-value
ratio; stable ownership; low debt ratios; strong residual income; a maximum of
one 30-day late payment on all mortgage loans during the last 12 months; and
stable employment or ownership of current residence of four or more years.
Based on the indicated underwriting standards applicable for mortgage loans
with risk features originated thereunder, those mortgage loans are likely to
experience greater rates of delinquency, foreclosure and loss, and may
experience substantially greater rates of delinquency, foreclosure and loss
than mortgage loans underwritten under more stringent underwriting standards.
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The Servicer
Chase Manhattan Mortgage Corporation (the "Servicer") will act as the
servicer of the Mortgage Loans under the Pooling and Servicing Agreement. The
following information has been provided by the Servicer and none of the
Depositor, the Seller, the Trustee, the Credit Risk Manager or the
underwriters or any other party makes any representation as to the accuracy or
completeness of such information.
Chase Manhattan Mortgage Corporation, a New Jersey corporation formed in
1920, is a wholly owned indirect subsidiary of J.P. Morgan Chase & Co. Chase
Manhattan Mortgage Corporation is engaged in the mortgage origination and
servicing businesses and is a HUD-approved mortgagee. Chase Manhattan Mortgage
Corporation is subject to supervision, examination and regulation by the Board
of Governors of the Federal Reserve System and various state regulatory
bodies. The address of Chase Manhattan Mortgage Corporation is 343 Thornall
Street, Edison, New Jersey 08837 and its telephone number is (732) 205-0600.
Chase Manhattan Mortgage Corporation makes loans in all 50 states and the
District of Columbia primarily for the purpose of enabling borrowers to
purchase or refinance residential real property, secured by first and second
liens on such property. Chase Manhattan Mortgage Corporation's real estate
loans primarily are made to homeowners based on the security of one- to four-
family residences.
The Servicer is providing below historical delinquency, foreclosure and loan
loss data for the Servicer's portfolio of fixed rate and adjustable rate
subprime mortgage loans which were originated or purchased by the Servicer and
subsequently securitized in asset-backed transactions (the "Chase Subprime
Securitized Servicing Portfolio"). The Chase Subprime Securitized Servicing
Portfolio represents only a portion of the total servicing portfolio of the
Servicer and many of the mortgage loans in the Chase Subprime Securitized
Servicing Portfolio have not been outstanding long enough to experience the
level of delinquencies, foreclosures and loan losses which might be expected
to occur on a larger, more seasoned portfolio of mortgage loans which were
underwritten, originated and serviced in a manner similar to the mortgage
loans in the Chase Subprime Securitized Servicing Portfolio. Because of the
relatively small size and relative lack of seasoning of the Chase Subprime
Securitized Servicing Portfolio, there can be no assurance that the
delinquency, foreclosure and loan loss experience on the Mortgage Loans will
correspond to the delinquency, foreclosure and loan loss experience shown in
the tables below, and the actual delinquency, foreclosure and loan loss
experience on the Mortgage Loans could be significantly worse. Moreover, the
Mortgage Loans were acquired by the depositor from the Seller and were not
originated by the Servicer and as a result, the actual delinquency, loss and
foreclosure experience on the Mortgage Loans could be significantly worse than
the delinquency, foreclosure and loan loss experience shown in the tables
below.
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The following tables contain information relating to the delinquency, loan
loss and foreclosure experience with respect to the Chase Subprime Securitized
Servicing Portfolio.
Delinquency and Foreclosure Experience of the
Chase Subprime Securitized Servicing Portfolio
(Dollars in Thousands)
As of December 31,
-----------------------------------------------------------------------
2002 2001 2000
--------------------- --------------------- ---------------------
Number Dollar Number Dollar Number Dollar
of Loans Amount of Loans Amount of Loans Amount
-------- ---------- -------- ---------- -------- ----------
Portfolio ........................ 73,597 $8,326,818 66,278 $7,274,554 31,960 $3,268,660
Delinquency
30-59 days ...................... 2.69% 2.28% 2.27% 1.96% 1.61% 1.46%
60-89 days ...................... 0.86% 0.72% 0.71% 0.65% 0.60% 0.55%
90 days or more ................. 1.41% 1.21% 0.89% 0.79% 0.94% 0.80%
-------- ---------- -------- ---------- -------- ----------
Total ............................ 4.96% 4.21% 3.88% 3.40% 3.15% 2.81%
Foreclosure rate ................. 2.65% 2.48% 1.78% 1.64% 2.13% 2.05%
REO properties ................... 480 264 127
The period of delinquency is based on the number of days payments are
contractually past due. The delinquency statistics for the period exclude
loans in foreclosure. The portfolio statistics set forth above exclude REO
properties.
The foreclosure rate reflects the number of mortgage loans in foreclosure as
a percentage of the total number of mortgage loans or the dollar amount of
mortgage loans in foreclosure as a percentage of the total dollar amount of
mortgage loans, as the case may be, as of the date indicated. REO properties
are real estate owned properties which relate to foreclosed mortgages or
properties for which deeds in lieu of foreclosure have been accepted, and held
by the Servicer pending disposition.
Loan Loss Experience
of the Chase Subprime Securitized Servicing Portfolio
(Dollars in thousands)
-------------------------------------
Year Ending December 31,
-------------------------------------
2002 2001 2000
---------- ---------- ----------
Average amount outstanding ..................... $7,902,732 $5,018,737 $2,829,706
Net losses ..................................... $ 34,897 $ 29,677 $ 8,613
Net losses as a percentage of
average amount outstanding.................... 0.44% 0.59% 0.30%
The average amount outstanding during the period is the arithmetic average
of the principal balances of the mortgage loans outstanding on the last
business day of each month during the period. Net losses are amounts relating
to mortgage loans which have been determined by the Servicer to be
uncollectible, less amounts received by the Servicer as recoveries from
liquidation proceeds and deficiency judgments.
There can be no assurance that the delinquency, foreclosure and loan loss
experience on the Mortgage Loans will correspond to the delinquency,
foreclosure and loan loss experience set forth in the tables above, in part
because the portfolio of mortgage loans reflected in those tables is
relatively small and unseasoned, which is likely to cause the delinquency,
foreclosure and loan loss experience shown to understate, perhaps
substantially, the actual delinquency, foreclosure and loan loss experience
that might occur as the portfolio becomes more seasoned. Therefore, the
Servicer
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cannot predict to what degree the actual delinquency, foreclosure and loan
loss experience on the Mortgage Loans will correspond to the statistical
information set forth above. Moreover, the Mortgage Loans were acquired by the
Depositor from the Seller and were not originated by the Servicer.
Consequently, the delinquency, foreclosure and loan loss experience set forth
in the tables above may not necessarily be material to your decision to invest
in the Certificates.
In general, during periods in which the residential real estate market is
experiencing an overall decline in property values such that the principal
balances of the Mortgage Loans and any secondary financing on the related
mortgaged properties become equal to or greater than the value of the related
mortgaged properties, rates of delinquencies, foreclosure and losses could be
significantly higher than might otherwise be the case. In addition, adverse
economic conditions (which may affect real property values) may affect the
timely payment by mortgagors of Scheduled Payments, and accordingly, the
actual rates of delinquencies, foreclosures and losses with respect to the
mortgage pool.
Collection Procedures. The Servicer employs a variety of collection
techniques during the various stages of delinquency. The primary purpose of
all collection efforts performed by the Servicer is to bring a delinquent
mortgage loan current in as short a time as possible. Phone calls are used as
the principal form of contacting a mortgagor. The Servicer utilizes a
predictive dialing system for the management of collection calling activity.
Prior to initiating foreclosure proceedings, the Servicer makes every
reasonable effort to determine the reason for the default; whether the
delinquency is a temporary or permanent condition; and the mortgagor's
attitude toward the obligation. The Servicer will take action to foreclose a
mortgage only once every reasonable effort to cure the default has been made
and a projection of the ultimate gain or loss on REO sale is determined. In
accordance with accepted servicing practices, foreclosures are processed
within individual state guidelines and in accordance with the provisions of
the mortgage and applicable state law.
Servicing of the Mortgage Loans
General
The Servicer will provide customary servicing functions with respect to the
mortgage loans. Among other things, the servicer is obligated under some
circumstances to advance delinquent payments of principal and interest with
respect to the mortgage loans and to pay month end interest with respect to
mortgage loans serviced by it. The servicer must obtain approval of the
Trustee with respect to some of its servicing activities. In managing the
liquidation of defaulted mortgage loans, the Servicer will have sole
discretion to take such action in maximizing recoveries to the
certificateholders including, without limitation, selling defaulted mortgage
loans and REO properties. See "The Agreements-Collection Procedures" in the
prospectus.
Servicing Compensation and Payment of Expenses
The Servicer will receive a monthly fee (the "Servicing Fee") calculated as
0.50% annually on the outstanding balance of each Mortgage Loan (the
"Servicing Fee Rate"). Any successor to the Servicer will receive a fee in an
amount equal to, but not greater than, the Servicing Fee calculated at the
Servicing Fee Rate. As additional servicing compensation, the Servicer is
entitled to retain all servicing-related fees, including assumption fees,
modification fees, ancillary servicing fees, extension fees, non-sufficient
fund fees and late payment charges (other than Prepayment Premiums) to the
extent collected from the borrower, together with any interest or other income
earned on funds held in the Collection Account and the custodial accounts and
escrow accounts.
The Servicing Fees are subject to reduction as described below under
"--Prepayment Interest Shortfalls." The Servicer will be entitled to
reimbursement for certain expenses prior to distribution of
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any amounts to Certificateholders. See "The Agreements--Servicing and Other
Compensation and Payment of Expenses" in the Prospectus.
Prepayment Interest Shortfalls
When a borrower prepays a Mortgage Loan in full or in part between Scheduled
Payment dates, the borrower pays interest on the amount prepaid only from the
last Scheduled Payment date to the date of prepayment, with a resulting
reduction in interest payable for the month during which the prepayment is
made. Any Prepayment Interest Shortfall resulting from a prepayment in full or
in part by a borrower during the period beginning on the 16th day of the
calendar month immediately preceding the month in which such Distribution Date
occurs and ending on the last day of such calendar month is generally required
to be funded by the Servicer, but only to the extent that such amount does not
exceed the total of its servicing compensation for the applicable Distribution
Date.
Advances, Servicing Advances
The Servicer will generally be obligated to make advances with respect to
delinquent payments of principal and interest on the Mortgage Loans (other
than Balloon Payments), adjusted to the related Mortgage Rate less the
Servicing Fee Rate (each, an "Advance"), to the extent that such Advances, in
its judgment, are reasonably recoverable from future payments and collections,
insurance payments or proceeds of liquidation of a Mortgage Loan. The Trustee,
solely in its capacity as successor servicer, will be obligated to make any
required Advance if the Servicer fails in its obligation to do so, to the
extent provided in the Pooling and Servicing Agreement. The Trustee and the
Servicer, as applicable, will be entitled to recover any Advances made by it
with respect to a Mortgage Loan out of late payments thereon or out of related
liquidation and insurance proceeds or, if those amounts are insufficient, from
collections on other Mortgage Loans. Such reimbursements may result in
Realized Losses.
The purpose of making these Advances is to maintain a regular cash flow to
the Certificateholders, rather than to guarantee or insure against losses. No
party will be required to make any Advances with respect to reductions in the
amount of the monthly payments on Mortgage Loans due to reductions made by a
bankruptcy court in the amount of a Scheduled Payment owed by a borrower or a
reduction of the applicable Mortgage Rate by application of the Soldiers' and
Sailors' Civil Relief Act of 1940, as amended.
In the course of performing its servicing obligations, the Servicer will be
required to pay all reasonable and customary "out-of-pocket" costs and
expenses, including costs and expenses of foreclosures (including reasonable
attorneys' fees and disbursements) incurred in the performance of its
servicing obligations, including, but not limited to, the cost of (i) the
preservation, restoration, inspection and protection of the mortgaged
properties, (ii) any enforcement or judicial proceedings 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, condemnation
proceeds and such other amounts (excluding Prepayment Premiums) as may be
collected by the Servicer from the related mortgagor or otherwise relating to
the Mortgage Loan in respect of which such unreimbursed amounts are owed,
unless such unreimbursed amounts are deemed to be nonrecoverable by the
Servicer, in which event reimbursement will be made to the Servicer from
general funds in the custodial account maintained by such Servicer for
collection of principal and interest on the Mortgage Loans.
The Pooling and Servicing Agreement provides that the Servicer may enter
into a facility with any person which provides that such person may fund the
Servicer's Advances or Servicing Advances,
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although no such facility shall reduce or otherwise affect the Servicer's
obligation to fund such Advances or Servicing Advances. Any Advances or
Servicing Advances made by an advancing person will be reimbursed to the
advancing person in the same manner as reimbursements would be made to the
Servicer.
Primary Mortgage Insurance
The Servicer will be required to take such action in servicing the Mortgage
Loans as is necessary to keep the PMI Policy in effect, and the Servicer will
be responsible for filing claims under the PMI Policy on behalf of the Trust
Fund.
Collection of Taxes, Assessments and Similar Items
The Servicer will, to the extent required by the related loan documents,
maintain escrow accounts for the collection of hazard insurance premiums and
real estate taxes with respect to the Mortgage Loans, and will make advances
with respect to delinquencies in required escrow payments by the related
borrowers to the extent necessary to avoid the loss of a Mortgaged Property
due to a tax sale or the foreclosure thereof as a result of a tax lien.
Insurance Coverage
The Servicer is required to obtain and thereafter maintain in effect a bond,
corporate guaranty or similar form of insurance coverage (which may provide
blanket coverage), or any combination thereof, insuring against loss
occasioned by the errors and omissions of their respective officers and
employees.
Evidence as to Compliance
The Pooling and Servicing Agreement will provide that each year a firm of
independent accountants will furnish a statement to the Trustee and the NIMS
Insurer, if any, to the effect that such firm has examined certain documents
and records relating to the servicing of mortgage loans similar to the
Mortgage Loans by the Servicer acceptable to the NIMS Insurer, if any, and
that, on the basis of such examination, such firm is of the opinion that the
servicing has been conducted in accordance with the terms of the Pooling and
Servicing Agreement, except for (1) exceptions as the firm believes to be
immaterial and (2) any other exceptions set forth in such statement.
Servicer Default
If the Servicer is in default in its obligations under the Pooling and
Servicing Agreement, the Trustee may, and must if directed to do so by either
the Class X owner, the NIMS Insurer , if any, or Certificateholders having
more than 50% of the Voting Rights applicable to each class of Certificates
affected thereby terminate the Servicer and either appoint a successor
Servicer acceptable to the NIMS Insurer, if any, (which acceptance shall not
be unreasonably withheld) in accordance with the Pooling and Servicing
Agreement or succeed to the responsibilities of the Servicer.
The Credit Risk Manager
The Murrayhill Company, a Colorado corporation, (the "Credit Risk Manager")
will monitor and make recommendations to the Servicer regarding certain
delinquent and defaulted Mortgage Loans, and will report to the Trustee on the
performance of such Mortgage Loans. The Credit Risk Manager will rely on
mortgage loan data that is provided to it by the Servicer in performing its
advisory and monitoring functions. The Credit Risk Manager will be entitled to
receive a fee (the "Credit Risk Manager's Fee") until the termination of the
Trust Fund or until its removal by the Depositor in
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accordance with the terms of the Pooling and Servicing Agreement. The Credit
Risk Manager's Fee will be paid by the Trust Fund in accordance with the terms
of the Pooling and Servicing Agreement.
Optional Repurchase of Distressed Mortgage Loans
Subject to certain limitations set forth in the Pooling and Servicing
Agreement, the Class X owner or the NIMS Insurer, if any, will have the right,
but not the obligation, to purchase for its own account any Mortgage Loan
which becomes more than 90 days delinquent or for which the Servicer has
accepted a deed in lieu of foreclosure (a "Distressed Mortgage Loan") for a
purchase price equal to the outstanding principal balance of such Mortgage
Loan, plus accrued interest thereon to the date of repurchase, plus any
unreimbursed Advances, Servicing Advances or Servicing Fees allocable to the
Distressed Mortgage Loan. The NIMS Insurer, if any, is prohibited from using
any procedure in selecting Distressed Mortgage Loans to be repurchased which
would be materially adverse to Certificateholders. Any such repurchase shall
be accomplished by remittance to the Servicer of the purchase price for the
Distressed Mortgage Loan for deposit into the Collection Account established
by the Servicer pursuant to the Pooling and Servicing Agreement.
Special Servicer for Distressed Mortgage Loans
The Seller, with the consent of the NIMS Insurer, if any, has the option to
transfer any Distressed Mortgage Loan serviced by the Servicer for servicing
by a special servicer selected by the Seller. Any special servicing fee paid
to a special servicer will not exceed the related Servicing Fee Rate. The NIMS
Insurer, if any, in lieu of providing its consent, may purchase any Distressed
Mortgage Loan precluding a transfer of a Distressed Mortgage Loan to a special
servicer, as described above.
The Agreement
The certificates will be issued in accordance with the pooling and servicing
agreement to be dated as of April 1, 2003, among the Depositor, the Seller,
the Servicer, the Credit Risk Manager and the Trustee (the "Pooling and
Servicing Agreement"). In addition to the provisions of the agreement
summarized elsewhere in this prospectus supplement, there is set forth below a
summary of certain other provisions of the agreement. See also "The Agreements
- -- The Trustee," "-- Events of Default; Rights upon Events of Default," "--
Amendment" and "-- Termination; Optional Termination" in the prospectus.
Formation of the Trust
On the closing date, the depositor will create and establish the trust under
the Pooling and Servicing Agreement and will sell without recourse the
mortgage loans to the trust, and the trust will issue the certificates under
the terms of the agreement. The prospectus contains important additional
information regarding the terms and conditions of the certificates. The
trustee will provide to any prospective or actual holder of Offered
Certificates, upon written request, a copy of the agreement without exhibits.
Requests should be addressed to Wells Fargo Bank Minnesota, National
Association, P.O. Box 98, Columbia, Maryland 21046, Attention: Client Manager-
Aegis 2003-1
The Trust Fund will consist of:
o the mortgage loans;
o Prepayment Premiums to the extent described in this prospectus
supplement;
o those assets that are held in any account held for the benefit of the
certificateholders;
o any mortgaged premises acquired on behalf of the certificateholders by
foreclosure or by deed in lieu of foreclosure;
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o the rights of the trustee to receive the proceeds of applicable insurance
policies and funds, if any, required to be maintained under the terms of
the agreement; and
o certain rights of the depositor to the enforcement of representations and
warranties made by the seller relating to the mortgage loans.
The Offered Certificates will not represent an interest in or an obligation
of, nor will the mortgage loans be guaranteed by, the seller, the depositor,
the servicer, or the trustee.
Reports to Certificateholders
On each distribution date, the trustee will make available to each holder of
an Offered Certificate, at the trustee's website at http://www.ctslink.com, a
distribution statement containing the following, based solely on information
received from the Servicer:
(i) the aggregate amount of the distribution to be made on such
Distribution Date to the holders of each Class of Certificates other than
any Class of Interest-Only Certificates, to the extent applicable, allocable
to principal on the Mortgage Loans, including Net Liquidation Proceeds and
Insurance Proceeds, stating separately the amount attributable to scheduled
principal payments and unscheduled payments in the nature of principal;
(ii) the aggregate amount of the distribution to be made on such
Distribution Date to the holders of each Class of Certificates allocable to
interest and the calculation thereof;
(iii) the amount, if any, of any distribution to the Holders of the Class
P Certificate, the Class X Certificate and the Class R Certificate;
(iv) the amount of Advances and Servicing Advances made by the Servicer
or the Trustee, solely in its capacity as successor servicer, for the
related Collection Period, the amount of unrecovered Advances and Servicing
Advances outstanding (after giving effect to Advances and Servicing Advances
made on such Distribution Date) and the aggregate amount of nonrecoverable
Advances and Servicing Advances for such Distribution Date;
(v) the aggregate Scheduled Principal Balance as of the close of business
on the last day of the related Prepayment Period (after giving effect to the
principal portion of Scheduled Payments due during the related Collection
Period, to the extent received or advanced, and unscheduled collections of
principal received during the related Prepayment Period);
(vi) the Class Principal Amount (or Class Notional Amount) of each Class
of Certificates, to the extent applicable, as of such Distribution Date
after giving effect to payments allocated to principal reported under clause
(i) above, separately identifying any reduction of any of the foregoing
Certificate Principal Amounts due to Applied Loss Amounts;
(vii) the amount of all Prepayment Premiums distributed to the Class P
Certificates;
(viii) the amount of any Realized Losses and Subsequent Recoveries
incurred or received with respect to the Mortgage Loans (x) in the
applicable Prepayment Period and (y) in the aggregate since the cut-off
date;
(ix) the amount of the Servicing Fee, Credit Risk Manager's Fees,
Trustee's Fees and MGIC Insurance Premiums paid during the Collection Period
to which such distribution relates;
(x) the number and aggregate Scheduled Principal Balance of Mortgage
Loans, as reported to the Trustee by the Servicer, (a) remaining
outstanding, (b) Delinquent 30 to 59 days on a contractual basis, (c)
delinquent 60 to 89 days on a contractual basis, (d) Delinquent 90 or more
days on a contractual basis, (e) as to which foreclosure proceedings have
been commenced as of the close of
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business on the last business day of the calendar month immediately
preceding the month in which such Distribution Date occurs, (f) in
bankruptcy and (g) that are REO Properties; the aggregate Realized Losses
during the preceding twelve month period expressed as a percentage of the
aggregate Scheduled Principal Balances of the Mortgage Loans (the "Annual
Loss Percentage (Rolling Twelve Month)");
(xi) the aggregate Scheduled Principal Balance of any Mortgage Loans with
respect to which the related mortgage property became a REO Property as of
the close of business on the last Business Day of the calendar month
immediately preceding the month in which such Distribution Date occurs;
(xii) with respect to substitution of Mortgage Loans in the preceding
calendar month, the Scheduled Principal Balance of each deleted Mortgage
Loan, and of each replacement Mortgage Loan;
(xiii) the aggregate outstanding Carryforward Interest, Prepayment
Interest Shortfalls, Basis Risk Shortfalls and Unpaid Basis Risk Shortfalls,
if any, for each Class of Certificates, after giving effect to the
distribution made on such Distribution Date;
(xiv) the level of LIBOR and the Certificate Interest Rate applicable to
such Distribution Date with respect to each Class of Certificates;
(xv) with respect to the MGIC-Insured Mortgage Loans, as reported to the
Trustee by the Servicer (1) the amount of (a) claims filed under the MGIC
Insurance Policy, (b) claims paid under the MGIC Insurance Policy and (c)
claims denied or curtailed under the MGIC Insurance Policy on an aggregate
basis during the Collection Period to which such distribution relates and on
a cumulative basis over the term of this Agreement and (2) cancellation of
the MGIC Insurance Policy with respect to any Mortgage Loan insured
thereunder;
(xvi) the Interest Remittance Amount and the Principal Remittance Amount
applicable to such Distribution Date;
(xvii) if applicable, the amount of any shortfall (i.e., the difference
between the aggregate amounts of principal and interest which
Certificateholders would have received if there were sufficient available
amounts in the Certificate Account and the amounts actually distributed);
and
(xviii) the amount of any Overcollateralization Deficiency after giving
effect to the distributions made on such Distribution Date.
Delivery and Substitution of Mortgage Loans
The depositor must repurchase any mortgage loan for which the required
documentation is not delivered on the closing date (or subsequent closing date
in the case of subsequent mortgage loans) or reasonably promptly thereafter.
Under the limited circumstances specified in the agreement, the depositor may
substitute substantially similar mortgage loans for mortgage loans initially
delivered. It is anticipated that any permitted substitution will not
materially change the characteristics of the mortgage pools, as set forth
above. See "The Trust Fund -- The Loans," and "-- Substitution of Trust Fund
Assets" in the prospectus.
The Trustee
Wells Fargo Bank Minnesota, National Association will act as trustee of the
trust. The mailing address of the trustee's Corporate Trust Office is c/o
Sixth Street and Marquette Avenue, Minneapolis, Minnesota 55479, Attention:
Aegis 2003-1, and for all other purposes is P.O. Box 98, Columbia, Maryland
21046, Attention: Client Manager--Aegis 2003-1 (or for overnight delivery at
9062 Old
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Annapolis Road, Columbia, Maryland 21405-1951, Attention: Client Manager--
Aegis 2003-1, and its telephone number is (410) 884-2000.
Voting Rights
The voting rights of the trust will be allocated as follows:
o 97% to the classes of Offered Certificates (other than the Class A-IO,
Class P and Class X Certificates) in proportion to their respective
outstanding certificate principal balances; and
o 1% to each of the Class A-IO, Class P and Class X Certificates.
Termination
The trust will terminate upon the payment to the holders of all certificates
of all amounts required to be paid to the holders and upon the last to occur
of:
o the final payment or other liquidation, or any related advance, of the
last mortgage loan; and
o the disposition of all property acquired in respect of any mortgage loan
remaining in the trust.
By the Class X owner and the NIMS Insurer. At its option, the Class X owner
may, on any distribution date when the aggregate principal balance of the
mortgage loans is less than 10% of the aggregate principal balances of the
initial mortgage loans as of the cut off date purchase from the trust all
remaining mortgage loans, in whole only, and other property acquired by
foreclosure, deed in lieu of foreclosure or otherwise then constituting the
trust at a price generally equal to 100% of the aggregate principal balance of
the mortgage loans (or, in the case of Nonrecoverable Mortgage Loan, at the
Nonrecoverable Mortgage Loan Purchase Price) plus one month's interest
computed as provided in the agreement plus unreimbursed Advances and Servicing
Advances. The date on which this optional repurchase is made is known as the
Clean-Up Call Date. If the Class X holder does not exercise its right to
purchase the Mortgage Loans on the Clean-Up Call Date, the NIMS Insurer, if
any, will be permitted to exercise the right.
Sale of Mortgage Loans
In connection with the sale of mortgage loans, the depositor will be
required to deliver a file to the trustee or custodian with respect to each
mortgage loan consisting of:
o the original note endorsed in blank or to the order of the trustee or a
custodian acting on behalf of the trustee, or a lost note affidavit in
lieu thereof, with all prior and intervening endorsements (the seller, in
some instances, having instructed the party selling a mortgage loan to
the seller to have required the originator to endorse the original note
directly to such custodian);
o the original recorded security instrument or a certified copy, naming the
originator of the related servicer, trustee or custodian as mortgagee, or
if the original security instrument has been submitted for recordation
but has not been returned by the applicable public recording office, a
photocopy certified by an officer of the servicer, title company,
closing/settlement-escrow agent or closing attorney;
o each original recorded intervening assignment of the security instrument
as may be necessary to show a complete chain of title to the servicer,
trustee or custodian (the seller, in some instances, having instructed
the party selling a mortgage loan to the seller to record an assignment
directly from the originator to the custodian) or if any assignment has
been submitted for recordation but has not been returned from the
applicable public recording office or is otherwise not available, a copy
certified by an officer of the servicer;
S-65
o if an assignment of the security instrument to the servicer has been
recorded or sent for recordation, an original assignment of the security
instrument from the servicer in blank or to the trustee or custodian in
recordable form;
o an original title insurance policy, certificate of title insurance or
written commitment or a copy certified as true and correct by the
insurer; and
o if indicated on the applicable schedule, the original or certified copies
of each assumption agreement, modification agreement, written assurance
or substitution agreement, if any.
The trustee or a custodian acting on its behalf is required to review each
mortgage loan note and provide certification regarding the existence of such
mortgage loan notes on or before the closing date and the custodian is
required to review the remainder of the mortgage loan file within a specified
number of days after the closing date and provide a final certification on the
entire mortgage loan file prior to the first anniversary of the closing date.
On the closing date, the depositor will also assign to the trustee all the
depositor's right, title and interest in the sales agreement between the
seller and the depositor insofar as it relates to the representations and
warranties made therein by the seller in respect of the origination of the
mortgage loans and the remedies provided for breach of such representations
and warranties. Such representations and warranties include, among others,
that (i) no such mortgage loan was subject to Home Ownership and Equity
Protection Act of 1994 or any comparable state law, (ii) no proceeds from any
such mortgage loan were used to finance single-premium credit insurance
policies, (iii) the servicer will accurately and fully report for each such
mortgage loan its borrower credit files to all three credit repositories in a
timely manner and (iv) no Prepayment Premium is payable on any such mortgage
loan for a period in excess of five years following origination. Upon
discovery by the trustee of a breach of any representation, warranty or
covenant which materially and adversely affects the interests of the holders
of the certificates, the discovering party will promptly notify the depositor
and the seller. The seller will have 60 days from its discovery or its receipt
of a notice to cure the breach or, if required, (i) to repurchase the mortgage
loan at the Purchase Price plus any costs and damages incurred by the Trust in
connection with any violation by such Mortgage Loan of any predatory- or
abusive-lending laws, or (ii) subject to the conditions in the agreement, to
substitute a qualified substitute mortgage loan. See "Loan Program--
Representations by Sellers; Repurchases" in the prospectus.
Events of Default
The trustee will have the right to direct the termination of the servicer if
the servicer is in breach under the Pooling and Servicing Agreement. In the
event of a termination, the trustee must appoint a successor servicer to
assume the obligations of the servicer under the Pooling and Servicing
Agreement, including the obligation to make advances. If the trustee is unable
to appoint a successor servicer, the trustee will be obligated to service the
mortgage loans. Any successor servicer will be entitled to compensation
arrangements similar to, but no greater than, those provided to the
predecessor servicer. See "The Agreements--Events of Default; Rights upon
Events of Default" in the prospectus.
Governing Law
The agreement and each certificate will be construed in accordance with and
governed by the laws of the State of New York applicable to agreements made
and to be performed therein.
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Yield, Prepayment and Weighted Average Life
General
The yields to maturity (or to early termination) of the Offered Certificates
will be affected by the rate of principal payments (including prepayments,
which may include amounts received by virtue of purchase, condemnation,
insurance or foreclosure) on the Mortgage Loans and the application of excess
interest to retire the Class Principal Amounts of the Certificates. Yields
will also be affected by the extent to which Mortgage Loans bearing higher
Mortgage Rates prepay at a more rapid rate than Mortgage Loans with lower
Mortgage Rates, the amount and timing of borrower delinquencies and defaults
resulting in Realized Losses, the purchase price for the Offered Certificates
and other factors.
Principal prepayments may be influenced by a variety of economic,
geographic, demographic, social, tax, legal and other factors, including the
credit quality of the Mortgage Loans. In general, if prevailing interest rates
fall below the interest rates on the Mortgage Loans, the Mortgage Loans are
likely to be subject to higher prepayments than if prevailing rates remain at
or above the interest rates on the Mortgage Loans. Conversely, if prevailing
interest rates rise above the interest rates on the Mortgage Loans, the rate
of prepayment would be expected to decrease. Other factors affecting
prepayment of the Mortgage Loans include such factors as changes in borrowers'
housing needs, job transfers, unemployment, borrowers' net equity in the
mortgaged properties, changes in the values of mortgaged properties, mortgage
market interest rates and servicing decisions. The Mortgage Loans generally
have due-on-sale clauses.
As of the cut off date, all of the Mortgage Loans that are Adjustable Rate
Mortgage Loans have Mortgage Rates that provide for a fixed interest rate
during an initial period of two and three years from the date of the
origination and thereafter provide for adjustments to the Mortgage Rates on a
semi-annual basis. When such Adjustable Rate Mortgage Loans begin their
adjustable period, increases and decreases in the Mortgage Rate on the
Mortgage Loan will be limited by the Periodic Cap, except in the case of the
first adjustment, the Maximum Rate and the Minimum Rate, if any, and will be
based on the Six-Month LIBOR Index in effect on the applicable date prior to
the related Adjustment Date plus the applicable Gross Margin. The Six-Month
LIBOR Index may not rise and fall consistently with Mortgage Rates. As a
result, the Mortgage Rates on the Adjustable Rate Mortgage Loans at any time
may not equal the prevailing mortgage interest rates of similar adjustable
rate loans, and accordingly the prepayment rate may be lower or higher than
would otherwise be anticipated. Moreover, each Adjustable Rate Mortgage Loan
has a Maximum Rate, and each Adjustable Rate Mortgage Loan has a Minimum Rate,
which in some cases is equal to the related Gross Margin. Further, some
borrowers who prefer the certainty provided by fixed rate mortgage loans may
nevertheless obtain adjustable rate mortgage loans at a time when they regard
the mortgage interest rates (and, therefore, the payments) on fixed rate
mortgage loans as unacceptably high. These borrowers may be induced to
refinance adjustable rate loans when the mortgage interest rates and monthly
payments on comparable fixed rate mortgage loans decline to levels which these
borrowers regard as acceptable, even though such mortgage interest rates and
monthly payments may be significantly higher than the current mortgage
interest rates and monthly payments on the borrowers' adjustable rate mortgage
loans. The ability to refinance a Mortgage Loan will depend on a number of
factors prevailing at the time refinancing is desired, including, without
limitation, real estate values, the borrower's financial situation, prevailing
mortgage interest rates, the borrower's equity in the related Mortgaged
Property, tax laws and prevailing general economic conditions. In addition, as
discussed below, the Interest Rate on the Offered Certificates (other than the
Class A-IO Certificates) beginning with the Accrual Period following the first
adjustment date may decrease, and may decrease significantly, after the
Mortgage Rates on the Mortgage Loans begin to adjust.
As of the cut off date, approximately 85.07% of the Mortgage Loans are
subject to Prepayment Premiums during intervals ranging from one year to five
years following origination, as described under
S-67
"Description of the Mortgage Pool--General" herein. Such Prepayment Premiums
may have the effect of reducing the amount or the likelihood of prepayment of
the related Mortgage Loans during the applicable Penalty Period.
The rate of principal payments on the Mortgage Loans will also be affected
by the amortization schedules of the Mortgage Loans, the rate and timing of
prepayments thereon by the borrowers, liquidations of defaulted Mortgage Loans
and repurchases of Mortgage Loans due to certain breaches of representations
and warranties or defective documentation. The timing of changes in the rate
of prepayments, liquidations and purchases of the related Mortgage Loans may,
and the timing of Realized Losses will, significantly affect the yield to an
investor, even if the average rate of principal payments experienced over time
is consistent with an investor's expectation. Because the rate and timing of
principal payments on the Mortgage Loans will depend on future events and on a
variety of factors (as described more fully herein and in the prospectus under
"Yield and Prepayment Considerations"), no assurance can be given as to such
rate or the timing of principal payments on the Offered Certificates. In
general, the earlier a prepayment of principal of the Mortgage Loans, the
greater the effect on an investor's yield. 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 the period immediately following the
issuance of the Certificates may not be offset by a subsequent like decrease
(or increase) in the rate of principal payments.
From time to time, areas of the United States may be affected by flooding,
severe storms, landslides, wildfires, earthquakes or other natural disasters.
Under the Sales Agreement, the Seller will represent and warrant that as of
the Closing Date each Mortgaged Property was free of material damage. In the
event of an uncured breach of this representation and warranty that materially
and adversely affects the interests of Certificateholders, the Seller will be
required to repurchase the affected Mortgage Loan or substitute another
mortgage loan therefor. If any damage caused by flooding, storms, wildfires,
landslides or earthquakes (or other cause) occurs after the Closing Date, the
Seller will not have any repurchase obligation. In addition, the standard
hazard policies covering the Mortgaged Properties generally do not cover
damage caused by earthquakes, flooding and landslides, and earthquake, flood
or landslide insurance may not have been obtained with respect to such
Mortgaged Properties. As a consequence, Realized Losses could result. To the
extent that the insurance proceeds received with respect to any damaged
Mortgage Properties are not applied to the restoration thereof, the proceeds
will be used to prepay the related Mortgage Loans in whole or in part. Any
repurchases or repayments of Mortgage Loans may reduce the weighted average
lives of the Offered Certificates and will reduce the yields on the Offered
Certificates to the extent they are purchased at a premium.
Prepayments, liquidations and purchases of Mortgage Loans will result in
distributions to holders of the related Certificates of principal amounts that
would otherwise be distributed over the remaining terms of such Mortgage
Loans. The rate of defaults on the Mortgage Loans will also affect the rate
and timing of principal payments on the Mortgage Loans. In general, defaults
on mortgage loans are expected to occur with greater frequency in their early
years.
The yields on the Offered Certificates may be adversely affected by Net
Prepayment Interest Shortfalls on the Mortgage Loans. The yields on the LIBOR
Certificates will be affected by the level of LIBOR from time to time, and by
the Mortgage Rates of the Mortgage Loans from time to time as described under
"Risk Factors--Mortgage Loan Interest Rates May Limit Interest Rates on the
Certificates."
As described herein, excess interest will be applied, to the extent
available, as an additional payment of principal on the Offered Certificates
to maintain limited overcollateralization. The level of excess interest
available on any Distribution Date will be influenced by, among other things:
S-68
o The overcollateralization level of the Mortgage Loans. This means the
extent to which interest on the Mortgage Loans is accruing on a higher
principal balance than the Certificate Principal Amounts of the
Certificates;
o The loss experience of the Mortgage Loans. For example, excess interest
will be reduced as a result of Realized Losses on the Mortgage Loans;
o The value of LIBOR; and
o The extent to which the weighted average Net Mortgage Rates of the
Mortgage Loans exceeds the weighted average of the pass-through rates of
the Offered Certificates.
No assurances can be given as to the amount or timing of excess interest
distributable on the Certificates.
The yields to investors in the Offered Certificates will be affected by the
exercise by the Class X holder or the NIMS Insurer, if any, of their right to
purchase the Mortgage Loans, as described under "Description of the
Certificates--Optional Purchase of Mortgage Loans" herein or their failure to
exercise that right.
If the purchaser of a Certificate offered at a discount from its initial
principal amount calculates its anticipated yield to maturity (or early
termination) based on an assumed rate of payment of principal that is faster
than that actually experienced on the related Mortgage Loans, the actual yield
may be lower than that so calculated. Conversely, if the purchaser of a
Certificate offered at a premium, particularly a Class A-IO Certificate,
calculates its anticipated yield based on an assumed rate of payment of
principal that is slower than that actually experienced on the related
Mortgage Loans, the actual yield may be lower than that so calculated. For
this purpose, prepayments of principal include not only voluntary prepayments
made by the borrower, but repurchases of Mortgage Loans by the related seller
due to breaches of representations and warranties.
The Class A-IO Certificates will have no principal amount and therefore are
offered at a premium. The Class Notional Amount of the Class A-IO Certificates
will decrease according to a schedule as described herein. After the
Distribution Date in April 2006, the Class Notional Amount of the Class A-IO
Certificates will be zero, and the Class A-IO Certificates will not be
entitled to distributions in respect of Current Interest. In the event that
the Mortgage Loans prepay at an extremely rapid rate resulting in a decline in
the Pool Balance below the applicable scheduled Class Notional Balance,
investors in such Certificates could fail to recover their initial
investments.
The Interest Rates applicable to the LIBOR Certificates will be affected by
the level of LIBOR from time to time, and by the Mortgage Rates of the
Mortgage Loans from time to time as described under "Risk Factors--Mortgage
Loan Interest Rates May Limit Interest Rates on the Certificates."
Overcollateralization
The yields of the Offered Certificates will be affected by the application
of Monthly Excess Cashflow as described herein and by the amount of
overcollateralization. The amount of Monthly Excess Cashflow will be affected
by the delinquency, default and prepayment experience of the Mortgage Loans.
There can be no assurance as to whether overcollateralization will be
maintained at the levels described herein.
Subordination of the Offered Subordinate Certificates
As described herein, Certificates having a relatively higher priority of
distribution will have a preferential right to receive distributions of
interest to the extent of the Interest Remittance Amount and principal to the
extent of the Principal Distribution Amount. In addition, Applied Loss Amounts
will be
S-69
allocated to the Class B1, Class M2 and Class M1 Certificates in inverse order
of seniority. As a result, the yields of the Offered Subordinate Certificates
will be more sensitive, in varying degrees, to delinquencies and losses on the
Mortgage Loans than the yields of more senior Certificates.
Weighted Average Life
Weighted average life refers to the average amount of time that will elapse
from the date of issuance of a security to the date of distribution to the
investor of each dollar distributed in net reduction of principal of such
security (assuming no losses). The weighted average lives of the Offered
Certificates will be influenced by, among other things, the rate at which
principal of the related Mortgage Loans is paid, which may be in the form of
scheduled amortization, prepayments or liquidations and the amount of excess
interest.
Prepayments on mortgage loans are commonly measured relative to a constant
prepayment standard or model. The model used in this Prospectus Supplement for
the Mortgage Loans is a prepayment assumption (the "Prepayment Assumption")
that represents an assumed rate of prepayment each month relative to the then
outstanding principal balance of the Mortgage Loans for the life of such
Mortgage Loans. A 100% Prepayment Assumption for the Adjustable Rate Mortgage
Loans assumes a constant prepayment rate of 27% per annum is assumed. A 100%
Prepayment Assumption for the Fixed Rate Mortgage Loans assumes a constant
prepayment rate of 4.60% per annum of the outstanding principal balance of
such Mortgage Loans for the first month following the origination of the
Mortgage Loan and approximately an additional 1.67% in each month thereafter
for the next eleven months; and in each month thereafter during the life of
such Mortgage Loans, a constant prepayment rate of 23.00% is assumed. As used
in the tables below, a 0% Prepayment Assumption assumes prepayment rates equal
to 0% of the Prepayment Assumption, i.e. no prepayments; a 50% Prepayment
Assumption assumes prepayment rates equal to 50% of the Prepayment Assumption,
and so forth. The Prepayment Assumption does not purport to be either a
historical description of the prepayment experience of the mortgage loans or a
prediction of the anticipated rate of prepayment of any mortgage loans,
including the Mortgage Loans to be included in the Trust Fund.
The tables on page S-67 were prepared based on the following assumptions
(collectively, the "Modeling Assumptions"): (1) the initial Class Principal
Amounts are as set forth in the table on
page S-3 and the Interest Rates are as described herein; (2) each Scheduled
Payment of principal and interest is timely received on the first day of each
month commencing in May 2003; (3) principal prepayments are received in full
on the last day of each month commencing in April 2003 and there are no Net
Prepayment Interest Shortfalls; (4) there are no defaults or delinquencies on
the Mortgage Loans; (5) Distribution Dates occur on the 25th day of each month
commencing in May 2003; (6) there are no purchases or substitutions of
Mortgage Loans; (7) the Mortgage Rate of each Adjustable Rate Mortgage Loan is
adjusted on the next applicable Adjustment Date to equal the value of the Six-
Month LIBOR Index set forth below plus the related Gross Margin; (8) the value
of Six-Month LIBOR is equal to 1.2337%; the value of One-Month LIBOR is equal
to 1.3038%; (9) the Trustee Fee Rate is equal to 0.01% annually; (10) there is
no optional termination of the Trust Fund by the Class X owner (except in the
case of Weighted Average Life in Years With Optional Termination); (11) no
Prepayment Premiums are collected on the Mortgage Loans; (12) the Certificates
are issued on April 24, 2003; (13) the Credit Risk Manager's Fee Rate is equal
to 0.015% annually; (14) the Mortgage Loans are aggregated into assumed
Mortgage Loans having the following characteristics:
S-70
Assumed Mortgage Loan Characteristics(1)
Original
Remaining Remaining Amortization
Net Term to Amortization Term to Next Rate
Principal Gross Mortgage Maturity Term Maturity Adjustment Maximum
Mortgage Loan Type Balance ($) Rate (%) Rate (%) (months) (months)(2) (months) Period Rate (%)
- ------------------ -------------- -------- -------- --------- ------------ ------------ ---------- --------
A(3) -2/28 Libor 4,695,168.67 8.053 7.543 358 358 360 21 14.053
A(3) -3/27 Libor 8,887,637.99 8.052 7.542 358 358 360 33 14.052
A(3) -Fixed 3,441,581.72 8.054 7.544 305 305 308 N/A N/A
B(4) -2/28 Libor 100,819,849.94 8.270 6.010 357 357 360 21 14.270
B(4) -3/27 Libor 78,316,960.22 8.355 6.095 357 357 360 33 14.355
B(4) -Balloon 161,900.66 8.102 5.842 177 357 360 N/A N/A
B(4) -Fixed 24,594,345.95 8.261 6.001 330 330 332 N/A N/A
C(5) -2/28 Libor 33,797,586.69 8.461 7.951 357 357 360 21 14.461
C(5) -3/27 Libor 26,456,743.16 8.899 8.389 357 357 360 33 14.899
C(5) -Balloon 71,903.44 9.990 9.480 177 357 360 N/A N/A
C(5) -Fixed 5,095,643.04 8.893 8.383 346 346 348 N/A N/A
Rate
Gross Initial Subsequent Adjustment
Minimum Margin Periodic Periodic Frequency
Mortgage Loan Type Rate (%) (%) Cap (%) Rate (%) (months)
- ------------------ -------- ------ -------- ---------- ----------
A(3) -2/28 Libor 8.053 7.541 3.000 1.000 6
A(3) -3/27 Libor 8.052 7.589 3.000 1.000 6
A(3) -Fixed N/A N/A N/A N/A N/A
B(4) -2/28 Libor 8.270 7.750 3.000 1.000 6
B(4) -3/27 Libor 8.356 7.864 3.000 1.000 6
B(4) -Balloon N/A N/A N/A N/A N/A
B(4) -Fixed N/A N/A N/A N/A N/A
C(5) -2/28 Libor 8.462 7.960 3.000 1.000 6
C(5) -3/27 Libor 8.900 8.413 3.000 1.000 6
C(5) -Balloon N/A N/A N/A N/A N/A
C(5) -Fixed N/A N/A N/A N/A N/A
- ---------------
(1) As of the cut off date.
(2) Each Mortgage Loan has an original amortization that is the same as its
original term to maturity, except for Balloon Mortgage Loans,
substantially all of which have an original amortization of 360 months.
(3) Each Mortgage Loan having a loan-to-value ratio less than or equal to 60%.
(4) Each Mortgage Loan with a loan-to-value ratio in excess of 60% and covered
by the PMI Policy.
(5) Each Mortgage Loan with a loan-to-value ratio in excess of 60% and not
covered by the PMI Policy.
S-71
The actual characteristics and the performance of the Mortgage Loans will
differ from the assumptions used in constructing the tables set forth below,
which are hypothetical in nature and are provided only to give a general sense
of how the principal cash flows might behave under varying prepayment
scenarios. For example, it is not expected 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 there will be no defaults or delinquencies on the
Mortgage Loans. Moreover, the diverse remaining terms to maturity and the
Mortgage Rate of the Mortgage Loans could produce slower or faster principal
distributions than indicated in the tables at the various percentages of the
Prepayment Assumption specified, even if the weighted average remaining term
to maturity and the weighted average Mortgage Rates of the Mortgage Loans are
as assumed. Any difference between such assumptions and the actual
characteristics and performance of the Mortgage Loans, or the actual
prepayment or loss experience, will cause the percentages of initial Class
Principal Amounts outstanding over time and the weighted average lives of the
Offered Certificates to differ (which difference could be material) from the
corresponding information in the tables for each indicated percentage of the
Prepayment Assumption.
Subject to the foregoing discussion and assumptions, the following tables
indicate the weighted average lives of the Offered Certificates and set forth
the percentages of the initial Class Principal Amounts of the Offered
Certificates that would be outstanding after each of the Distribution Dates
shown at various percentages of the Prepayment Assumption.
The weighted average life of an Offered Certificate is determined by (1)
multiplying the net reduction, if any, of the applicable Class Principal
Amount by the number of years from the date of issuance of the Offered
Certificate to the related Distribution Date, (2) adding the results and (3)
dividing the sum by the aggregate of the net reductions of Class Principal
Amount described in (1) above.
S-72
Percentage of Initial Class Principal Amount of the Class A1
Certificates Outstanding at the Following Percentages of the Prepayment
Assumption
Class A1 Certificates
-----------------------------------
0% 50% 100% 150% 200%
----- ---- ---- ---- ----
Initial Percentage.......................................................................... 100% 100% 100% 100% 100%
April 25, 2004.............................................................................. 98 83 68 54 39
April 25, 2005.............................................................................. 97 69 45 26 10
April 25, 2006.............................................................................. 96 57 29 9 0
April 25, 2007.............................................................................. 95 47 24 9 0
April 25, 2008.............................................................................. 94 39 17 6 0
April 25, 2009.............................................................................. 92 33 12 4 0
April 25, 2010.............................................................................. 91 29 9 2 0
April 25, 2011.............................................................................. 89 24 7 1 0
April 25, 2012.............................................................................. 88 21 5 1 0
April 25, 2013.............................................................................. 86 18 3 * 0
April 25, 2014.............................................................................. 84 15 2 0 0
April 25, 2015.............................................................................. 82 13 2 0 0
April 25, 2016.............................................................................. 79 11 1 0 0
April 25, 2017.............................................................................. 76 9 1 0 0
April 25, 2018.............................................................................. 74 8 * 0 0
April 25, 2019.............................................................................. 70 6 * 0 0
April 25, 2020.............................................................................. 67 5 0 0 0
April 25, 2021.............................................................................. 63 4 0 0 0
April 25, 2022.............................................................................. 59 4 0 0 0
April 25, 2023.............................................................................. 54 3 0 0 0
April 25, 2024.............................................................................. 50 2 0 0 0
April 25, 2025.............................................................................. 44 2 0 0 0
April 25, 2026.............................................................................. 39 1 0 0 0
April 25, 2027.............................................................................. 34 1 0 0 0
April 25, 2028.............................................................................. 29 1 0 0 0
April 25, 2029.............................................................................. 24 * 0 0 0
April 25, 2030.............................................................................. 18 0 0 0 0
April 25, 2031.............................................................................. 12 0 0 0 0
April 25, 2032.............................................................................. 5 0 0 0 0
April 25, 2033.............................................................................. 0 0 0 0 0
Weighted Average Life in Years:
Without Optional Termination................................................................ 19.42 5.59 2.79 1.62 0.95
With Optional Termination................................................................... 19.37 5.22 2.56 1.48 0.95
- ---------------
* Indicates a value between 0.0% and 0.5%.
S-73
Percentage of Initial Class Principal Amount of the Class M1 and M2
Certificates Outstanding at the Following Percentages of the Prepayment
Assumption
Class M1 Certificates Class M2 Certificates
------------------------------------ ------------------------------------
0% 50% 100% 150% 200% 0% 50% 100% 150% 200%
----- ----- ---- ---- ---- ----- ----- ---- ---- ----
Initial Percentage ................................. 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
April 25, 2004 ..................................... 100 100 100 100 100 100 100 100 100 100
April 25, 2005 ..................................... 100 100 100 100 100 100 100 100 100 100
April 25, 2006 ..................................... 100 100 100 100 39 100 100 100 100 100
April 25, 2007 ..................................... 100 100 57 55 39 100 100 57 26 53
April 25, 2008 ..................................... 100 94 41 16 32 100 94 41 16 0
April 25, 2009 ..................................... 100 81 30 9 11 100 81 30 6 0
April 25, 2010 ..................................... 100 69 22 5 1 100 69 22 0 0
April 25, 2011 ..................................... 100 59 16 0 0 100 59 16 0 0
April 25, 2012 ..................................... 100 50 12 0 0 100 50 11 0 0
April 25, 2013 ..................................... 100 43 8 0 0 100 43 5 0 0
April 25, 2014 ..................................... 100 37 6 0 0 100 37 0 0 0
April 25, 2015 ..................................... 100 31 2 0 0 100 31 0 0 0
April 25, 2016 ..................................... 100 26 0 0 0 100 26 0 0 0
April 25, 2017 ..................................... 100 22 0 0 0 100 22 0 0 0
April 25, 2018 ..................................... 100 19 0 0 0 100 19 0 0 0
April 25, 2019 ..................................... 100 16 0 0 0 100 16 0 0 0
April 25, 2020 ..................................... 100 13 0 0 0 100 13 0 0 0
April 25, 2021 ..................................... 100 11 0 0 0 100 9 0 0 0
April 25, 2022 ..................................... 100 9 0 0 0 100 5 0 0 0
April 25, 2023 ..................................... 100 7 0 0 0 100 2 0 0 0
April 25, 2024 ..................................... 100 5 0 0 0 100 0 0 0 0
April 25, 2025 ..................................... 100 3 0 0 0 100 0 0 0 0
April 25, 2026 ..................................... 95 * 0 0 0 95 0 0 0 0
April 25, 2027 ..................................... 83 0 0 0 0 83 0 0 0 0
April 25, 2028 ..................................... 71 0 0 0 0 71 0 0 0 0
April 25, 2029 ..................................... 58 0 0 0 0 58 0 0 0 0
April 25, 2030 ..................................... 43 0 0 0 0 43 0 0 0 0
April 25, 2031 ..................................... 28 0 0 0 0 28 0 0 0 0
April 25, 2032 ..................................... 13 0 0 0 0 13 0 0 0 0
April 25, 2033 ..................................... 0 0 0 0 0 0 0 0 0 0
Weighted Average Life in Years:
Without Optional Termination ....................... 26.44 10.49 5.42 4.42 3.94 26.43 10.31 5.26 3.97 4.12
With Optional Termination .......................... 26.34 9.71 4.96 4.14 2.97 26.34 9.71 4.92 3.77 3.17
- ---------------
* Indicates a value between 0.0% and 0.5%.
S-74
Percentage of Initial Class Principal Amount of the Class B1
Certificates Outstanding at the Following Percentages of the Prepayment
Assumption
Class B1 Certificates
-----------------------------------
0% 50% 100% 150% 200%
----- ---- ---- ---- ----
Initial Percentage.......................................................................... 100% 100% 100% 100% 100%
April 25, 2004.............................................................................. 100 100 100 100 100
April 25, 2005.............................................................................. 100 100 100 100 100
April 25, 2006.............................................................................. 100 100 100 100 100
April 25, 2007.............................................................................. 100 100 57 18 0
April 25, 2008.............................................................................. 100 94 39 4 0
April 25, 2009.............................................................................. 100 81 24 0 0
April 25, 2010.............................................................................. 100 69 13 0 0
April 25, 2011.............................................................................. 100 59 5 0 0
April 25, 2012.............................................................................. 100 50 0 0 0
April 25, 2013.............................................................................. 100 41 0 0 0
April 25, 2014.............................................................................. 100 33 0 0 0
April 25, 2015.............................................................................. 100 25 0 0 0
April 25, 2016.............................................................................. 100 19 0 0 0
April 25, 2017.............................................................................. 100 13 0 0 0
April 25, 2018.............................................................................. 100 8 0 0 0
April 25, 2019.............................................................................. 100 4 0 0 0
April 25, 2020.............................................................................. 100 1 0 0 0
April 25, 2021.............................................................................. 100 0 0 0 0
April 25, 2022.............................................................................. 100 0 0 0 0
April 25, 2023.............................................................................. 100 0 0 0 0
April 25, 2024.............................................................................. 100 0 0 0 0
April 25, 2025.............................................................................. 100 0 0 0 0
April 25, 2026.............................................................................. 95 0 0 0 0
April 25, 2027.............................................................................. 83 0 0 0 0
April 25, 2028.............................................................................. 71 0 0 0 0
April 25, 2029.............................................................................. 58 0 0 0 0
April 25, 2030.............................................................................. 42 0 0 0 0
April 25, 2031.............................................................................. 21 0 0 0 0
April 25, 2032.............................................................................. * 0 0 0 0
April 25, 2033.............................................................................. 0 0 0 0 0
Weighted Average Life in Years:
Without Optional Termination................................................................ 26.26 9.53 4.80 3.54 3.34
With Optional Termination................................................................... 26.24 9.42 4.74 3.50 3.17
- ---------------
* Indicates a value between 0.0% and 0.5%.
S-75
Material Federal Income Tax Considerations
General
The Pooling and Servicing Agreement provides that the Trust Fund, exclusive
of the Basis Risk Reserve Fund, will comprise one or more REMICs (each, a
"Lower Tier REMIC") and a single upper tier REMIC (the "Upper Tier REMIC") in
a tiered structure. Each of the Lower Tier REMICs and the Upper Tier REMIC
will designate a single class of interests as the residual interest in that
REMIC. The Class R Certificate will represent ownership of the residual
interests in each of the REMICs. Elections will be made to treat each of the
Lower Tier REMICs and the Upper Tier REMIC as a REMIC for federal income tax
purposes.
Upon the issuance of the Offered Certificates, McKee Nelson LLP ("Tax
Counsel") will deliver its opinion to the effect that, assuming compliance
with the Pooling and Servicing Agreement, each of the Lower Tier REMICs and
the Upper Tier REMIC will qualify as a REMIC within the meaning of Section 860D
of the Internal Revenue Code of 1986, as amended (the "Code"). In addition,
Tax Counsel will deliver an opinion to the effect that the Basis Risk Reserve
Fund is an "outside reserve fund" that is beneficially owned by the beneficial
owner of the Class X Certificate. Moreover, Tax Counsel will deliver an
opinion to the effect that the rights of the beneficial owners of the Offered
Certificates to receive payments from the Basis Risk Reserve Fund represent
interests in an interest rate cap contract for federal income tax purposes.
Tax Treatment of the Class A-IO Certificates
The Class A-IO Certificates will represent ownership of REMIC regular
interests for federal income tax purposes. See "Material Federal Income Tax
Consequences--Types of Securities--REMIC Certificates Generally" in the
prospectus. In addition, the Class A-IO Certificates will be issued with
original issue discount ("OID"). A beneficial owner of a certificate issued
with OID must include the OID in income as it accrues on a constant yield
method, regardless of whether the beneficial owner receives currently the cash
attributable to such OID. See "Material Federal Income Tax Consequences--
Taxation of Securities Treated as Debt Instruments--Interest Income and OID"
in the Prospectus. The prepayment assumption that will be used in determining
the accrual of any OID, market discount, or bond premium, if any, will be a
rate equal to 100% of the Prepayment Assumption with respect to both the
Adjustable Rate Mortgage Loans and Fixed Rate Mortgage Loans. See "Yield,
Prepayment and Weighted Average Life--Weighted Average Life" above. No
representation is made that the Mortgage Loans will prepay at such a rate or
at any other rate.
Tax Treatment of the Remaining Offered Certificates
For federal income tax purposes, a beneficial owner of an Offered
Certificate (other than a Class A-IO Certificate) (a "Component Certificate")
will be treated (i) as holding an undivided interest in a REMIC regular
interest corresponding to that certificate and (ii) as having entered into a
limited recourse interest rate cap contract (the "Cap Contract"). The REMIC
regular interest corresponding to a Component Certificate will be entitled to
receive interest and principal payments at the times and in the amounts equal
to those made on the Certificate to which it corresponds, except that the
interest payments will be determined without regard to any payments made from
the Basis Risk Reserve Fund. Any payment on a Component Certificate that is
made from the Basis Risk Reserve Fund will be deemed to have been paid
pursuant to the Cap Contract. Consequently, each beneficial owner of a
Component Certificate will be required to report income accruing with respect
to the REMIC regular interest component as discussed under "Material Federal
Income Tax Consequences--Types of Securities--REMIC Certificates Generally" in
the Prospectus. In addition, each beneficial owner of a Component Certificate
will be required to report net income with respect to the Cap Contract
component and will be permitted to recognize a net deduction with respect to
the Cap Contract component, subject to the discussion under "--The Cap
Contract Components" below. Prospective investors should consult their
S-76
own tax advisors regarding the consequences to them in light of their own
particular circumstances of taxing separately the two components comprising
each Component Certificate.
Allocations. A beneficial owner of a Component Certificate must allocate
its purchase price for the certificate between its components--the REMIC
regular interest component and the Cap Contract component. For information
reporting purposes the Trustee will assume the Cap Contract components will
have nominal value. Each Cap Contract is difficult to value, and the Internal
Revenue Service ("IRS") could assert that the value of a Cap Contract
component as of the closing date is greater than the value used for
information reporting purposes. Prospective investors should consider the tax
consequences to them if the IRS were to assert a different value for the Cap
Contract components.
Upon the sale, exchange, or other disposition of a Component Certificate,
the beneficial owner of the certificate must allocate the amount realized
between the components of the certificate based on the relative fair market
values of those components at the time of sale and must treat the sale,
exchange or other disposition as a sale, exchange or disposition of the REMIC
regular interest component and the Cap Contract component. Assuming that the
Component Certificate is held as a "capital asset" within the meaning of
Section 1221 of the Code, gain or loss on the disposition of an interest in
the Cap Contract component should be capital gain or loss. For a discussion of
the material federal income tax consequences to a beneficial owner upon
disposition of a REMIC regular interest, see "Material Federal Income Tax
Consequences--Types of Securities--REMIC Certificates Generally" in the
Prospectus.
Original Issue Discount. The REMIC regular interest component of a
Component Certificate may be issued with OID. A beneficial owner of a
Component Certificate must include any OID with respect to such component in
income as it accrues on a constant yield method, regardless of whether the
beneficial owner receives currently the cash attributable to such OID. See
"Material Federal Income Tax Consequences--Taxation of Securities Treated as
Debt Instruments--Interest Income and OID" in the Prospectus. The prepayment
assumption that will be used in determining the accrual of any OID, market
discount, or bond premium, if any, will be a rate equal to 100% of the
Prepayment Assumption with respect to both the Adjustable Rate Mortgage Loans
and Fixed Rate Mortgage Loans. See "Yield, Prepayment and Weighted Average
Life--Weighted Average Life" above. No representation is made that the
Mortgage Loans will prepay at such a rate or at any other rate.
The Cap Contract Components. The portion of the overall purchase price of a
Component Certificate attributable to the Cap Contract component must be
amortized over the life of such certificate, taking into account the declining
balance of the related REMIC regular interest component. Treasury regulations
concerning notional principal contracts provide alternative methods for
amortizing the purchase price of an interest rate cap contract. Under one
method--the level yield constant interest method--the price paid for an
interest rate cap is amortized over the life of the cap as though it were the
principal amount of a loan bearing interest at a reasonable rate. Prospective
investors are urged to consult their tax advisors concerning the methods that
can be employed to amortize the portion of the purchase price paid for the Cap
Contract component of a Component Certificate.
Any payments made to a beneficial owner of a Component Certificate from the
Basis Risk Reserve Fund will be treated as periodic payments on an interest
rate cap contract. To the extent the sum of such periodic payments for any
year exceeds that year's amortized cost of the Cap Contract component, such
excess represents net income for that year. Conversely, to the extent that the
amount of that year's amortized cost exceeds the sum of the periodic payments,
such excess shall represent a net deduction for that year. Although not clear,
net income or a net deduction should be treated as ordinary income or as an
ordinary deduction.
A beneficial owner's ability to recognize a net deduction with respect to
the Cap Contract component is limited under Sections 67 and 68 of the Code in
the case of (i) estates and trusts and (ii) individuals owning an interest in
such component directly or through a "pass-through entity" (other than in
connection with such individual's trade or business). Pass-through entities
include partnerships, S corporations, grantor trusts and non-publicly offered
regulated investment companies, but do not include
S-77
estates, nongrantor trusts, cooperatives, real estate investment trusts and
publicly offered regulated investment companies. Further, such a beneficial
owner will not be able to recognize a net deduction with respect to the Cap
Contract component in computing the beneficial owner's alternative minimum tax
liability.
Status of the Component Certificates
The REMIC regular interest components of Component Certificates will be
treated as assets described in Section 7701(a)(19)(C) of the Code, and as
"real estate assets" under Section 856(c)(5)(B) of the Code, generally, in the
same porportion that the assets of the Trust Fund, exclusive of the assets not
included in any REMIC, would be so treated. In addition, the interest derived
from the REMIC regular interest component of a Component Certificate will be
interest on obligations secured by interests in real property for purposes of
Section 856(c)(3) of the Code, subject to the same limitation in the preceding
sentence. The Cap Contract components of the Component Certificate will not
qualify, however, as an asset described in Section 7701(a)(19)(C) of the Code
or as a real estate asset under Section 856(c)(5)(B) of the Code.
Legal Investment Considerations
The Class A1, A-IO, and M1 Certificates will constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984, as amended ("SMMEA") for so long as they are rated in one of the two
highest rating categories by one or more nationally recognized statistical
rating organizations. As such, they will be legal investments for particular
entities to the extent provided in SMMEA, subject to state laws overriding
SMMEA. None of the other classes of Offered Certificates will constitute
"mortgage related securities."
Institutions whose investment activities are subject to review by certain
regulatory authorities may be or may become subject to restrictions, which may
be retroactively imposed by such regulatory authorities, on the investment by
such institutions in certain mortgage related securities. In addition, several
states have adopted or may adopt regulations that prohibit certain state-
chartered institutions from purchasing or holding similar types of securities.
Accordingly, investors should consult their own legal advisors to determine
whether and to what extent the Offered Certificates may be purchased by such
investors. See "Legal Investment" in the Prospectus.
ERISA Considerations
Subject to the limitations and qualifications described under "ERISA
Considerations" in the Prospectus, the Offered Certificates may be purchased
by an employee benefit plan or other retirement arrangement that is subject to
the Employee Retirement Income Security Act of 1974, as amended ("ERISA") or
to Section 4975 of the Internal Revenue Code of 1986, as amended (the "Code")
(collectively, a "Plan"), or by a person investing on behalf of or with plan
assets of such a plan or arrangement pursuant to an administrative exemption
from the prohibited transaction provisions of ERISA and Section 4975 of the
Code which has been granted by the U.S. Department of Labor to the
Underwriters relating to the acquisition, holding and transfers of the Offered
Certificates (the "Exemption"). See "ERISA Considerations" in the Prospectus.
A fiduciary of any employee benefit plan or other retirement arrangement
subject to ERISA, or the Code, should carefully review with its legal advisors
whether the purchase or holding of Certificates could give rise to a
transaction prohibited or not otherwise permissible under ERISA or the Code.
See "ERISA Considerations" in the Prospectus.
The rating of an Offered Certificate may change. If the rating of a class of
Offered Certificates declines below the lowest permitted rating, Certificates
of that class may no longer be eligible for relief under the Exemption
(although a Plan that had purchased a Certificate of that class when the
Certificate had a permitted rating would not be required to dispose of it).
However, insurance company general
S-78
accounts may be able to purchase a Certificate in such circumstances pursuant
to Sections I and II of Prohibited Transaction Class Exemption 95-60.
Use of Proceeds
The net proceeds from the sale of the Offered Certificates will be applied
by the Depositor toward the purchase of the Mortgage Loans from the Seller and
the repayment of the related financing.
Underwriting
Subject to the terms and conditions set forth in the underwriting agreement
and in a terms agreement (collectively, the "Underwriting Agreement") between
the Depositor and the Underwriters, the Depositor has agreed to sell to the
Underwriters, named below and the Underwriters have agreed to purchase from
the Depositor the following principal amounts or notional amounts of Offered
Certificates.
Countrywide Securities
Class Lehman Brothers Inc. Corporation
----- -------------------- -----------
Class A-1 $211,748,000.00 $37,367,000.00
Class A-IO $ 16,387,910.00 $ 2,890,000.00
Class M-1 $ 13,995,000.00 $ 2,469,000.00
Class M-2 $ 10,344,000.00 $ 1,825,000.00
Class B-1 $ 7,302,321.00 $ 1,289,000.00
The distribution of the Offered Certificates by the Underwriters will be
effected in each case from time to time in one or more negotiated
transactions, or otherwise, at varying prices to be determined, in each case,
at the time of sale. The Underwriters may effect such transactions by selling
the Certificates to or through dealers, and such dealers may receive from the
Underwriters, for whom 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 the
Certificates may be deemed to be an underwriter, and any discounts,
commissions or concessions received by them, and any profit on the resale of
the Certificates purchased by them, may be deemed to be underwriting discounts
and commissions under the Securities Act of 1933, as amended (the "Act"). The
Underwriting Agreement provides that the Depositor will indemnify the
Underwriters against certain civil liabilities, including liabilities under
the Act.
Expenses incurred by the Depositor in connection with this offering are
expected to be approximately $357,000.
After the initial distribution of the Offered Certificates by the
Underwriters, the Prospectus and Prospectus Supplement may be used by the
Underwriters in connection with market making transactions in the Offered
Certificates. The Underwriters may act as principal or agent in such
transactions. Such transactions will be at prices related to prevailing market
prices at the time of sale.
The Mortgage Loans have been the subject of financing provided by Lehman
Brothers Inc. An affiliate of Countrywide Securities Corporation also provides
warehouse financing to the Seller.
Legal Matters
Certain legal matters with respect to the Certificates will be passed upon
for the Depositor by McKee Nelson LLP, Washington, D.C. and for the
Underwriters by Morgan, Lewis & Bockius, New York, NY.
Ratings
It is a condition to the issuance of the Class A and Class A-IO Certificates
that they be rated "AAA" by S&P and Fitch and "Aaa" by Moody's (together with
S&P and Fitch, the "Rating Agencies"). It is a condition to the issuance of
the Class M1 Certificates that they be rated "AA" by
S-79
S&P and Fitch and "Aa2" by Moody's. It is a condition to the issuance of the
Class M2 Certificates that they be rated "A" by S&P and Fitch and "A2" by
Moody's. It is a condition to the issuance of the Class B1 Certificates that
they be rated "BBB" by S&P and Fitch and "Baa2" by Moody's.
The rating of "AAA" and "Aaa" are the highest ratings that the applicable
Rating Agency assigns to securities. A securities rating is not a
recommendation to buy, sell or hold securities and may be subject to revision
or withdrawal at any time by the assigning Rating Agency. A securities rating
addresses the likelihood of receipt by holders of Offered Certificates of
distributions in the amount of scheduled payments on the Mortgage Loans. The
rating takes into consideration the characteristics of the Mortgage Loans and
the structural and legal aspects associated with the Offered Certificates. The
ratings on the Offered Certificates do not represent any assessment of the
likelihood or rate of principal prepayments. The ratings do not address the
possibility that holders of Offered Certificates might suffer a lower than
anticipated yield due to prepayments.
The ratings do not address the likelihood that any Basis Risk Shortfall or
Unpaid Basis Risk Shortfall will be repaid to Certificateholders from Monthly
Excess Cashflow. In addition, the ratings on the Class A-IO Certificates do
not address whether investors in those Certificates will fail to recoup their
initial investment due to a faster than anticipated rate of prepayments.
The security ratings assigned to the Offered Certificates should be
evaluated independently from similar ratings on other types of securities.
The Depositor has not requested a rating of the Offered Certificates by any
rating agency other than the Rating Agencies; there can be no assurance,
however, as to whether any other rating agency will rate the Offered
Certificates or, if it does, what rating would be assigned by such other
rating agency. The rating assigned by such other rating agency to the Offered
Certificates could be lower than the respective ratings assigned by the Rating
Agencies.
S-80
Index of Principal Terms
Defined Term Page
- ------------ ----
A1 Spread ........................................................ S-23
Accrual Period ................................................... S-23
Act .............................................................. S-79
Adjustment Date .................................................. S-37
Advance .......................................................... S-60
Aggregate Expense Rate ........................................... S-29
Aggregate Overcollateralization Release Amount ................... S-31
Applied Loss Amount .............................................. S-33
B1 Spread ........................................................ S-23
Balloon Loans .................................................... S-36
Balloon Payments ................................................. S-36
Basis Risk Payment ............................................... S-28
Basis Risk Reserve Fund .......................................... S-26
Basis Risk Shortfall ............................................. S-25
BBA .............................................................. S-27
Beneficial Owner ................................................. S-18
Book-Entry Certificates .......................................... S-18
Business Day ..................................................... S-18
Cap Contract ..................................................... S-76
capital asset .................................................... S-77
Carryforward Interest ............................................ S-22
Certificate Account .............................................. S-17
Certificate Principal Amount ..................................... S-25
Certificateholder ................................................ S-17
Certificates ..................................................... S-17
Class Notional Amount ............................................ S-17
Class Principal Amount ........................................... S-17
Clearstream Luxembourg ........................................... S-18
Clearstream Luxembourg Participants .............................. S-20
Closing Date ..................................................... S-17
Code ............................................................. S-76
Collection Period ................................................ S-28
Compensating Interest ............................................ S-27
Component Certificate ............................................ S-76
Cooperative ...................................................... S-20
Corporate Trust Office ........................................... S-35
Credit Risk Manager .............................................. S-61
Deferred Amount .................................................. S-35
Definitive Certificate ........................................... S-18
Delinquency Rate ................................................. S-30
Depositor ........................................................ S-18
Designated Telerate Page ......................................... S-27
Distressed Mortgage Loan ......................................... S-62
Distribution Date ................................................ S-18
DTC .............................................................. S-18
ERISA ............................................................ S-78
Euroclear ........................................................ S-18
Euroclear Operator ............................................... S-20
Euroclear Participants ........................................... S-20
European Depositaries ............................................ S-18
Financial Intermediary ........................................... S-19
Defined Term Page
- ------------ ----
Gross Margin ..................................................... S-38
Guide ............................................................ S-50
Homeownership Act ................................................ S-15
Initial Cap ...................................................... S-38
Initial Purchase Date ............................................ S-35
Insurance Fee Rate ............................................... S-37
Insurance Proceeds ............................................... S-28
Interest Rates ................................................... S-23
Interest Remittance Amount ....................................... S-25
Interest Settlement Rate ......................................... S-27
Interest-only Certificates ....................................... S-17
IRS .............................................................. S-77
LIBOR ............................................................ S-27
LIBOR Business Day ............................................... S-27
LIBOR Certificates ............................................... S-17
LIBOR Determination Date ......................................... S-27
LIBOR Mortgage Loans ............................................. S-37
Liquidated Mortgage Loan ......................................... S-33
Loan-to-Value Ratio .............................................. S-36
Lower Tier REMIC ................................................. S-76
M1 Principal Distribution Amount ................................. S-31
M1 Spread ........................................................ S-23
M1 Target Amount ................................................. S-32
M2 Principal Distribution Amount ................................. S-31
M2 Spread ........................................................ S-23
M2 Target Amount ................................................. S-32
Maximum Interest Rate ............................................ S-26
Maximum Rate ..................................................... S-38
MGIC ............................................................. S-38
Minimum Rate ..................................................... S-38
Modeling Assumptions ............................................. S-70
Monthly Excess Cashflow .......................................... S-33
Monthly Excess Interest .......................................... S-25
Mortgage Loans ................................................... S-17
Mortgage Pool .................................................... S-17
Mortgage Rate .................................................... S-24
Net Funds Cap .................................................... S-24
Net Liquidation Proceeds ......................................... S-28
Net Mortgage Rate ................................................ S-24
Net Prepayment Interest Shortfalls ............................... S-27
NIMS Insurer ..................................................... S-18
NIMS Securities .................................................. S-17
NIMS Transaction ................................................. S-17
Notional Amount .................................................. S-23
Offered Certificates ............................................. S-17
Offered Subordinate Certificates ................................. S-17
OID .............................................................. S-76
Optimal Interest Remittance Amount ............................... S-24
Optional Termination ............................................. S-35
Overcollateralization Amount ..................................... S-31
S-81
Defined Term Page
- ------------ ----
Overcollateralization Cumulative Loss Trigger Event .............. S-30
Overcollateralization Deficiency ................................. S-31
Participant ...................................................... S-19
Payahead ......................................................... S-25
Penalty Period ................................................... S-37
Periodic Cap ..................................................... S-38
Plan ............................................................. S-78
PMI Insurer ...................................................... S-38
PMI Policy ....................................................... S-38
Pool Balance ..................................................... S-24
Prepayment Assumption ............................................ S-70
Prepayment Interest Shortfall .................................... S-26
Prepayment Period ................................................ S-28
Prepayment Premium ............................................... S-37
Principal Distribution Amount .................................... S-27
Principal Remittance Amount ...................................... S-28
Purchase Price ................................................... S-35
Rating Agencies .................................................. S-79
Realized Loss .................................................... S-32
Record Date ...................................................... S-18
Relevant Depositary .............................................. S-18
Residual Certificate ............................................. S-17
Rolling Three Month Delinquency Rate ............................. S-30
Rules ............................................................ S-19
Defined Term Page
- ------------ ----
Scheduled Payment ................................................ S-28
Scheduled Principal Balance ...................................... S-28
Senior Certificates .............................................. S-17
Senior Enhancement Percentage .................................... S-31
Senior Principal Distribution Amount ............................. S-30
Senior Target Amount ............................................. S-32
Servicing Advance ................................................ S-60
Servicing Fee .................................................... S-59
Servicing Fee Rate ............................................... S-59
Six-Month LIBOR Index ............................................ S-38
SMMEA ............................................................ S-78
Stepdown Date .................................................... S-30
Subordinate Certificates ......................................... S-17
Substitution Amount .............................................. S-25
Target Amount .................................................... S-30
Targeted Overcollateralization Amount ............................ S-31
Tax Counsel ...................................................... S-76
Terms and Conditions ............................................. S-21
Trigger Event .................................................... S-32
Trust Fund ....................................................... S-17
Trustee .......................................................... S-35
Trustee Fee Rate ................................................. S-35
Underwriting Agreement ........................................... S-79
Unpaid Basis Risk Shortfall ...................................... S-30
Upper Tier REMIC ................................................. S-76
S-82
Annex A
Global Clearance, Settlement and Tax Documentation Procedures
Except in certain limited circumstances, the globally offered Aegis Mortgage
Loan Asset-Backed Certificates, Series 2003-1 (the Global Securities) will be
available only in book-entry form. Investors in the Global Securities may hold
such Global Securities through any of DTC, Clearstream Luxembourg or
Euroclear. The Global Securities will be tradable as home market instruments
in both the European and U.S. domestic markets. Initial settlement and all
secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities through
Clearstream Luxembourg and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities through
DTC will be conducted according to the rules and procedures applicable to U.S.
corporate debt obligations and prior mortgage loan asset backed certificates
issues.
Secondary cross-market trading between Clearstream Luxembourg or Euroclear
and DTC Participants holding Certificates will be effected on a delivery-
against-payment basis through the respective Depositaries of Clearstream
Luxembourg and Euroclear (in such capacity) and as DTC Participants.
A holder that is not a United States person (as described below) of Global
Securities will be subject to U.S. withholding taxes unless such holders meet
certain requirements and deliver appropriate U.S. tax documents to the
securities clearing organizations or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities
will be represented through financial institutions acting on their behalf as
direct and indirect Participants in DTC. As a result, Clearstream Luxembourg
and Euroclear will hold positions on behalf of their participants through
their respective Relevant Depositaries, which in turn will hold such positions
in accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to prior mortgage loan asset backed
certificates issues. Investor securities custody accounts will be credited
with their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Clearstream
Luxembourg or Euroclear accounts will follow the settlement procedures
applicable to conventional eurobonds, except that there will be no temporary
global security and no lock-up or restricted period. Global Securities will be
credited to the securities custody accounts on the settlement date against
payment in same-day funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired
value date.
Trading Between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset backed certificates issues in same-day funds.
S-A-1
Trading Between Clearstream Luxembourg and/or Euroclear
Participants. Secondary market trading between Clearstream Luxembourg
Participants or Euroclear Participants will be settled using the procedures
applicable to conventional eurobonds in same-day funds.
Trading Between DTC Seller and Clearstream Luxembourg or Euroclear
Purchaser. When Global Securities are to be transferred from the account of a
DTC Participant to the account of a Clearstream Luxembourg Participant or a
Euroclear Participant, the purchaser will send instructions to Clearstream
Luxembourg or Euroclear through a Clearstream Luxembourg Participant or
Euroclear Participant at least one business day prior to settlement.
Clearstream Luxembourg or Euroclear will instruct the respective Relevant
Depositary, as the case may be, to receive the Global Securities against
payment. Payment will include interest accrued on the Global Securities from
and including the last coupon payment date to and excluding the settlement
date, on the basis of either the actual number of days in such accrual period
and a year assumed to consist of 360 days or a 360-day year of twelve 30-day
months as applicable to the related class of Global Securities. For
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. Payment will
then be made by the respective Relevant Depositary of the DTC Participant's
account against delivery of the Global Securities. After settlement has been
completed, the Global Securities will be credited to the respective clearing
system and by the clearing system, in accordance with its usual procedures, to
the Clearstream Luxembourg Participant's or Euroclear Participant's account.
The securities credit will appear the next day (European time) and the cash
debt will be back-valued to, and the interest on the Global Securities will
accrue from, the value date (which would be the preceding day when settlement
occurred in New York). If settlement is not completed on the intended value
date (i.e., the trade fails), the Clearstream Luxembourg or Euroclear cash
debt will be valued instead as of the actual settlement date.
Clearstream Luxembourg Participants and Euroclear Participants will need to
make available to the respective clearing systems the funds necessary to
process same-day funds settlement. The most direct means of doing so is to
preposition funds for settlement, either from cash on hand or existing lines
of credit, as they would for any settlement occurring within Clearstream
Luxembourg or Euroclear. Under this approach, they may take on credit exposure
to Clearstream Luxembourg or Euroclear until the Global Securities are
credited to their accounts one day later.
As an alternative, if Clearstream Luxembourg or Euroclear has extended a
line of credit to them, Clearstream Luxembourg Participants or Euroclear
Participants can elect not to preposition funds and allow that credit line to
be drawn upon the finance settlement. Under this procedure, Clearstream
Luxembourg Participants or Euroclear Participants purchasing Global Securities
would incur overdraft charges for one day, assuming they cleared the overdraft
when the Global Securities were credited to their accounts. However, interest
on the Global Securities would accrue from the value date. Therefore, in many
cases the investment income on the Global Securities earned during that one-
day period may substantially reduce or offset the amount of such overdraft
charges, although this result will depend on each Clearstream Luxembourg
Participant's or Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities
to the respective European Depositary for the benefit of Clearstream
Luxembourg Participants or Euroclear Participants. The sale proceeds will be
available to the DTC seller on the settlement date. Thus, to the DTC
Participants a cross-market transaction will settle no differently than a
trade between two DTC Participants.
Trading between Clearstream Luxembourg or Euroclear Seller and DTC
Purchaser. Due to time zone differences in their favor, Clearstream Luxembourg
Participants and Euroclear Participants may employ their customary procedures
for transactions in which Global Securities are to be transferred by the
respective clearing system, through the respective Relevant Depositary, to a
DTC Participant. The
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seller will send instructions to Clearstream Luxembourg or Euroclear through a
Clearstream Luxembourg Participant or Euroclear Participant at least one
business day prior to settlement. In these cases Clearstream Luxembourg or
Euroclear will instruct the respective Relevant Depositary, as appropriate, to
deliver the Global Securities to the DTC Participant's account against
payment. Payment will include interest accrued on the Global Securities from
and including the last coupon payment to and excluding the settlement date on
the basis of either the actual number of days in such accrual period and a
year assumed to consist of 360 days or a 360-day year of twelve 30-day months
as applicable to the related class of Global Securities. For transactions
settling on the 31st of the month, payment will include interest accrued to
and excluding the first day of the following month. The payment will then be
reflected in the account of the Clearstream Luxembourg Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in
the Clearstream Luxembourg Participant's or Euroclear Participant's account
would be back-valued to the value date (which would be the preceding day, when
settlement occurred in New York). Should the Clearstream Luxembourg
Participant or Euroclear Participant have a line of credit with its respective
clearing system and elect to be in debt in anticipation of receipt of the sale
proceeds in its account, the back-valuation will extinguish any overdraft
incurred over that one day period. If settlement is not completed on the
intended value date (i.e., the trade fails), receipt of the cash proceeds in
the Clearstream Luxembourg Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use Clearstream Luxembourg or Euroclear and that
purchase Global Securities from DTC Participants for delivery to Clearstream
Luxembourg Participants or Euroclear Participants should note that these
trades would automatically fail on the sale side unless affirmative action
were taken. At least three techniques should be readily available to eliminate
this potential problem:
(a) borrowing through Clearstream Luxembourg or Euroclear for one day
(until the purchase side of the day trade is reflected in their Clearstream
Luxembourg or Euroclear accounts) in accordance with the clearing system's
customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant no
later than one day prior to the settlement, which would give the Global
Securities sufficient time to be reflected in their Clearstream Luxembourg
or Euroclear account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at least
one day prior to the value date for the sale to the Clearstream Luxembourg
or Euroclear Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A holder that is not a United States person within the meaning of
Section 7701(a)(30) of the Internal Revenue Code of 1986 holding a book-entry
certificate through Clearstream, Euroclear or DTC may be subject to U.S.
withholding tax at a rate of 30% unless such holder provides certain
documentation to the Trustee or to the U.S. entity required to withhold tax
(the U.S. withholding agent) establishing an exemption from withholding. A
holder that is not a United States person may be subject to 30% withholding
unless:
I. the Trustee or the U.S. withholding agent receives a statement--
(a) from the holder on Internal Revenue Service (IRS) Form W-8BEN (or any
successor form) that--
(i) is signed by the certificateholder under penalties of perjury,
(ii) certifies that such owner is not a United States person, and
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(iii) provides the name and address of the certificateholder, or
(b) from a securities clearing organization, a bank or other financial
institution that holds customers' securities in the ordinary course of its
trade or business that--
(i) is signed under penalties of perjury by an authorized
representative of the financial institution,
(ii) states that the financial institution has received an IRS Form
W-8BEN (or any successor form) from the certificateholder or that another
financial institution acting on behalf of the certificateholder has
received such IRS Form W-8BEN (or any successor form),
(iii) provides the name and address of the certificateholder, and
(iv) attaches the IRS Form W-8BEN (or any successor form) provided by
the certificateholder;
II. the holder claims an exemption or reduced rate based on a treaty and
provides a properly executed IRS Form W-8BEN (or any successor form) to the
Trustee or the U.S. withholding agent;
III. the holder claims an exemption stating that the income is effectively
connected to a U.S. trade or business and provides a properly executed IRS
Form W-8ECI (or any successor form) to the Trustee or the U.S. withholding
agent; or
IV. the holder is a nonwithholding partnership and provides a properly
executed IRS Form W-8IMY (or any successor form) with all necessary
attachments to the Trustee or the U.S. withholding agent. Certain pass-through
entities that have entered into agreements with the Internal Revenue Service
(for example qualified intermediaries) may be subject to different
documentation requirements; it is recommended that such holders consult with
their tax advisors when purchasing the Certificates.
A holder holding book-entry certificates through Clearstream or Euroclear
provides the forms and statements referred to above by submitting them to the
person through which he holds an interest in the book-entry certificates,
which is the clearing agency, in the case of persons holding directly on the
books of the clearing agency. Under certain circumstances a Form W-8BEN, if
furnished with a taxpayer identification number, (TIN), will remain in effect
until the status of the beneficial owner changes, or a change in circumstances
makes any information on the form incorrect. A Form W-8BEN, if furnished
without a TIN, and a Form W-8ECI will remain in effect for a period starting
on the date the form is signed and ending on the last day of the third
succeeding calendar year, unless a change in circumstances makes any
information on the form incorrect.
In addition, all holders holding book-entry certificates through
Clearstream, Euroclear or DTC may be subject to backup withholding at a rate
of up to 31% unless the holder:
I. provides a properly executed IRS Form W-8BEN, Form W-8ECI or Form W-
8IMY (or any successor forms) if that person is not a United States person;
II. provides a properly executed IRS Form W-9 (or any substitute form)
if that person is a United States person; or
III. is a corporation, within the meaning of Section 7701(a) of the
Internal Revenue Code of 1986, or otherwise establishes that it is a
recipient exempt from United States backup withholding.
This summary does not deal with all aspects of federal income tax
withholding or backup withholding that may be relevant to investors that are
not United States persons within the meaning of Section 7701(a)(30) of the
Internal Revenue Code. Such investors are advised to consult their own tax
advisors for specific tax advice concerning their holding and disposing of the
book-entry certificates.
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The term United States person means (1) a citizen or resident of the United
States, (2) a corporation or partnership organized in or under the laws of the
United States or any state or the District of Columbia (other than a
partnership that is not treated as a United States person under any applicable
Treasury regulations), (3) an estate the income of which is includible in
gross income for United States tax purposes, regardless of its source, (4) 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, and
(5) to the extent provided in regulations, certain trusts in existence on
August 20, 1996 that are treated as United States persons prior to such date
and that elect to continue to be treated as United States persons.
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PROSPECTUS
[AEGIS MORTGAGE CORP. LOGO]
Aegis Asset Backed Securities Corporation
Depositor
Mortgage and Asset Backed Securities
(Issuable in Series)
--------------------
The Trusts
Each trust will be established to hold assets in its trust fund transferred
to it by Aegis Asset Backed Securities Corporation. The assets in each trust
fund will be specified in the prospectus supplement for the particular trust
and will generally consist of:
o first lien mortgage loans secured by one- to four-family residential
properties or participations in that type of loan,
o private mortgage-backed securities backed by first and/or
subordinate lien mortgage loans secured by one- to four-family
residential properties or participations in that type of loan, or
o closed-end and/or revolving home equity loans, secured in whole or
in part by first and/or subordinate liens on one- to four-family
residential properties or participations in that type of loan.
The Securities:
The securities of a series will consist of certificates which evidence
beneficial ownership of a trust established by the depositor, and/or notes
secured by the assets of a trust fund. The depositor or a trust established by
the depositor will sell the securities pursuant to a prospectus supplement.
The securities will be grouped into one or more series, each having its own
distinct designation. Each series of securities will be issued in one or more
classes and each class will evidence the right to receive a specified portion
of future payments on the assets in the trust fund that the series relates to.
A prospectus supplement for a series will specify all the terms of the series
and each of the classes in the series.
Offers of Securities:
The securities may be offered to the public through several different
methods, including offerings through underwriters.
You should carefully consider the risk factors beginning on page 4 of this
prospectus.
The SEC and state securities regulators have not approved or disapproved of
these securities or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
April 17, 2003
IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS AND EACH ACCOMPANYING
PROSPECTUS SUPPLEMENT
Information about each series of securities is contained in two separate
documents:
o this prospectus, which provides general information, some of which may
not apply to a particular series; and
o the accompanying prospectus supplement for a particular series, which
describes the specific terms of the securities of that series.
The prospectus supplement will contain information about a particular series
that supplements the information contained in this prospectus, and you should
rely on that supplementary information in the prospectus supplement.
You should rely only on the information in this prospectus and the
accompanying prospectus supplement. We have not authorized anyone to provide
you with information that is different from that contained in this prospectus
and the accompanying prospectus supplement.
If you require additional information, the mailing address of our principal
executive offices is Investor Relations Department, Aegis Asset Backed
Securities Corporation, 3250 Briar Park, Suite 400, Houston, Texas 77042 and
the telephone number is (713) 787-0100. For other means of acquiring
additional information about us or a series of securities, see "Incorporation
of Certain Documents by Reference" beginning on page 20.
2
Table of Contents
Page
----
Risk Factors ...................................................... 4
The Trust Fund .................................................... 14
General .......................................................... 14
The Loans ........................................................ 15
Participation Certificates ....................................... 18
Private Mortgage-Backed Securities ............................... 18
Substitution of Trust Fund Assets ................................ 20
Available Information ............................................. 20
Incorporation of Certain Documents by Reference ................... 20
Reports to Securityholders ........................................ 21
Use of Proceeds ................................................... 21
The Depositor ..................................................... 21
Loan Program ...................................................... 21
Underwriting Standards ........................................... 21
Qualifications of Unaffiliated Sellers ........................... 25
Representations by Sellers; Repurchases .......................... 25
Description of the Securities ..................................... 26
General .......................................................... 27
Distributions on Securities ...................................... 28
Advances ......................................................... 30
Reports to Securityholders ....................................... 31
Categories of Classes of Securities .............................. 32
Indices Applicable to Floating Rate and Inverse Floating Rate
Classes ........................................................ 34
Book-entry Registration of Securities ............................ 37
Credit Enhancement ................................................ 41
General .......................................................... 41
Subordination .................................................... 42
Letter of Credit ................................................. 42
Insurance Policies, Surety Bonds and Guaranties .................. 43
Over-collateralization ........................................... 43
Reserve Accounts ................................................. 43
Pool Insurance Policies .......................................... 45
Special Hazard Insurance Policies ................................ 46
Bankruptcy Bonds ................................................. 47
Cross Support .................................................... 47
Financial Instruments ............................................ 48
Yield and Prepayment Considerations ............................... 48
The Agreements .................................................... 51
Assignment of the Trust Fund Assets .............................. 51
Payments on Loans; Deposits to Security Account .................. 53
Pre-Funding Account .............................................. 54
Sub-servicing by Sellers ......................................... 55
Collection Procedures ............................................ 55
Hazard Insurance ................................................. 56
Realization upon Defaulted Loans ................................. 58
Servicing and Other Compensation and Payment of Expenses ......... 58
Page
----
Evidence as to Compliance ........................................ 58
Certain Matters Regarding the Servicer and the Depositor ......... 59
Events of Default; Rights upon Event of Default .................. 60
Amendment ........................................................ 62
Termination; Optional Termination ................................ 63
The Trustee ...................................................... 63
The Master Servicer .............................................. 64
Legal Aspects of the Loans ........................................ 64
General .......................................................... 64
Foreclosure ...................................................... 65
Environmental Risks .............................................. 67
Rights of Redemption ............................................. 68
Anti-deficiency Legislation and Other Limitations on Lenders ..... 68
Due-on-sale Clauses .............................................. 69
Enforceability of Prepayment and Late Payment Fees ............... 70
Applicability of Usury Laws ...................................... 70
Soldiers' and Sailors' Civil Relief Act .......................... 70
Junior Mortgages and Rights of Senior Mortgagees ................. 71
Consumer Protection Laws ......................................... 72
Home Ownership and Equity Protection Act of 1994 ................. 72
Material Federal Income Tax Consequences .......................... 72
Types of Securities .............................................. 73
Taxation of Securities Treated as Debt Instruments ............... 76
REMIC Residual Certificates ...................................... 81
FASIT Ownership Certificates ..................................... 87
Grantor Trusts Certificates ...................................... 88
Partner Certificates ............................................. 90
Special Tax Attributes ........................................... 92
Backup Withholding ............................................... 94
State and Local Tax Considerations ................................ 94
ERISA Considerations .............................................. 95
General .......................................................... 95
Legal Investment .................................................. 99
Method of Distribution ............................................ 100
Legal Matters ..................................................... 101
Financial Information ............................................. 101
Rating ............................................................ 101
Global Clearance, Settlement and Tax Documentation Procedures ..... 103
Initial Settlement ................................................ 103
Secondary Market Trading .......................................... 104
Certain U.S. Federal Income Tax Documentation Requirements ........ 106
Index of Defined Terms ............................................ 107
3
Risk Factors
You should carefully consider the following information since it identifies
known material sources of risk associated with an investment in the
securities.
Limited Source of Payments -- No
Recourse To Sellers, Depositor
or Servicer . . . . . . . . . The applicable prospectus supplement may
provide that securities will be payable from
other trust funds in addition to their
associated trust fund, but if it does not,
they will be payable solely from their
associated trust fund. If the trust fund does
not have sufficient assets to distribute the
full amount due to you as a securityholder,
your yield will be impaired, and perhaps even
the return of your principal may be impaired,
without your having recourse to anyone else.
Furthermore, at the times specified in the
applicable prospectus supplement, some assets
of the trust fund may be released and paid out
to other people, such as the depositor, a
servicer, a credit enhancement provider, or
any other person entitled to payments from the
trust fund. Those assets will no longer be
available to make payments to you. Those
payments are generally made after other
specified payments that may be set forth in
the applicable prospectus supplement have been
made.
You will not have any recourse against the
depositor or any servicer if you do not
receive a required distribution on the
securities. Nor will you have recourse against
the assets of the trust fund of any other
series of securities.
The securities will not represent an interest
in the depositor, any servicer, any seller to
the depositor, or anyone else except the trust
fund. The only obligation of the depositor to
a trust fund comes from certain
representations and warranties made by it
about assets transferred to the trust fund. If
these representations and warranties turn out
to be untrue, the depositor may be required to
repurchase some of the transferred assets.
Aegis Asset Backed Securities Corporation,
which is the depositor, does not have
significant assets and is unlikely to have
significant assets in the future. Therefore,
if the depositor were required to repurchase a
loan because of a breach of a representation,
its only sources of funds for the repurchase
would be funds obtained from enforcing a
corresponding obligation from the seller or
originator of the loan.
The only obligations of the master servicer to
a trust fund (other than its master servicing
obligations) come from certain representations
and warranties made by it in connection with
its loan servicing activities.
The only obligations to a trust fund of a
seller of loans to the depositor comes from
certain representations and warranties made by
it in connection with its sale of the loans
and certain document delivery requirements. If
these representations and warranties turn out
to be untrue, or the seller fails to deliver
required documents, it may be required to
repurchase or substitute for some of the
4
loans. However, the seller may not have the
financial ability to make the required
repurchase or substitution.
Credit Enhancement May Not Be
Sufficient To Protect You
from Losses . . . . . . . . . Credit enhancement is intended to reduce the
effect of loan losses. But credit enhancements
may benefit only some classes of a series of
securities and the amount of any credit
enhancement will be limited as described in
the applicable prospectus supplement.
Furthermore, the amount of a credit
enhancement may decline over time pursuant to
a schedule or formula or otherwise, and could
be depleted from payments or for other reasons
before the securities covered by the credit
enhancement are paid in full. In addition, a
credit enhancement may not cover all potential
sources of loss. For example, a credit
enhancement may or may not cover fraud or
negligence by a loan originator or other
parties. Also, the trustee may be permitted to
reduce, substitute for, or even eliminate all
or a portion of a credit enhancement so long
as the rating agencies that have rated the
securities at the request of the depositor
indicate that the reduction would not cause
them to change adversely their rating of the
securities. Consequently, securityholders may
suffer losses even though a credit enhancement
exists and its provider does not default.
Nature of Mortgages
Junior Status of Liens
Securing Home Equity Loans
Could Adversely Affect You . . A portion of the mortgages and deeds of trust
may include junior liens subordinate to the
rights of the mortgagee under the related
senior mortgage(s) or deed(s) of trust.
Accordingly, the proceeds from any
liquidation, insurance or condemnation will be
available to satisfy the outstanding balance
of the junior lien only to the extent that the
claims of the related senior mortgagees have
been satisfied in full, including any related
foreclosure costs. In addition, if a junior
mortgagee forecloses on the property securing
a junior mortgage, it forecloses subject to
any senior mortgage and must take one of the
following steps to protect its interest in the
property:
o pay the senior mortgage in full at or prior
to the foreclosure sale, or
o assume the payments on the senior mortgage
in the event the mortgagor is in default
under the senior mortgage.
The trust fund may effectively be prevented
from foreclosing on the related property since
it will have no funds to satisfy any senior
mortgages or make payments due to any senior
mortgagees.
Some states have imposed legal limits on the
remedies of a secured lender in the event that
the proceeds of any sale under a deed of trust
or other foreclosure proceedings are
insufficient to pay amounts owed to that
secured lender. In some states, including
California, if a lender simultaneously
originates a loan secured by a senior lien on
a particular property and a loan secured by a
junior lien on the same property, that lender
as the
5
holder of the junior lien may be precluded
from obtaining a deficiency judgment with
respect to the excess of:
o the aggregate amount owed under both the
senior and junior loans over
o the proceeds of any sale under a deed of
trust or other foreclosure proceedings.
See "Legal Aspects of the Loans -- Anti-
Deficiency Legislation; Bankruptcy Laws;
Tax Liens."
Declines in Property Values
May Adversely Affect You . . . The value of the properties underlying the
loans held in the trust fund may decline over
time. Among the factors that could adversely
affect the value of the properties are:
o an overall decline in the residential real
estate market in the areas in which they are
located,
o a decline in their general condition from
the failure of borrowers to maintain their
property adequately, and
o natural disasters that are not covered by
insurance, such as earthquakes and floods.
In the case of home equity loans, declining
property values could diminish or extinguish
the value of a junior mortgage before reducing
the value of a senior mortgage on the same
property.
If property values decline, the actual rates
of delinquencies, foreclosures, and losses on
all underlying loans could be higher than
those currently experienced in the mortgage
lending industry in general. These losses, to
the extent not otherwise covered by a credit
enhancement, will be borne by the holder of
one or more classes of securities.
Delays In Liquidation May
Adversely Affect You . . . . . Even if the properties underlying the loans
held in the trust fund provide adequate
security for the loans, substantial delays
could occur before defaulted loans are
liquidated and their proceeds are forwarded to
investors. Property foreclosure actions are
regulated by state statutes and rules and are
subject to many of the delays and expenses of
other lawsuits if defenses or counterclaims
are made, sometimes requiring several years to
complete. Furthermore, in some states if the
proceeds of the foreclosure are insufficient
to repay the loan, the borrower is not liable
for the deficit. Thus, if a borrower defaults,
these restrictions may impede the trust's
ability to dispose of the property and obtain
sufficient proceeds to repay the loan in full.
In addition, the servicer will be entitled to
deduct from liquidation proceeds all expenses
reasonably incurred in attempting to recover
on the defaulted loan, including legal fees
and costs, real estate taxes, and property
maintenance and preservation expenses.
6
Disproportionate Effect of
Liquidation Expenses May Liquidation expenses of defaulted loans
Adversely Affect You . . . . . generally do not vary directly with the
outstanding principal balance of the loan at
the time of default. Therefore, if a servicer
takes the same steps for a defaulted loan
having a small remaining principal balance as
it does for a defaulted loan having a large
remaining principal balance, the amount
realized after expenses is smaller as a
percentage of the outstanding principal
balance of the small loan than it is for the
defaulted loan having a large remaining
principal balance.
Consumer Protection Laws May
Adversely Affect You . . . . . Because the mortgage loans are originated
nationwide, the originator of the loans in the
trust fund must also comply with the laws and
regulations, as well as judicial and
administrative decisions, of all relevant
state and local jurisdictions. State laws
generally regulate interest rates and other
charges, require specific disclosures, and
require licensing of mortgage loan originators
and servicers. In addition, most states have
other laws and public policies for the
protection of consumers that prohibit unfair
and deceptive practices in the origination,
servicing, and collection of mortgage loans.
The volume of new or modified laws and
regulations has increased in recent years,
and, in addition, individual cities and
counties have begun to enact laws that
restrict loan origination activities, and in
some cases loan servicing activities, in those
cities and counties. The laws and regulations
of each of these jurisdictions are different,
complex and, in some cases, may be in direct
conflict with each other.
The loans held in the trust fund may also be
subject to certain federal laws, including:
o the Federal Truth in Lending Act and its
regulations, which require disclosures to
the borrowers regarding the terms of any
mortgage loan;
o the Equal Credit Opportunity Act and its
regulations, which prohibit discrimination
in the extension of credit on the basis of
age, race, color, sex, religion, marital
status, national origin, receipt of public
assistance, or the exercise of any right
under the Consumer Credit Protection Act;
and
o the Fair Credit Reporting Act, which
regulates the use and reporting of
information related to the borrower's credit
experience.
Home Equity Loan Consumer Protection Act. The
Home Equity Loan Consumer Protection Act of
1988, which requires additional application
disclosures, limits changes that may be made
to the loan documents without the borrower's
consent and restricts a lender's ability to
declare a default or to suspend or reduce a
borrower's credit limit to certain enumerated
events.
The Riegle Act. Certain mortgage loans may be
subject to the Riegle Community Development
and Regulatory Improvement Act of 1994, known
as the Riegle Act, which incorporates the
7
Home Ownership and Equity Protection Act of
1994. These provisions impose additional
disclosure and other requirements on creditors
with respect to non-purchase money mortgage
loans with high interest rates or high up-
front fees and charges. The provisions of the
Riegle Act apply on a mandatory basis to all
mortgage loans originated on or after
October 1, 1995. These provisions can impose
specific statutory liabilities upon creditors
who fail to comply with their provisions and
may affect the enforceability of the related
loans. In addition, any assignee of the
creditor, including the trust fund, would
generally be subject to all claims and
defenses that the consumer could assert
against the creditor, including the right to
rescind the mortgage loan.
Failure by the originator or servicer to
comply with these federal, state and local
laws can in some circumstances give rise to
legal defenses to loan enforceability;
potential refunds to borrowers; loss of state
licenses or other approved servicer status;
class action lawsuits; administrative
enforcement actions that may delay or
otherwise materially and adversely affect the
servicer's ability to collect or enforce
mortgage loans; and claims against the trust
fund. Losses on loans from the application of
those laws that are not otherwise covered by a
credit enhancement will be borne by the
holders of one or more classes of securities.
Losses on Balloon Payment
Mortgages Are Borne by You . . Some.of the mortgage loans held in the trust
fund may not be fully amortizing over their
terms to maturity and, thus, will require
substantial principal payments (that is,
balloon payments) at their stated maturity.
Loans with balloon payments involve a greater
degree of risk than fully amortizing loans
because typically the borrower must be able to
refinance the loan or sell the property to
make the balloon payment at maturity. The
ability of a borrower to do this will depend
on factors such as mortgage rates at the time
of sale or refinancing, the borrower's equity
in the property, the relative strength of the
local housing market, the financial condition
of the borrower, and tax laws. Losses on these
loans that are not otherwise covered by a
credit enhancement will be borne by the
holders of one or more classes of
certificates.
Modification of mortgage
loans may delay or reduce
certificate payments . . . . . With respect to a mortgage loan on which a
material default has occurred or a payment
default is imminent, the servicer may enter
into a forbearance or modification agreement
with the borrower. The terms of any
forbearance or modification agreement may
affect the amount and timing of payment on the
mortgage loan and, consequently, the amount
and timing of payment on one or more classes
of the related series of certificates. For
example, a modification agreement that results
in a lower mortgage interest rate would lower
the pass through rate of any related class of
certificates that accrues interest at a rate
based on the weighted average net rate of the
mortgage loans.
8
Your Risk of Loss May Be
Higher than You Expect If
Your Securities Are Backed
by Loans that Were
Underwritten to Standards
which do not Conform to the
Standards of Freddie Mac or
Fannie Mae . . . . . . . . . . Substantially all of the loans in the trust
fund will have been originated under standards
that were less stringent than the standards
generally acceptable to Freddie Mac and Fannie
Mae with regard to the borrower's credit
standing and repayment ability. The related
borrowers may have payment histories and debt-
to-income ratios which would not satisfy
Freddie Mac and Fannie Mae underwriting
guidelines and may have a record of major
derogatory credit items such as outstanding
judgments or prior bankruptcies. In addition,
on a case by case basis, the related seller
may determine that, based upon compensating
factors, a prospective borrower not strictly
qualifying under its applicable underwriting
risk category guidelines warrants an
underwriting exception. These exceptions would
represent a further departure from the Freddie
Mac and Fannie Mae standards.
As a result of the application of less
stringent underwriting standards, certain
mortgage loans in a mortgage pool may
experience rates of delinquency, foreclosure
and bankruptcy that are higher, and that may
be substantially higher, than those
experienced by mortgage loans underwritten in
a more traditional manner. Furthermore,
changes in the values of the related mortgaged
properties may have a greater effect on the
delinquency, foreclosure, bankruptcy and loss
experience of these mortgage loans than on
mortgage loans originated in a more
traditional manner. No assurance can be given
that the values of the related mortgage
properties have remained or will remain at the
levels in effect on the dates of origination
of the related mortgage loans.
Your Risk of Loss May Be
Higher than You Expect If
Your Securities Are Backed
by Partially Unsecured
Home Equity Loans . . . . . . The trust fund may also include home equity
loans that were originated with loan-to-value
ratios or combined loan-to-value ratios in
excess of the value of the related mortgaged
property. Under these circumstances, the trust
fund could be treated as a general unsecured
creditor as to any unsecured portion of any
related loan. In the event of a default under
a loan that is unsecured in part, the trust
fund will have recourse only against the
borrower's assets generally for the unsecured
portion of the loan, along with all other
general unsecured creditors of the borrower.
The Prepayment Rate on Home
Equity Loans is Uncertain . . Generally, if prevailing interest rates fall
below the coupon rates on the loans, the loans
are likely to be subject to higher prepayment
rates than if prevailing rates remain at or
above the coupon rates on the loans.
Conversely, if prevailing interest rates
9
rise above the coupon rate on the home equity
loans, the rate of prepayments may decrease.
The average life of your securities and, if
purchased at other than par, the yields
realized by you will be sensitive to levels of
payment (including prepayments) on the loans.
In general, if you purchase a security at a
premium to the outstanding principal amount of
the security, the yield on your security may
be adversely affected by a higher than
anticipated level of prepayments of the loans.
Conversely, if you purchase a security at a
discount to the outstanding principal balance
of the security, the yield on your security
may be adversely affected by a lower than
anticipated level of prepayments.
You May be Unable to Reinvest
Distributions in Comparable
Investments . . . . . . . . . Asset-backed securities usually produce more
returns of principal to investors when market
interest rates fall below the interest rates
on the loans and produce less returns on
principal when market interest rates rise
above the interest rates on the loans. If
borrowers refinance their loans as a result of
lower interest rates, you will receive an
unanticipated payment of principal. As a
result, you are likely to receive more money
to reinvest at a time when other investments
generally are producing a lower yield than
that on the securities, and you are likely to
receive less money to reinvest when other
investments generally are producing a higher
yield than that on the securities. You will
bear the risk that the timing and amount of
distributions on your securities will prevent
you from obtaining your desired yield.
You Could Be Adversely Affected
by Violations of Environmental
Laws . . . . . . . . . . . . . Federal, state, and local laws and regulations
impose a wide range of requirements on
activities that may affect the environment,
health, and safety. In some circumstances,
these laws and regulations impose obligations
on owners or operators of residential
properties such as those that secure the loans
held in the trust fund. Failure to comply with
these laws and regulations can result in fines
and penalties that could be assessed against
the trust as owner of the related property.
In some states, a lien on the property due to
contamination has priority over the lien of an
existing mortgage.
Ratings of the Securities
Do Not Assure Their Payment;
Ratings May be Lowered or
Withdrawn at Any Time . . . . Any class of securities issued under this
prospectus and the accompanying prospectus
supplement may be rated by one or more
nationally recognized rating agencies. A
rating is based on the adequacy of the value
of the trust assets and any credit enhancement
for that class, and reflects the rating
agency's assessment of how likely it is that
holders of the class of securities will
receive the payments to which they are
entitled. A rating does not constitute an
assessment of how likely it is that principal
prepayments on the underlying loans will be
made, the
10
degree to which the rate of prepayments might
differ from that originally anticipated, or
the likelihood that the securities will be
redeemed early. A rating is not a
recommendation to purchase, hold, or sell
securities because it does not address the
market price of the securities or the
suitability of the securities for any
particular investor.
A rating may not remain in effect for any
predetermined period of time and the rating
agency could lower or withdraw the rating
entirely in the future. For example, the
rating agency could lower or withdraw its
rating due to:
o a decrease in the adequacy of the value of
the trust assets or any related credit
enhancement,
o an adverse change in the financial or other
condition of a credit enhancement provider,
or
o a change in the rating of the credit
enhancement provider's long-term debt.
The amount, type, and nature of credit
enhancement established for a class of
securities will be determined on the basis of
criteria established by each rating agency
rating classes of the securities. These
criteria are sometimes based upon an actuarial
analysis of the behavior of similar loans in a
larger group. That analysis is often the basis
upon which each rating agency determines the
amount of credit enhancement required for a
class. The historical data supporting any
actuarial analysis may not accurately reflect
future experience, and the data derived from a
large pool of similar loans may not accurately
predict the delinquency, foreclosure, or loss
experience of any particular pool of mortgage
loans. Mortgaged properties may not retain
their values. If residential real estate
markets experience an overall decline in
property values such that the outstanding
principal balances of the loans held in a
particular trust fund and any secondary
financing on the related mortgaged properties
become equal to or greater than the value of
the mortgaged properties (or in the case that
the differential is increased where the loan
to value was greater than 100%), the rates of
delinquencies, foreclosures, and losses could
be higher than those now generally experienced
in the mortgage lending industry. In addition,
adverse economic conditions may affect timely
payment by mortgagors on their loans whether
or not the conditions affect real property
values and, accordingly, the rates of
delinquencies, foreclosures, and losses in any
trust fund. Losses from this that are not
otherwise covered by a credit enhancement will
be borne, by the holders of one or more
classes of securities.
You May Have Difficulty
Reselling Your Securities
Due to a Lack of a Secondary
Market, Fluctuating Market
Values or Periods of
Illiquidity . . . . . . . . . No market for any of the securities will exist
before they are issued. We cannot assure you
that a secondary market will develop or, if it
develops, that it will continue. Consequently,
you may not be able to sell your securities
readily or at prices that
11
will enable you to realize your desired return
or yield to maturity. The market values of the
securities are likely to fluctuate; these
fluctuations may be significant and could
result in significant losses to you. The
secondary markets for mortgage and asset
backed securities have experienced periods of
illiquidity and can be expected to do so in
the future.
Illiquidity can have a severely adverse effect
on the prices of securities that are
especially sensitive to prepayment, credit, or
interest rate risk. Illiquidity can also have
an adverse effect on the price of securities
that have been structured to support other
classes of certificates or that have been
structured to meet the investment requirements
of limited categories of investors. For
example, a particular investor may require a
security with a specified maturity date, a
call protection feature, or a specific type of
amortization feature. The unique nature of the
security may inhibit its marketability to
other investors.
Book-entry Registration
Limited Liquidity . . . . . . Securities issued in book-entry form may have
only limited liquidity in the resale market,
since investors may be unwilling to purchase
securities for which they cannot obtain
physical instruments.
Limit on Ability to Transfer or
Pledge . . . . . . . . . . . . Transactions in book-entry securities can be
effected only through The Depository Trust
Company, its participating organizations, its
indirect participants, and some banks.
Therefore, your ability to transfer or pledge
securities issued in book-entry form may be
limited.
Delays in Distributions . . . . You may experience some delay in the receipt
of distributions on book-entry securities
since the distributions will be forwarded by
the trustee to The Depository Trust Company
for it to credit the accounts of its
participants. In turn, these participants will
then credit the distributions to your account
either directly or indirectly through indirect
participants.
Bankruptcy or Insolvency
May Affect the Timing and
Amount of Distributions on
The Securities . . . . . . . The seller and the depositor intend that the
transfers of assets to the depositor and, in
turn, to the related trust constitute sales
under applicable law rather than pledges to
secure indebtedness for insolvency purposes.
If the seller becomes bankrupt, its bankruptcy
trustee or one of its creditors may attempt to
recharacterize the sale of the loans as a
borrowing by the seller, secured by a pledge
of the loans. Presenting this position to a
bankruptcy court could prevent timely payments
on the securities and even reduce the payments
on the securities. Similarly, if the
characterizations of the transfers as sales
are correct, then if the depositor were to
become bankrupt, the loans would not be part
of the depositor's bankruptcy estate and would
not be available to the depositor's creditors.
On the other hand, if the depositor becomes
bankrupt, its bankruptcy trustee or one of its
creditors may attempt to recharacterize the
sale of the loans as a borrowing by the
depositor, secured by a pledge of the loans.
Presenting this
12
position to a bankruptcy court could prevent
timely payments on the securities and even
reduce the payments on the securities.
If the master servicer becomes bankrupt, the
bankruptcy trustee may have the power to
prevent the appointment of a successor master
servicer. The period during which cash
collections may be commingled with the master
servicer's own funds before each distribution
date for securities will be specified in the
applicable prospectus supplement. If the
master servicer becomes bankrupt and cash
collections have been commingled with the
master servicer's own funds for at least ten
days, the trust fund will likely not have a
perfected interest in those collections. In
this case the trust might be an unsecured
creditor of the master servicer as to the
commingled funds and could recover only its
share as a general creditor, which might be
nothing. Collections commingled less than ten
days but still in an account of the master
servicer might also be included in the
bankruptcy estate of the master servicer even
though the trust may have a perfected security
interest in them. Their inclusion in the
bankruptcy estate of the master servicer may
result in delays in payment and failure to pay
amounts due on the securities.
Federal and state statutory provisions
affording protection or relief to distressed
borrowers may affect the ability of the
secured mortgage lender to realize upon its
security in other situations as well. For
example, in a proceeding under the federal
Bankruptcy Code, a lender may not foreclose on
a mortgaged property without the permission of
the bankruptcy court. And in some instances a
bankruptcy court may allow a borrower to
reduce the monthly payments, change the rate
of interest, and alter the mortgage loan
repayment schedule for under-collateralized
mortgage loans. The effect of these types of
proceedings can be to cause delays in
receiving payments on the loans underlying
securities and even to reduce the aggregate
amount of payments on the loans underlying
securities.
The Principal Amount of
Securities May Exceed the
Market Value of the Trust
Fund Assets . . . . . . . . . The market value of the assets relating to a
series of securities at any time may be less
than the principal amount of the securities of
that series then outstanding, plus accrued
interest. After an event of default and a sale
of the assets relating to a series of
securities, the trustee, the master servicer,
the credit enhancer, if any, and any other
service provider specified in the related
prospectus supplement generally will be
entitled to receive the proceeds of that sale
to the extent of unpaid fees and other amounts
owing to them under the related transaction
document prior to distributions to
securityholders. Upon any such sale, the
proceeds may be insufficient to pay in full
the principal of and interest on the
securities of the related series.
Some capitalized terms are used in this prospectus to assist you in
understanding the terms of the securities. The capitalized terms used in this
prospectus are defined on the pages indicated under the caption "Index of
Defined Terms" beginning on page 107.
13
The Trust Fund
General
The securities of each series will represent interests in the assets of the
related trust fund, and the notes of each series will be secured by the pledge
of the assets of the related trust fund. The trust fund for each series will
be held by the trustee for the benefit of the related securityholders. Each
trust fund will consist of the trust fund assets (the "Trust Fund Assets")
consisting of a pool comprised of loans as specified in the related prospectus
supplement, together with payments relating to those loans as specified in the
related prospectus supplement.(1) The pool will be created on the first day of
the month of the issuance of the related series of securities or another date
as may be specified in the related prospectus supplement. The securities will
be entitled to payment from the assets of the related trust fund or funds or
other assets pledged for the benefit of the securityholders, as specified in
the related prospectus supplement and will not be entitled to payments in
respect of the assets of any other trust fund established by the depositor.
The Trust Fund Assets will be acquired by the depositor, either directly or
through affiliates, from originators or sellers which may be affiliates of the
depositor (the "Sellers"), and conveyed without recourse by the depositor to
the related trust fund. Loans acquired by the depositor will have been
originated in accordance with the underwriting criteria specified below under
"Loan Program -- Underwriting Standards" and in the related prospectus
supplement. In addition to loans acquired on the closing date, the trust fund
may acquire loans during a subsequent funding period specified in the related
Agreement. See "The Agreements--Assignment of Trust Fund Assets --Conveyance
of Subsequent Loans."
The depositor will cause the Trust Fund Assets to be assigned to the trustee
named in the related prospectus supplement for the benefit of the holders of
the securities of the related series. The servicer named in the related
prospectus supplement will service the Trust Fund Assets, either directly or
through other servicing institutions called sub-servicers, pursuant to a
pooling and servicing agreement (each, a "Pooling and Servicing Agreement")
among the depositor, the master servicer, the servicer(s) and the trustee with
respect to a series consisting of certificates, or a sale and servicing
agreement (each, a "Sale and Servicing Agreement") among the trustee, the
seller, the issuer, the depositor, the master servicer and the servicer with
respect to a series consisting of certificates and notes, and will receive a
fee for those services. See "Loan Program" and "The Agreements". With respect
to loans serviced by a servicer through a sub-servicer, the servicer will
remain liable for its servicing obligations under the related Agreement as if
such servicer alone were servicing the loans.
As used in this prospectus, "Agreement" means, with respect to a series
consisting of certificates, the Pooling and Servicing Agreement, and with
respect to a series consisting of certificates and notes, the Trust Agreement,
the Indenture and the Sale and Servicing Agreement, as the context requires.
If so specified in the related prospectus supplement, a trust fund relating
to a series of securities may be a business trust formed under the laws of the
state specified in the related prospectus supplement pursuant to a trust
agreement (each, a "Trust Agreement") between the depositor and the trustee of
the trust fund.
With respect to each trust fund, prior to the initial offering of the
related series of securities, the trust fund will have no assets or
liabilities. No trust fund is expected to engage in any activities other than
acquiring, managing and holding of the related Trust Fund Assets and other
assets contemplated in this prospectus and in the related prospectus
supplement and the proceeds thereof, issuing securities and making payments
and distributions thereon and certain related activities. No trust fund is
expected to have any source of capital other than its assets and any related
credit enhancement.
- ---------------
(1) Whenever the terms "pool," "certificates," "notes" and "securities" are
used in this prospectus, those terms will be considered to apply, unless
the context indicates otherwise, to one specific pool and the securities of
one series including the certificates representing undivided interests in,
and/or notes secured by the assets of, a single trust fund consisting
primarily of the loans in that pool. Similarly, the term "Pass-Through
Rate" will refer to the pass- through rate borne by the certificates and
the term "interest rate" will refer to the interest rate borne by the notes
of one specific series, as applicable, and the term "trust fund" will refer
to one specific trust fund.
14
The applicable prospectus supplement may provide for additional obligations
of the depositor, but if it does not, the only obligations of the depositor
with respect to a series of securities will be to obtain certain
representations and warranties from the sellers and to assign to the trustee
for that series of securities the depositor's rights with respect to those
representations and warranties. See "The Agreements -- Assignment of the Trust
Fund Assets". The obligations of the master servicer or servicer with respect
to the loans will consist principally of its contractual servicing obligations
under the related Agreement (including its obligation to enforce the
obligations of the sub-servicers or sellers, or both, as more fully described
in this prospectus under "Loan Program -- Representations by Sellers;
Repurchases" and "The Agreements -- Sub-Servicing By Sellers" and " --
Assignment of the Trust Fund Assets") and its obligation, if any, to make
certain cash advances in the event of delinquencies in payments on or with
respect to the loans in the amounts described in this prospectus under
"Description of the Securities -- Advances". The obligations of the master
servicer to make advances may be subject to limitations, to the extent
provided in this prospectus and in the related prospectus supplement.
The following is a brief description of the assets expected to be included
in the trust funds. If specific information respecting the Trust Fund Assets
is not known at the time the related series of securities initially is
offered, more general information of the nature described below will be
provided in the related prospectus supplement, and specific information will
be set forth in a report on Form 8-K to be filed with the Securities and
Exchange Commission after the initial issuance of the securities (the
"Detailed Description"). A schedule of the loans relating to the series will
be attached to the Agreement delivered to the trustee upon delivery of the
securities. No more than 5% of the loans relative to the pool principal
balance as of the related cut-off date will deviate from the loan
characteristics described in the related prospectus supplement.
The Loans
General. Loans will consist of single family mortgage loans or home equity
loans. For purposes hereof, "home equity loans" includes "closed-end loans"
and "revolving credit line loans". If so specified, the loans may include
cooperative apartment loans ("cooperative loans") secured by security
interests in shares issued by private, non-profit, cooperative housing
corporations ("cooperatives") and in the related proprietary leases or
occupancy agreements granting exclusive rights to occupy specific dwelling
units in the cooperatives' buildings. Substantially all of the loans will have
been underwritten to standards that are less stringent than the standards
generally acceptable to Freddie Mac and Fannie Mae with regard to the
borrower's credit standing and repayment ability because the standards focus
more on the value of the mortgaged property.
The applicable prospectus supplement may specify the day on which monthly
payments on the loans in a pool will be due, but if it does not, all of the
mortgage loans in a pool will have monthly payments due on the first day of
each month. The payment terms of the loans to be included in a trust fund will
be described in the related prospectus supplement and may include any of the
following features or combination thereof or other features described in the
related prospectus supplement:
o Interest may be payable at a fixed rate, a rate adjustable from time to
time in relation to an index (which will be specified in the related
prospectus supplement), a rate that is fixed for a period of time or
under certain circumstances and is followed by an adjustable rate, a rate
that otherwise varies from time to time, or a rate that is convertible
from an adjustable rate to a fixed rate. Changes to an adjustable rate
may be subject to periodic limitations, maximum rates, minimum rates or a
combination of the limitations. Accrued interest may be deferred and
added to the principal of a loan for the periods and under the
circumstances as may be specified in the related prospectus supplement.
Loans may provide for the payment of interest at a rate lower than the
specified interest rate borne by the loan (the "Loan Rate") for a period
of time or for the life of the loan, and the amount of any difference may
be contributed from funds supplied by the seller of the Property or
another source.
o Principal may be payable on a level debt service basis to fully amortize
the loan over its term, may be calculated on the basis of an assumed
amortization schedule that is significantly longer than the original term
to maturity or on an interest rate that is different from the Loan Rate
or may not be amortized during all or a portion of the original term.
Payment of all or a substantial portion of the
15
principal may be due on maturity, called balloon payments. Principal may
include interest that has been deferred and added to the principal
balance of the loan.
o Monthly payments of principal and interest may be fixed for the life of
the loan, may increase over a specified period of time or may change from
period to period. The terms of a loan may include limits on periodic
increases or decreases in the amount of monthly payments and may include
maximum or minimum amounts of monthly payments.
o The loans generally may be prepaid at any time. Prepayments of principal
may be subject to a prepayment fee, which may be fixed for the life of
the loan or may decline over time, and may be prohibited for the life of
the loan or for certain periods, which are called lockout periods. Some
loans may permit prepayments after expiration of the applicable lockout
period and may require the payment of a prepayment fee in connection with
any subsequent prepayment. Other loans may permit prepayments without
payment of a fee unless the prepayment occurs during specified time
periods. The loans may include "due-on-sale" clauses that permit the
mortgagee to demand payment of the entire loan in connection with the
sale or certain transfers of the related Property. Other loans may be
assumable by persons meeting the then applicable underwriting standards
of the seller.
A trust fund may contain buydown loans that include provisions whereby a
third party partially subsidizes the monthly payments of the obligors on the
loans during the early years of the loans, the difference to be made up from a
buydown fund contributed by the third party at the time of origination of the
loan. A buydown fund will be in an amount equal either to the discounted value
or full aggregate amount of future payment subsidies. Thereafter, buydown
funds are applied to the applicable loan upon receipt by the master servicer
of the mortgagor's portion of the monthly payment on the loan. The master
servicer administers the buydown fund to ensure that the monthly allocation
from the buydown fund combined with the monthly payment received from the
mortgagor equals the scheduled monthly payment on the applicable loan. The
underlying assumption of buydown plans is that the income of the mortgagor
will increase during the buydown period as a result of normal increases in
compensation and inflation, so that the mortgagor will be able to meet the
full mortgage payments at the end of the buydown period. To the extent that
this assumption as to increased income is not fulfilled, the possibility of
defaults on buydown loans is increased. The related prospectus supplement will
contain information with respect to any buydown loan concerning limitations on
the interest rate paid by the mortgagor initially, on annual increases in the
interest rate and on the length of the buydown period.
The loans will be secured by mortgages or deeds of trust or other similar
security instruments creating a lien on a mortgaged property. In the case of
home equity loans, the liens generally will be subordinated to one or more
senior liens on the related mortgaged properties as described in the related
prospectus supplement. If so specified in the related prospectus supplement,
the home equity loans may include loans (primarily for home improvement or
debt consolidation purposes) that are in amounts in excess of the value of the
related mortgaged properties at the time of origination. The mortgaged
properties and the home improvements are collectively referred to in this
prospectus as the "Properties". The Properties may be located in any one of
the fifty states, the District of Columbia, Guam, Puerto Rico or any other
territory of the United States.
Loans with certain Loan-to-Value Ratios and/or certain principal balances
may be covered wholly or partially by primary mortgage guaranty insurance
policies (each, a "Primary Mortgage Insurance Policy"). The existence, extent
and duration of coverage under a Primary Mortgage Insurance Policy will be
described in the applicable prospectus supplement.
The aggregate principal balance of loans secured by Properties that are
owner-occupied will be disclosed in the related prospectus supplement. The
applicable prospectus supplement may provide for the basis for representations
relating to Single Family Properties, but if it does not, the sole basis for a
representation that a given percentage of the loans is secured by Single
Family Properties that are owner-occupied will be either (i) the making of a
representation by the borrower at origination of the loan either that the
underlying Property will be used by the borrower for a period of at least six
months every year or that the borrower intends to use the Property as a
primary residence or (ii) a finding that the address of the underlying
Property is the borrower's mailing address.
16
Single Family Loans. The mortgaged properties relating to single family
loans will consist of detached or semi-detached one- to four-family dwelling
units, townhouses, rowhouses, individual condominium units, individual units
in planned unit developments, manufactured housing that is permanently affixed
and treated as real property under local law, and certain other dwelling units
("Single Family Properties"). Single Family Properties may include vacation
and second homes, investment properties and leasehold interests. In the case
of leasehold interests, the applicable prospectus supplement may provide for
the leasehold term, but if it does not, the term of the leasehold will exceed
the scheduled maturity of the loan by at least five years.
Home Equity Loans. The mortgaged properties relating to home equity loans
will consist of Single Family Properties. As more fully described in the
related prospectus supplement, interest on each revolving credit line loan,
excluding introductory rates offered from time to time during promotional
periods, is computed and payable monthly on the average daily outstanding
principal balance of the loan. Principal amounts on a revolving credit line
loan may be drawn down (up to a maximum amount as set forth in the related
prospectus supplement) or repaid under each revolving credit line loan from
time to time, but may be subject to a minimum periodic payment. Except to the
extent provided in the related prospectus supplement, the trust fund will not
include any amounts borrowed under a revolving credit line loan after the cut-
off date. The full amount of a closed-end loan is advanced at the inception of
the loan and generally is repayable in equal (or substantially equal)
installments of an amount to fully amortize the loan at its stated maturity.
Except to the extent provided in the related prospectus supplement, the
original terms to stated maturity of closed-end loans will not exceed 360
months. Under some circumstances, under either a revolving credit line loan or
a closed-end loan, a borrower may choose an interest only payment option and
is obligated to pay only the amount of interest which accrues on the loan
during the billing cycle. An interest only payment option may be available for
a specified period before the borrower must begin paying at least the minimum
monthly payment of a specified percentage of the average outstanding balance
of the loan.
Additional Information. Each prospectus supplement will contain
information, as of the date of the prospectus supplement and to the extent
then specifically known to the depositor, with respect to the loans contained
in the related pool, including:
o the aggregate outstanding principal balance and the average outstanding
principal balance of the loans as of the first day of the month of
issuance of the related series of certificates or another date specified
in the related prospectus supplement called a cut-off date,
o the type of property securing the loans (e.g., single-family residences,
individual units in condominium apartment buildings or in buildings owned
by cooperatives, other real property or home improvements),
o the original terms to maturity of the loans,
o the Loan-to-Value Ratios or Combined Loan-to-Value Ratios, as applicable,
of the loans,
o the Loan Rates or annual percentage rates ("APR") or range of Loan Rates
or APR's borne by the loans,
o the maximum and minimum per annum Loan Rates and
o the geographical distribution of the loans.
If specific information respecting the loans is not known to the depositor
at the time the related securities are initially offered, more general
information of the nature described above will be provided in the Detailed
Description.
The "Loan-to-Value Ratio" of a loan at any given time is the fraction,
expressed as a percentage, the numerator of which is the original principal
balance of the related loan and the denominator of which is the Collateral
Value of the related Property. The "Combined Loan-to-Value Ratio" of a loan at
any given time is the ratio, expressed as a percentage, of (i) the sum of (a)
the original principal balance of the loan (or, in the case of a revolving
credit line loan, the maximum amount thereof available) and (b) the
outstanding principal balance at the date of origination of the loan of any
senior mortgage loan(s) or, in the case of any open-ended senior mortgage
loan, the maximum available line of credit with respect to the mortgage loan,
regardless of
17
any lesser amount actually outstanding at the date of origination of the loan,
to (ii) the Collateral Value of the related Property. The "Collateral Value"
of the Property, other than for loans the proceeds of which were used to
refinance an existing mortgage loan (each, a "Refinance Loan"), is the lesser
of (a) the appraised value determined in an appraisal obtained by the
originator at origination of the loan and (b) the sales price for the
Property. In the case of Refinance Loans, the "Collateral Value" of the
related Property is generally the appraised value thereof determined in an
appraisal obtained at the time of refinancing.
No assurance can be given that values of the Properties have remained or
will remain at their levels on the dates of origination of the related loans.
If the residential real estate market should experience an overall decline in
property values such that the outstanding principal balances of the loans, and
any secondary financing on the Properties, in a particular pool become equal
to or greater than the value of the Properties, the actual rates of
delinquencies, foreclosures and losses could be higher than those now
generally experienced in the mortgage lending industry. In addition, adverse
economic conditions and other factors (which may or may not affect real
property values) may affect the timely payment by borrowers of scheduled
payments of principal and interest on the loans and, accordingly, the actual
rates of delinquencies, foreclosures and losses with respect to any pool. To
the extent that the losses are not covered by subordination provisions or
alternative arrangements, the losses will be borne, at least in part, by the
holders of the securities of the related series.
Participation Certificates
The Trust Fund Assets may include participation certificates evidencing
interests in loans or contracts, including:
o first lien mortgage loans secured by one- to four-family residential
properties,
o private mortgage-backed securities backed by first lien mortgage loans
secured by one- to four-family residential properties, or
o closed-end and/or revolving home equity loans, secured in whole or in
part by first and/or subordinate liens on one- to four-family residential
properties.
If those participation certificates were issued by an issuer that is not
affiliated with the depositor, the depositor must have acquired them from one
or more entities unaffiliated with the depositor in one or more bona fide
secondary market transactions and they must either have been previously
registered under the Securities Act of 1933, as amended (the "Securities
Act"), or have been held for at least the holding period required to be
eligible for sale under Rule 144(k) under the Securities Act. If those
participation certificates were issued by the depositor or an affiliate of the
depositor, they must be registered under the Securities Act concurrently with
the offering of the securities under the related prospectus supplement.
Private Mortgage-Backed Securities
Private mortgage-backed securities may consist of mortgage pass-through
certificates or participation certificates evidencing an undivided interest in
a pool of mortgage loans or collateralized mortgage obligations secured by
mortgage loans. Private mortgage-backed securities may include stripped
mortgage-backed securities representing an undivided interest in all or a part
of either the principal distributions (but not the interest distributions) or
the interest distributions (but not the principal distributions) or in some
specified portion of the principal and interest distributions (but not all the
distributions) on some mortgage loans. Private mortgage-backed securities will
have been issued pursuant to a pooling and servicing agreement, an indenture
or similar agreement. The private trustee or its agent, or a custodian, will
possess the mortgage loans underlying the private mortgage-backed security.
Mortgage loans underlying a private mortgage-backed security will be serviced
by a private servicer directly or by one or more subservicers who may be
subject to the supervision of the private servicer.
The issuer of the private mortgage-backed securities will be a financial
institution or other entity engaged generally in the business of mortgage
lending, a public agency or instrumentality of a state, local or federal
government, or a limited purpose corporation organized for the purpose of
establishing trusts and acquiring and selling housing loans to the trusts and
selling beneficial interests in the trusts. If so specified in
18
the related prospectus supplement, the issuer of private mortgage-backed
securities may be an affiliate of the depositor. The obligations of the issuer
of private mortgage-backed securities will generally be limited to its
representations and warranties with respect to the assets conveyed by it to
the related trust fund. The issuer of private mortgage-backed securities will
not have guaranteed any of the assets conveyed to the related trust fund or
any of the private mortgage-backed securities issued under the pooling and
servicing agreement. Additionally, although the mortgage loans underlying the
private mortgage-backed securities may be guaranteed by an agency or
instrumentality of the United States, the private mortgage-backed securities
themselves will not be so guaranteed.
Distributions of principal and interest will be made on the private
mortgage-backed securities on the dates specified in the related prospectus
supplement. The private mortgage-backed securities may be entitled to receive
nominal or no principal distributions or nominal or no interest distributions.
Principal and interest distributions will be made on the private mortgage-
backed securities by the private trustee or the private servicer. The issuer
of private mortgage-backed securities or the private servicer may have the
right to repurchase assets underlying the private mortgage-backed securities
after a specific date or under other circumstances specified in the related
prospectus supplement.
The mortgage loans underlying the private mortgage-backed securities may
consist of fixed rate, level payment, fully amortizing loans or graduated
payment mortgage loans, buydown loans, adjustable rate mortgage loans or loans
having balloon or other special payment features. The mortgage loans may be
secured by single family property or by an assignment of the proprietary lease
or occupancy agreement relating to a specific dwelling within a cooperative
and the related shares issued by the cooperative.
The prospectus supplement for a series for which the trust fund includes
private mortgage-backed securities will specify the aggregate approximate
principal amount and type of the private mortgage-backed securities to be
included in the trust fund and specific characteristics of the mortgage loans
that comprise the underlying assets for the private mortgage-backed
securities, including:
o the payment features of the mortgage loans;
o the approximate aggregate principal balance, if known, of underlying
mortgage loans insured or guaranteed by a governmental entity;
o the minimum and maximum stated maturities of the underlying mortgage
loans at origination;
o the weighted average term-to stated maturity of the private mortgage-
backed securities;
o the pass-through or certificate rate of the private mortgage-backed
securities;
o the weighted average pass-through or certificate rate of the private
mortgage-backed securities;
o the issuer, the servicer and the trustee of the private mortgage-backed
securities;
o certain characteristics of credit support, if any, such as reserve funds,
insurance policies, surety bonds, letters of credit or guaranties
relating to the mortgage loans underlying the private mortgage-backed
securities or to the private mortgage-backed securities themselves;
o the terms on which the underlying mortgage loans for the private
mortgage-backed securities may, or are required to, be purchased before
their stated maturity or the stated maturity of the private mortgage-
backed securities; and
o the terms on which mortgage loans may be substituted for those originally
underlying the private mortgage-backed securities.
Private mortgage-backed securities included in the trust fund for a series
of securities that were issued by an issuer of private mortgage-backed
securities that is not affiliated with the depositor must be acquired from one
or more entities unaffiliated with the depositor in one or more bona fide
secondary market transactions and they must either have been previously
registered under the Securities Act or have been held for at least the holding
period required to be eligible for sale under Rule 144(k) under the Securities
Act. Private mortgaged-backed securities included in the trust fund for a
series of securities that were issued by the
19
depositor or an affiliate of the depositor must be registered under the
Securities Act concurrently with the offering of the securities under the
related prospectus supplement.
Substitution of Trust Fund Assets
Substitution of Trust Fund Assets will be permitted in the event of breaches
of representations and warranties with respect to any original Trust Fund
Asset or in the event the documentation with respect to any Trust Fund Asset
is determined by the trustee to be incomplete. The period during which
substitution will be permitted generally will be indicated in the related
prospectus supplement.
Available Information
The depositor has filed with the SEC a Registration Statement under the
Securities Act covering the securities. This prospectus, which forms a part of
the Registration Statement, and the prospectus supplement relating to each
series of certificates contain summaries of the material terms of the
documents referred to in this prospectus and in the prospectus supplement, but
do not contain all of the information in the Registration Statement pursuant
to the rules and regulations of the SEC. For further information, reference is
made to the Registration Statement and its exhibits. The Registration
Statement and exhibits can be inspected and copied at prescribed rates at the
public reference facilities maintained by the SEC at its Public Reference Room
at 450 Fifth Street, N.W., Washington, D.C. 20549, and at its Regional Offices
located as follows: Chicago Regional Office, 500 West Madison Street, Chicago,
Illinois 60661; and Northeast Regional Office, 233 Broadway, New York, New
York 10279. You may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an
Internet Web site that contains reports, information statements and other
information regarding the registrants that file electronically with the SEC,
including the depositor. The address of that Internet Web site is http://
www.sec.gov.
This prospectus and any applicable prospectus supplement do not constitute
an offer to sell or a solicitation of an offer to buy any securities other
than the securities offered by this prospectus and the prospectus supplement
nor an offer of the securities to any person in any state or other
jurisdiction in which the offer would be unlawful.
Incorporation of Certain Documents by Reference
All documents filed under the name of Aegis Asset Backed Securities
Corporation and/or the name of the trust referred to in the accompanying
prospectus supplement after the date of this prospectus and before the end of
the related offering with the SEC pursuant to Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended, are incorporated by
reference in this prospectus and are a part of this prospectus from the date
of their filing. Any statement contained in a document incorporated by
reference in this prospectus is modified or superseded for all purposes of
this prospectus to the extent that a statement contained in this prospectus
(or in the accompanying prospectus supplement) or in any other subsequently
filed document that also is incorporated by reference differs from that
statement. Any statement so modified or superseded shall not, except as so
modified or superseded, constitute a part of this prospectus. Neither the
depositor nor the master servicer intends to file with the Securities and
Exchange Commission periodic reports with respect to the trust fund following
completion of the reporting period required by Rule 15d-1 or Regulation 15D
under the Securities Exchange Act of 1934.
The trustee on behalf of any trust fund will provide without charge to each
person to whom this prospectus is delivered, on the person's written or oral
request, a copy of any or all of the documents referred to above that have
been or may be incorporated by reference in this prospectus (not including
exhibits to the information that is incorporated by reference unless the
exhibits are specifically incorporated by reference into the information that
this prospectus incorporates). Requests should be directed to the corporate
trust office of the trustee specified in the accompanying prospectus
supplement.
20
Reports to Securityholders
Periodic and annual reports concerning the trust fund will be forwarded to
securityholders. However, these reports will neither be examined nor reported
on by an independent public accountant. See "Description of the Securities --
Reports to Securityholders."
Use of Proceeds
The net proceeds to be received from the sale of the securities will be
applied by the depositor to acquire the related Trust Fund Assets and for
other general corporate purposes consistent with the limitations set forth in
its charter documents. See "The Depositor." The depositor expects to sell
securities in series from time to time, but the timing and amount of offerings
of securities will depend on a number of factors, including the volume of
Trust Fund Assets acquired by the depositor, prevailing interest rates,
availability of funds and general market conditions.
The Depositor
Aegis Asset Backed Securities Corporation, a Delaware corporation, the
depositor, was incorporated on June 3, 2002 for the limited purpose of
acquiring, owning and transferring mortgage collateral and selling interests
in mortgage collateral or bonds secured by mortgage collateral. The depositor
is a wholly owned limited purpose finance subsidiary of Aegis Mortgage
Corporation, an Oklahoma corporation ("Aegis"). The depositor maintains its
principal office at 3250 Briar Park, Suite 400, Houston, Texas 77042. Its
telephone number is (713) 787-0100.
Neither the depositor nor any of the depositor's affiliates will insure or
guarantee distributions on the securities of any series.
Loan Program
The loans will have been purchased by the depositor, either directly or
through affiliates, from sellers, that may include unaffiliated parties. The
applicable prospectus supplement may provide for the underwriting criteria
used in originating the loans, but if it does not, the loans so acquired by
the depositor will have been originated in accordance with the underwriting
criteria specified below under "Underwriting Standards."
Underwriting Standards
General Standards for First Lien Mortgage Loans. Aegis's underwriting
standards with respect to first lien mortgage loans will generally conform to
those published in the guide for Aegis's alternative documentation programs
for first lien mortgage loans (the "Guide"). The underwriting standards as set
forth in the Guide are continuously revised based on opportunities and
prevailing conditions in the residential mortgage market and the market for
the depositor's securities. If an affiliate of the depositor originates the
loan directly, the underwriting standards described below will apply to the
affiliate's origination process. If a non-affiliated loan broker or
correspondent originates the loan, the underwriting standards described below
will apply collectively to the originator's and Aegis's origination processes.
If groups of loans are acquired by Aegis or an affiliate of Aegis in bulk, the
mortgage loans may be reunderwritten by Aegis or by a designated third party
on Aegis's behalf. See " -- Qualifications of Unaffiliated Sellers." In such
bulk acquisitions, Aegis may perform only sample quality assurance reviews to
determine whether the mortgage loans in any mortgage pool were underwritten in
accordance with applicable standards.
Aegis's underwriting standards, as well as any other underwriting standards
that may be applicable to any first lien mortgage loans, generally include a
set of specific criteria pursuant to which the underwriting evaluation is
made. However, the application of those underwriting standards does not imply
that each specific criterion was satisfied individually. Rather, a mortgage
loan will be considered to be originated in accordance with a given set of
underwriting standards if, based on an overall qualitative evaluation, the
loan
21
substantially complies with the underwriting standards. For example, a
mortgage loan may be considered to comply with a set of underwriting
standards, even if one or more specific criteria included in the underwriting
standards were not satisfied, if other factors compensated for the criteria
that were not satisfied or if the mortgage loan is considered to be in
substantial compliance with the underwriting standards.
The level of review by Aegis, if any, of any mortgage loan acquired in bulk
for conformity with the applicable underwriting standards will vary depending
on any one of a number of factors, including:
o factors relating to the experience and status of the seller,
o characteristics of the specific mortgage loan, including the principal
balance, the loan-to-value ratio, the loan type or loan program, and
o the applicable credit score of the related mortgagor used in connection
with the origination of the mortgage loan, as determined based on a
credit scoring model acceptable to Aegis.
Generally, credit scoring models provide a means for evaluating the
information about a prospective borrower that is available from a credit
reporting agency. The underwriting criteria applicable to any program under
which the mortgage loans may be originated and reviewed may provide that
qualification for the loan, or the availability of specific loan features,
such as maximum loan amount, maximum loan-to-value ratio, property type and
use, and documentation level, may depend on the borrower's credit score.
Aegis's underwriting standards for first lien mortgage loans are generally
intended to provide an underwriter with information to evaluate the borrower's
repayment ability and the adequacy of the Property as collateral. Due to the
variety of underwriting standards and review procedures that may be applicable
to the mortgage loans included in any mortgage pool, the related prospectus
supplement generally will not distinguish among the various underwriting
standards applicable to the mortgage loans nor describe any review for
compliance with applicable underwriting standards performed by Aegis.
Moreover, there can be no assurance that every mortgage loan was originated in
conformity with the applicable underwriting standards in all material
respects, or that the quality or performance of mortgage loans underwritten
pursuant to varying standards as described above will be equivalent under all
circumstances.
Guide Standards. The following is a brief description of the underwriting
standards set forth in the Guide. Initially, a prospective borrower is
required to fill out a detailed application providing pertinent credit
information. As part of the application, the borrower is required to provide a
current balance sheet describing assets and liabilities and a statement of
income and expenses, as well as an authorization for the lender to obtain for
a credit report which summarizes the borrower's credit history with merchants
and lenders and any record of bankruptcy. Salaried prospective borrowers
generally are required to submit pay stubs covering a consecutive 30-day
period and their W-2 form for the most recent year. In addition, Aegis
generally requires a verbal verification of employment from the prospective
borrower's employer. If a prospective borrower is self-employed, the borrower
may be required to submit copies of signed tax returns or provide bank
statements.
In determining the adequacy of the Property as collateral, an appraisal is
made of each Property considered for financing. The appraiser is required to
verify that the Property is in good condition and that construction, if new,
has been completed. The appraisal is based on various factors, including the
market value of comparable homes and the cost of replacing the improvements.
Information with respect to the credit scores for the mortgage loans
underlying a series of certificates may be supplied in the related prospectus
supplement. Credit scores are obtained by many mortgage lenders in connection
with mortgage loan applications to help assess a borrower's credit-worthiness.
In addition, credit scores may be obtained by Aegis after the origination of a
mortgage loan if the seller does not provide a credit score to Aegis. Credit
scores are obtained from credit reports provided by various credit reporting
organizations, each of which may employ differing computer models and
methodologies.
The credit score is designed to assess a borrower's credit history at a
single point in time, using objective information currently on file for the
borrower at a particular credit reporting organization. Information utilized
to create a credit score may include, among other things, payment history,
delinquencies on accounts, levels of outstanding indebtedness, length of
credit history, types of credit, and bankruptcy
22
experience. Credit scores range from approximately 350 to approximately 840,
with higher scores indicating an individual with a more favorable credit
history compared to an individual with a lower score. However, a credit score
purports only to be a measurement of the relative degree of risk a borrower
represents to a lender. For example, a borrower with a higher credit score is
statistically expected to be less likely to default in payment than a borrower
with a lower credit score. In addition, it should be noted that credit scores
were developed to indicate a level of default probability over a two-year
period, which does not correspond to the life of a mortgage loan. Furthermore,
credit scores were not developed specifically for use in connection with
mortgage loans, but for consumer loans in general, and assess only the
borrower's past credit history. Therefore, a credit score does not take into
consideration the differences between mortgage loans and consumer loans
generally, or the specific characteristics of the related mortgage loan, such
as the loan-to-value ratio, the collateral for the mortgage loan, or the debt
to income ratio. There can be no assurance that the credit scores of the
mortgagors will be an accurate predictor of the likelihood of repayment of the
related mortgage loans or that any mortgagor's credit score would not be lower
if obtained as of the date of the related prospectus supplement.
Once all applicable employment, credit and Property information is received,
a determination is made as to whether the prospective borrower has sufficient
monthly income available to meet their monthly obligations on the proposed
mortgage loan and other expenses related to the home, including property taxes
and hazard insurance, and their other financial obligations and monthly living
expenses. Aegis will generally underwrite adjustable rate mortgage loans, buy-
down mortgage loans, graduated payment mortgage loans and certain other
mortgage loans on the basis of the borrower's ability to make monthly payments
as determined by reference to the mortgage rates in effect at origination or
the reduced initial monthly payments, as the case may be, and on the basis of
an assumption that the borrowers will likely be able to pay the higher monthly
payments that may result from later increases in the mortgage rates or from
later increases in the monthly payments, as the case may be, at the time of
the increase, even though the borrowers may not be able to make the higher
payments at the time of origination. The mortgage rate in effect from the
origination date of an adjustable rate mortgage loan or certain other types of
loans to the first adjustment date generally will be lower, and may be
significantly lower, than the sum of the then applicable index and note
margin. Similarly, the amount of the monthly payment on buy-down mortgage
loans and graduated payment mortgage loans will increase periodically. If the
borrowers' incomes do not increase in an amount commensurate with the
increases in monthly payments, the likelihood of default will increase. In
addition, in the case of either adjustable rate mortgage loans or graduated
payment mortgage loans that are subject to negative amortization, due to the
addition of deferred interest to the principal balances of the mortgage loans
are more likely to equal or exceed the value of the underlying mortgaged
properties, thereby increasing the likelihood of defaults and losses. With
respect to balloon loans, payment of the balloon amount will generally depend
on the borrower's ability to obtain refinancing or to sell the Property before
the maturity of the balloon loan, and there can be no assurance that the
borrower will be able to refinance or sell the Property before the balloon
loan matures.
If so specified in the related prospectus supplement, a mortgage pool may
include mortgage loans that have been underwritten pursuant to a streamlined
documentation refinancing program, as set forth in the Guide. These programs
permit certain mortgage loans to be refinanced with only limited verification
or updating of the underwriting information that was obtained at the time that
the original mortgage loan was originated. For example, a new appraisal of the
Property may not be required if the refinanced mortgage loan was originated up
to approximately 24 months before the refinancing. In addition, the
mortgagor's income may not be verified, although continued employment is
required to be verified. In certain circumstances, the mortgagor may be
permitted to borrow up to 107% of the outstanding principal amount of the
original mortgage loan. Each mortgage loan underwritten pursuant to this
program will be treated as having been underwritten pursuant to the same
underwriting documentation program as the mortgage loan that it refinanced,
including for purposes of the disclosure in the related prospectus supplement.
The underwriting standards set forth in the Guide will be varied in
appropriate cases, including limited or reduced documentation programs.
Certain limited documentation programs, for example, do not require income,
employment or asset verifications. Generally, in order to be eligible for a
limited documentation program, the loan-to-value ratio must meet applicable
guidelines, the borrower must have a good credit
23
history and the borrower's eligibility for this type of program may be
determined by use of a credit scoring model.
In its evaluation of mortgage loans which have more than twelve months of
payment experience, Aegis generally places greater weight on payment history
and may take into account market and other economic trends while placing less
weight on underwriting factors generally applied to newly originated mortgage
loans. Mortgage loans seasoned for over twelve months may be underwritten for
purchase by Aegis based on the borrower's credit score and payment history,
with no current income verification, and under an alternative property
valuation method.
The mortgaged properties may be located in states where, in general, a
lender providing credit on a single-family property may not seek a deficiency
judgment against the mortgagor but rather must look solely to the Property for
repayment in the event of foreclosure. See "Certain Legal Aspects of the
Mortgage Loans -- Anti-Deficiency Legislation and Other Limitations on
Lenders." Aegis's underwriting standards applicable to all states, including
anti-deficiency states, require that the value of the Property being financed,
as indicated by the appraisal, currently supports and is anticipated to
support in the future the outstanding loan balance, although there can be no
assurance that the value of the Property will continue to support the loan
balance in the future.
General Standards for Home Equity Loans. The applicable prospectus
supplement may provide for the seller's representations and warranties
relating to the home equity loans, but if it does not, each seller will
represent and warrant that all home equity loans originated and/or sold by it
to the depositor or one of its affiliates will have been underwritten in
accordance with standards consistent with those utilized by home equity
lenders generally during the period of origination for similar types of loans.
Underwriting standards are applied by or on behalf of a lender to evaluate
the borrower's credit standing and repayment ability, and the value and
adequacy of the related Property as collateral. In general, a prospective
borrower applying for a home equity loan is required to fill out a detailed
application designed to provide to the underwriting officer pertinent credit
information, including the principal balance and payment history with respect
to any senior mortgage, if any. The applicable prospectus supplement may
specify whether that credit information will be verified by the seller, but if
it does not, the credit information supplied by the borrower will be verified
by the related seller. As part of the description of the borrower's financial
condition, the borrower generally is required to provide a current list of
assets and liabilities and a statement of income and expenses, as well as an
authorization to apply for a credit report which summarizes the borrower's
credit history with local merchants and lenders and any record of bankruptcy.
In most cases, an employment verification is obtained from an independent
source (typically the borrower's employer) which verification reports, among
other things, the length of employment with that organization and the
borrower's current salary. If a prospective borrower is self-employed, the
borrower may be required to submit copies of signed tax returns. The borrower
may also be required to authorize verification of deposits at financial
institutions where the borrower has demand or savings accounts.
In determining the adequacy of the Property to be used as collateral, an
appraisal will generally be made of each Property considered for financing.
The appraiser is generally required to inspect the Property, issue a report on
its condition and, if applicable, verify construction, if new, has been
completed. The appraisal is generally based on the market value of comparable
homes, the estimated rental income (if considered applicable by the appraiser)
and the cost of replacing the home. The value of the Property being financed,
as indicated by the appraisal, must be such that it currently supports, and is
anticipated to support in the future, the outstanding loan balance.
The maximum loan amount will vary depending upon a borrower's credit grade
and loan program but will not generally exceed $150,000. Variations in maximum
loan amount limits will be permitted based on compensating factors.
Compensating factors may generally include, to the extent specified in the
related prospectus supplement, low loan-to-value ratio, low debt-to-income
ratio, stable employment, favorable credit history and the nature of the
underlying first mortgage loan, if applicable.
Each seller's underwriting standards will generally permit home equity with
loan-to-value ratios at origination of up to 125% depending on the loan
program, type and use of the Property, creditworthiness of
24
the borrower and debt-to-income ratio. If so specified in the related
prospectus supplement, a seller's underwriting criteria may permit home equity
loans with loan-to-value ratios at origination in excess of 125%, such as for
debt consolidation or home improvement purposes.
After obtaining all applicable employment, credit and Property information,
the related seller will use a debt-to-income ratio to assist in determining
whether the prospective borrower has sufficient monthly income available to
support the payments of principal and interest on the mortgage loan in
addition to other monthly credit obligations. The "debt-to-income ratio" is
the ratio of the borrower's total monthly payments to the borrower's gross
monthly income. The maximum monthly debt-to-income ratio will vary depending
upon a borrower's credit grade and loan program but will not generally exceed
55%. Variations in the monthly debt-to-income ratio limit will be permitted
based on compensating factors to the extent specified in the related
prospectus supplement.
In the case of a home equity loan secured by a leasehold interest in
Property, the title to which is held by a third party lessor, the applicable
prospectus supplement may provide for the related representations and
warranties of the seller, but if it does not, the related seller will
represent and warrant, among other things, that the remaining term of the
lease and any sublease is at least five years longer than the remaining term
on the home equity loan.
Certain of the types of home equity loans that may be included in a trust
fund are recently developed and may involve additional uncertainties not
present in traditional types of loans. For example, certain of the loans may
provide for escalating or variable payments by the borrower. These types of
home equity loans are underwritten on the basis of a judgment that the
borrowers have the ability to make the monthly payments required initially. In
some instances, a borrower's income may not be sufficient to permit continued
loan payments as those payments increase. These types of loans may also be
underwritten primarily upon the basis of loan-to-value ratios or other
favorable credit factors.
Qualifications of Unaffiliated Sellers
Each seller that is not an affiliate of the depositor will be required to
satisfy the following qualifications. Each such seller must be an institution
experienced in originating and servicing loans of the type contained in the
related pool in accordance with accepted practices and prudent guidelines, and
must maintain satisfactory facilities to originate and service those loans.
Each such seller must be a mortgagee approved by the FHA or an institution the
deposit accounts of which are insured by the FDIC.
Representations by Sellers; Repurchases
Each seller will have made representations and warranties in respect of the
loans sold by that seller and evidenced by all, or a part, of a series of
securities. These representations and warranties may include, among other
things:
o that title insurance (or in the case of Properties located in areas where
title insurance policies are generally not available, an attorney's
certificate of title) and any required hazard insurance policy were
effective at origination of each loan, other than cooperative loans and
certain home equity loans, and that each policy (or certificate of title
as applicable) remained in effect on the date of purchase of the loan
from the seller by or on behalf of the depositor;
o that the seller had good title to each loan and the loan was subject to
no offsets, defenses, counterclaims or rights of rescission except to the
extent that any buydown agreement may forgive certain indebtedness of a
borrower;
o that each loan constituted a valid lien on, or a perfected security
interest with respect to, the Property (subject only to permissible liens
disclosed, if applicable, title insurance exceptions, if applicable, and
certain other exceptions described in the Agreement) and that the
Property was free from damage and was in acceptable condition;
o that there were no delinquent tax or assessment liens against the
Property;
25
o that no required payment on a loan was delinquent more than the number of
days specified in the related prospectus supplement; and
o that each loan was made in compliance with, and is enforceable under, all
applicable local, state and federal laws and regulations in all material
respects.
In addition, if any required payment on a mortgage loan was more than 31
days delinquent at any time during the twelve months before the cut-off date,
the related prospectus supplement shall so indicate.
If so specified in the related prospectus supplement, the representations
and warranties of a seller in respect of a loan will be made not as of the
cut-off date but as of the date on which the seller sold the loan to the
depositor or one of its affiliates. Under those circumstances, a substantial
period of time may have elapsed between the sale date and the date of initial
issuance of the series of securities evidencing an interest in the loan. Since
the representations and warranties of a seller do not address events that may
occur following the sale of a loan by the seller, its repurchase obligation
described below will not arise if the relevant event that would otherwise have
given rise to such an obligation with respect to a loan occurs after the date
of sale of the loan by the seller to the depositor or its affiliates or after
the origination of the mortgage loan, as the case may be. In addition, certain
representations, including the condition of the related Property, will be
limited to the extent the seller has knowledge and the seller will be under no
obligation to investigate the substance of the representation. However, the
depositor will not include any loan in the trust fund for any series of
securities if anything has come to the depositor's attention that would cause
it to believe that the representations and warranties of a seller will not be
accurate and complete in all material respects in respect of the loan as of
the date of initial issuance of the related series of securities.
The trustee will promptly notify the relevant seller of any breach of any
representation or warranty made by it in respect of a loan which materially
and adversely affects the interests of the securityholders in the loan. If the
seller cannot cure the breach within 90 days following notice from the trustee
the applicable prospectus supplement may provide for the seller's obligations
under those circumstances, but if it does not, then the seller will be
obligated either
o to repurchase the loan from the trust fund at a price (the "Purchase
Price") equal to 100% of the unpaid principal balance thereof as of the
date of the repurchase plus accrued interest thereon to the first day of
the month following the month of repurchase at the Loan Rate or
o substitute for the loan a replacement loan that satisfies the criteria
specified in the related prospectus supplement.
The trustee will be required under the applicable Agreement to enforce this
obligation for the benefit of the holders of the securities, following the
practices it would employ in its good faith business judgment were it the
owner of the loan. This repurchase or substitution obligation will constitute
the sole remedy available to holders of securities or the trustee for a breach
of representation by a seller.
Neither the depositor nor the servicer will be obligated to purchase or
substitute a loan if a seller defaults on its obligation to do so, and no
assurance can be given that sellers will carry out their respective repurchase
or substitution obligations with respect to loans.
Description of the Securities
Each series of certificates will be issued pursuant to separate agreements
(each, a "Pooling and Servicing Agreement" or a "Trust Agreement") among the
depositor, the master servicer, the servicer(s) and the trustee. A form of
Pooling and Servicing Agreement and Trust Agreement has been filed as an
exhibit to the Registration Statement of which this prospectus forms a part.
Each series of notes will be issued pursuant to an indenture (the "Indenture")
between the related trust fund and the entity named in the related prospectus
supplement as trustee with respect to the series, and the related loans will
be serviced by either the master servicer or by a servicer directly pursuant
to a Sale and Servicing Agreement. A form of Indenture and Sale and Servicing
Agreement has been filed as an exhibit to the Registration Statement of which
this prospectus forms a part. A series of securities may consist of both notes
and certificates. Each Agreement, dated as of
26
the related cut-off date, will be among the depositor, the master servicer,
the servicer(s) and the trustee for the benefit of the holders of the
securities of the series. The provisions of each Agreement will vary depending
upon the nature of the securities to be issued thereunder and the nature of
the related trust fund. The following are descriptions of the material
provisions which may appear in each Agreement. The depositor will provide a
copy of the Agreement (without exhibits) relating to any series without charge
upon written request of a holder of record of a security of the series
addressed to Aegis Asset Backed Securities Corporation, 3250 Briar Park, Suite
400, Houston, Texas 77042, Attention: Investor Relations.
General
The securities of each series will be issued in book-entry or fully
registered form, in the authorized denominations specified in the related
prospectus supplement, will, in the case of certificates, evidence specified
beneficial ownership interests in, and in the case of notes, be secured by,
the assets of the related trust fund created pursuant to each Agreement and
will not be entitled to payments in respect of the assets included in any
other trust fund established by the depositor. The applicable prospectus
supplement may provide for guarantees or insurance obtained from a
governmental entity or other person, but if it does not, the Trust Fund Assets
will not be guaranteed or insured by any governmental entity or other person.
Each trust fund will consist of, to the extent provided in the related
Agreement,
o the Trust Fund Assets, as from time to time are subject to the related
Agreement (exclusive of any amounts specified in the related prospectus
supplement ("Retained Interest")), including all payments of interest and
principal received with respect to the loans after the cut-off date (to
the extent not applied in computing the principal balance of the loans as
of the cut-off date (the "Cut-off Date Principal Balance"));
o the assets required to be deposited in the related Security Account from
time to time;
o Property which secured a loan and which is acquired on behalf of the
securityholders by foreclosure or deed in lieu of foreclosure and any
insurance policies or other forms of credit enhancement required to be
maintained pursuant to the related Agreement.
If so specified in the related prospectus supplement, a trust fund may also
include one or more of the following: reinvestment income on payments received
on the Trust Fund Assets, a reserve fund, a mortgage pool insurance policy, a
special hazard insurance policy, a bankruptcy bond, one or more letters of
credit, a surety bond, guaranties or similar instruments.
Each series of securities will be issued in one or more classes. Each class
of certificates of a series evidence beneficial ownership of future interest
and/or principal payments on, and each class of notes of a series will be
secured by, the related Trust Fund Assets. A series of securities may include
one or more classes that are senior in right to payment to one or more other
classes of securities of the series. Certain series or classes of securities
may be covered by insurance policies, surety bonds or other forms of credit
enhancement, in each case as described under "Credit Enhancement" in this
prospectus and in the related prospectus supplement. One or more classes of
securities of a series may be entitled to receive distributions of principal,
interest or any combination thereof. Distributions on one or more classes of a
series of securities may be made prior to one or more other classes, after the
occurrence of specified events, in accordance with a schedule or formula or on
the basis of collections from designated portions of the related Trust Fund
Assets, in each case as specified in the related prospectus supplement. The
timing and amounts of distributions may vary among classes or over time as
specified in the related prospectus supplement.
Distributions of principal and interest (or, where applicable, of principal
only or interest only) on the related securities will be made by the trustee
on each distribution date (i.e., monthly, quarterly, semi-annually or at such
other intervals and on the dates as are specified in the related prospectus
supplement) amounts determined as described in the related prospectus
supplement. Distributions will be made to the persons in whose names the
securities are registered at the close of business on the dates specified in
the related prospectus supplement (each, a "Record Date"). Distributions will
be made in the manner specified in the related prospectus supplement to the
persons entitled thereto at the address appearing in the register maintained
for holders of securities (the "Security Register"); provided, however, that
the final distribution in
27
retirement of the securities will be made only upon presentation and surrender
of the securities at the office or agency of the trustee or other person
specified in the notice to securityholders of the final distribution.
The securities will be freely transferable and exchangeable at the Corporate
Trust Office of the trustee as set forth in the related prospectus supplement.
No service charge will be made for any registration of exchange or transfer of
securities of any series, but the trustee may require payment of a sum
sufficient to cover any related tax or other governmental charge.
Under current law the purchase and holding of a class of securities entitled
only to a specified percentage of payments of either interest or principal or
a notional amount of either interest or principal on the related loans or a
class of securities entitled to receive payments of interest and principal on
the loans only after payments to other classes or after the occurrence of
certain specified events by or on behalf of any employee benefit plan or other
retirement arrangement (including individual retirement accounts and
annuities, Keogh plans and collective investment funds in which the plans,
accounts or arrangements are invested) subject to provisions of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") or the Internal
Revenue Code of 1986, as amended (the "Code"), may result in prohibited
transactions, within the meaning of ERISA and the Code. See "ERISA
Considerations". The applicable prospectus supplement may provide for the
conditions for transferring a security of that type of class, but if it does
not, the transfer of securities of that class will not be registered unless
the transferee (i) represents that it is not, and is not purchasing on behalf
of, any plan, account or arrangement or (ii) provides an opinion of counsel
satisfactory to the trustee and the depositor that the purchase of securities
of that class by or on behalf of a plan, account or arrangement is permissible
under applicable law and will not subject the trustee, the master servicer,
the servicer(s) or the depositor to any obligation or liability in addition to
those undertaken in the Agreements.
As to each series, an election may be made to treat the related trust fund
or designated portions thereof as a "real estate mortgage investment conduit"
or REMIC as defined in the Code. The related prospectus supplement will
specify whether a REMIC election is to be made. Alternatively, the Agreement
for a series may provide that a REMIC election may be made at the discretion
of the depositor or the trustee and may only be made if certain conditions are
satisfied. As to any series for which a REMIC election will be made, the terms
and provisions applicable to the making of the REMIC election will be set
forth in the related prospectus supplement. If a REMIC election is made with
respect to a series, one of the classes will be designated as evidencing the
sole class of "residual interests" in the related REMIC, as defined in the
Code. All other classes of securities in the series will constitute "regular
interests" in the related REMIC, as defined in the Code. As to each series
with respect to which a REMIC election is to be made, the trustee or a holder
of the related residual certificate will be obligated to take all actions
required in order to comply with applicable laws and regulations and will be
obligated to pay any prohibited transaction taxes. The trustee, unless
otherwise provided in the related prospectus supplement, will be entitled to
reimbursement for these payments from the assets of the trust fund or from any
holder of the related residual certificate.
Distributions on Securities
General. In general, the method of determining the amount of distributions
on a particular series of securities will depend on the type of credit
support, if any, that is used with respect to the series. See "Credit
Enhancement". Set forth below are descriptions of various methods that may be
used to determine the amount of distributions on the securities of a
particular series. The prospectus supplement for each series of securities
will describe the method to be used in determining the amount of distributions
on the securities of the series.
Distributions allocable to principal and interest on the securities will be
made by the trustee out of, and only to the extent of, funds in the related
Security Account, including any funds transferred from any reserve fund. As
between securities of different classes and as between distributions of
principal (and, if applicable, between distributions of Principal Prepayments,
as defined below, and scheduled payments of principal) and interest,
distributions made on any distribution date will be applied as specified in
the related prospectus supplement.
28
Available Funds. All distributions on the securities of each series on each
distribution date will be made from the Available Funds described below, in
accordance with the terms described in the related prospectus supplement and
specified in the Agreement. "Available Funds" for each distribution date will
generally equal the amount on deposit in the related Security Account on the
distribution date (net of related fees and expenses payable by the related
trust fund) other than amounts to be held in the Security Account for
distribution on future distribution dates.
Distributions of Interest. Interest will accrue on the aggregate principal
balance of the securities (or, in the case of securities entitled only to
distributions allocable to interest, the aggregate notional amount) of each
class of securities (the "Class Security Balance") entitled to interest from
the date, at the Pass-Through Rate or interest rate, as applicable (which in
either case may be a fixed rate or rate adjustable as specified in the
prospectus supplement), and for the periods specified in the prospectus
supplement. To the extent funds are available therefor, interest accrued
during each specified period on each class of securities entitled to interest
(other than a class of securities that provides for interest that accrues, but
is not currently payable) will be distributable on the distribution dates
specified in the related prospectus supplement until the aggregate
Class Security Balance of the securities of the class has been distributed in
full or, in the case of securities entitled only to distributions allocable to
interest, until the aggregate notional amount of the securities is reduced to
zero or for the period of time designated in the related prospectus
supplement. The original Class Security Balance of each security will equal
the aggregate distributions allocable to principal to which the security is
entitled. Distributions allocable to interest on each security that is not
entitled to distributions allocable to principal will be calculated based on
the notional amount of the security. The notional amount of a security will
not evidence an interest in or entitlement to distributions allocable to
principal but will be used solely for convenience in expressing the
calculation of interest and for certain other purposes.
Interest payable on the securities of a series on a distribution date will
include all interest accrued during the period specified in the related
prospectus supplement. In the event interest accrues over a period ending two
or more days prior to a distribution date, the effective yield to
securityholders will be reduced from the yield that would otherwise be
obtainable if interest payable on the security were to accrue through the day
immediately preceding the distribution date, and the effective yield (at par)
to securityholders will be less than the indicated coupon rate.
With respect to any class of accrual securities, if specified in the related
prospectus supplement, any interest that has accrued but is not paid on a
given distribution date will be added to the aggregate Class Security Balance
of the class of securities on that distribution date. Distributions of
interest on any class of accrual securities will commence only after the
occurrence of the events specified in the prospectus supplement. Prior to that
time, the beneficial ownership interest in the trust fund or the principal
balance, as applicable, of the class of accrual securities, as reflected in
the aggregate Class Security Balance of the class of accrual securities, will
increase on each distribution date by the amount of interest that accrued on
the class of accrual securities during the preceding interest accrual period
but that was not required to be distributed to that class on the distribution
date. The class of accrual securities will thereafter accrue interest on its
outstanding Class Security Balance as so adjusted.
Distributions of Principal. The related prospectus supplement will specify
the method by which the amount of principal to be distributed on the
securities on each distribution date will be calculated and the manner in
which the amount will be allocated among the classes of securities entitled to
distributions of principal. The aggregate Class Security Balance of any class
of securities entitled to distributions of principal generally will be the
aggregate original Class Security Balance of the class of securities specified
in the prospectus supplement, reduced by all distributions paid to such class
of holders of the securities as allocable to principal and,
o in the case of accrual securities, in general, increased by all interest
accrued but not then distributable on the accrual securities; and
o in the case of adjustable rate securities, subject to the effect of
negative amortization, if applicable.
29
If so provided in the related prospectus supplement, one or more classes of
securities will be entitled to receive all or a disproportionate percentage of
the payments of principal including payments of principal which are received
from borrowers in advance of their scheduled due dates and are not accompanied
by amounts representing scheduled interest due after the month of the payments
("Principal Prepayments") in the percentages and under the circumstances or
for the periods specified in the prospectus supplement. The allocation of
disproportional amounts of principal to a class or classes of securities will
have the effect of accelerating the amortization of those securities while
increasing the interests evidenced by one or more other classes of securities
in the trust fund. Increasing the interests of the other classes of securities
relative to that of certain securities is intended to preserve the
availability of the subordination provided by the other securities. See
"Credit Enhancement -- Subordination".
Unscheduled Distributions. If specified in the related prospectus
supplement, the securities will be subject to distributions of principal
before the next scheduled distribution date under the circumstances and in the
manner described below and in the prospectus supplement. If applicable, the
trustee will be required to make unscheduled distributions on the day and in
the amount specified in the related prospectus supplement if, due to
substantial payments of principal (including Principal Prepayments) on the
Trust Fund Assets, the trustee determines that the funds available or
anticipated to be available from the Security Account and, if applicable, any
reserve fund, may be insufficient to make required distributions on the
securities on that distribution date. The applicable prospectus supplement may
provide for limits on the amount of an unscheduled distribution, but if it
does not, the amount of any unscheduled distribution that is allocable to
principal will not exceed the amount that would otherwise have been required
to be distributed as principal on the securities on the next distribution
date. The applicable prospectus supplement may specify whether the unscheduled
distribution will include interest, but if it does not, the unscheduled
distributions will include interest at the applicable Pass-Through Rate (if
any) or interest rate (if any) on the amount of the unscheduled distribution
allocable to principal for the period and to the date specified in the
prospectus supplement.
Advances
To the extent provided in the related prospectus supplement, the servicer(s)
will be required to advance on or before each distribution date (from its own
funds, funds advanced by sub-servicers or funds held in the Security Account
for future distributions to the holders of securities of the related series),
an amount equal to the aggregate of payments of interest and/or principal that
were delinquent on the related Determination Date (as that term is defined in
the related prospectus supplement) and were not advanced by any sub-servicer,
subject to the servicer's determination that those advances may be recoverable
out of late payments by borrowers, Liquidation Proceeds, Insurance Proceeds or
otherwise. In the case of cooperative loans, the servicer(s) also may be
required to advance any unpaid maintenance fees and other charges under the
related proprietary leases as specified in the related prospectus supplement.
In making advances, the servicer(s) will endeavor to maintain a regular flow
of scheduled interest and principal payments to holders of the securities,
rather than to guarantee or insure against losses. If advances are made by the
servicer from cash being held for future distribution to securityholders, the
servicer will replace those funds on or before any future distribution date to
the extent that funds in the applicable Security Account on the future
distribution date would be less than the amount required to be available for
distributions to securityholders on that distribution date. Any servicer funds
advanced will be reimbursable to the servicer out of recoveries on the
specific loans with respect to which those advances were made (e.g., late
payments made by the related borrower, any related Insurance Proceeds,
Liquidation Proceeds or proceeds of any loan purchased by the depositor, a
sub-servicer or a seller pursuant to the related Agreement). Advances by the
servicer (and any advances by a sub-servicer) also will be reimbursable to the
servicer (or sub-servicer) from cash otherwise distributable to
securityholders (including the holders of Senior Securities) to the extent
that the servicer determines that the advances previously made are not
ultimately recoverable as described above. To the extent provided in the
related prospectus supplement, the servicer also will be obligated to make
advances, to the extent recoverable out of Insurance Proceeds, Liquidation
Proceeds or otherwise, in respect of certain taxes and insurance premiums not
paid by borrowers on a timely basis. Funds so advanced are reimbursable to the
servicer to the extent permitted by the related Agreement. The obligations of
the servicer to make advances may be supported by a cash advance reserve fund,
a surety bond
30
or other arrangement of the type described in this prospectus under "Credit
Enhancement", in each case as described in the related prospectus supplement.
In the event the servicer or a sub-servicer fails to make a required
advance, the applicable prospectus supplement may specify whether another
party will have advancing obligations, but if it does not, the master servicer
will be obligated to make the advance in its capacity as successor servicer.
If the master servicer makes an advance, it will be entitled to be reimbursed
for the advance to the same extent and degree as the servicer or a sub-
servicer is entitled to be reimbursed for advances. See "Description of the
Securities -- Distributions on Securities".
Reports to Securityholders
Prior to or concurrently with each distribution on a distribution date the
trustee will furnish to each securityholder of record of the related series a
statement setting forth, to the extent applicable to the related series of
securities, among other things:
o the amount of the distribution allocable to principal, separately
identifying the aggregate amount of any Principal Prepayments and if so
specified in the related prospectus supplement, any applicable prepayment
penalties included in the distribution;
o the amount of the distribution allocable to interest;
o the amount of any advance;
o the aggregate amount (a) otherwise allocable to the Subordinated
Securityholders on the distribution date, and (b) withdrawn from the
reserve fund, if any, that is included in the amounts distributed to the
Senior Securityholders;
o the outstanding principal balance or notional amount of each class of the
related series after giving effect to the distribution of principal on
the distribution date;
o the related amount of the servicing compensation retained or withdrawn
from the Security Account by the master servicer, and the amount of
additional servicing compensation received by the master servicer
attributable to penalties, fees, excess Liquidation Proceeds and other
similar charges and items;
o the number and aggregate principal balances of loans (A) delinquent
(exclusive of loans in foreclosure) 1 to 30 days, 31 to 60 days, 61 to 90
days and 91 or more days and (B) in foreclosure and delinquent 1 to 30
days, 31 to 60 days, 61 to 90 days and 91 or more days, as of the close
of business on the last day of the calendar month preceding the
distribution date;
o the book value of any real estate acquired through foreclosure or grant
of a deed in lieu of foreclosure;
o if applicable, the amount remaining in any reserve fund at the close of
business on the distribution date;
o if applicable, the amount of the Pre-Funding Amount deployed by the
trustee to purchase Subsequent Loans during the preceding collection
period;
o the Pass-Through Rate or interest rate, as applicable, as of the day
prior to the immediately preceding distribution date;
o any amounts remaining under letters of credit, pool policies or other
forms of credit enhancement; and
o the servicing fee payable to the and any subservicer, if applicable.
Where applicable, any amount set forth above may be expressed as a dollar
amount per $1,000 security of the relevant class having the percentage
interest specified in the related prospectus supplement. The report to
securityholders for any series of securities may include additional or other
information of a similar nature to that specified above.
31
In addition, within a reasonable period of time after the end of each
calendar year, the master servicer or the trustee will mail to each
securityholder of record at any time during that calendar year a report as to
(a) the aggregate of amounts reported pursuant to the first two items above
for that calendar year or, in the event the person was a securityholder of
record during a portion of that calendar year, for the applicable portion of
that calendar year and (b) such other customary information as may be deemed
necessary or desirable for securityholders to prepare their tax returns.
Categories of Classes of Securities
The securities of any series may be comprised of one or more classes. These
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 the series by reference to the following categories.
CATEGORIES OF CLASSES DEFINITION
--------------------- ----------
Principal Types
Accretion Directed............................... A class that receives principal payments from the
accreted interest from specified Accrual classes. An
accretion directed class also may receive principal
payments from principal paid on the underlying Trust
Fund Assets for the related series.
Component Securities............................. A class consisting of "components." The components of
a class of component securities may have different
principal and/or interest payment characteristics but
together constitute a single class. Each component of
a class of component securities may be identified as
falling into one or more of the categories in this
chart.
Notional Amount Securities....................... A class having no principal balance and bearing
interest on the related notional amount. The notional
amount is used for purposes of the determination of
interest distributions.
Planned Principal Class or PACs.................. A class that is designed to receive principal
payments using a predetermined principal balance
schedule derived by assuming two constant prepayment
rates for the underlying Trust Fund Assets. These two
rates are the endpoints for the "structuring range"
for the planned principal class. The planned
principal classes in any series of certificates may
be subdivided into different categories (e.g.,
primary planned principal classes, secondary planned
principal classes and so forth) having different
Peffective structuring ranges and different principal
payment priorities. The structuring range for the
secondary planned principal class of a series of
certificates will be narrower than that for the
primary planned principal class of the series.
Scheduled Principal Class........................ A class that is designed to receive principal
payments using a predetermined principal balance
schedule but is not designated as a Planned Principal
Class or Targeted Principal class. In many cases, the
schedule is derived by assuming two constant
prepayment rates for the underlying Trust Fund
Assets. These two rates are the endpoints for the
"structuring range" for the scheduled principal
class.
32
CATEGORIES OF CLASSES DEFINITION
--------------------- ----------
Sequential Pay................................... Classes that receive principal payments in a
prescribed sequence, that do not have predetermined
principal balance schedules and that under all
circumstances receive payments of principal
continuously from the first distribution date on
which they receive principal until they are retired.
A single class that receives principal payments
before or after all other classes in the same series
of securities may be identified as a sequential pay
class.
Strip............................................ A class that receives a constant proportion, or
"strip," of the principal payments on the underlying
Trust Fund Assets.
Support Class (also sometimes referred to as
"companion classes")........................... A class that receives principal payments on any
distribution date only if scheduled payments have
been made on specified planned principal classes,
targeted principal classes and/or Scheduled Principal
Classes.
Targeted Principal Class or TACs................. A class that is designed to receive principal
payments using a predetermined principal balance
schedule derived by assuming a single constant
prepayment rate for the underlying Trust Fund Assets.
Interest Types
Fixed Rate....................................... A class with an interest rate that is fixed
throughout the life of the class.
Floating Rate.................................... A class with an interest rate that resets
periodically based upon a designated index and that
varies directly with changes in the index.
Inverse Floating Rate............................ A class with an interest rate that resets
periodically based upon a designated index and that
varies inversely with changes in the index.
Variable Rate.................................... A class with an interest rate that resets
periodically and is calculated by reference to the
rate or rates of interest applicable to specified
assets or instruments (e.g., the Loan Rates borne by
the underlying loans).
Interest Only.................................... A class that receives some or all of the interest
payments made on the underlying Trust Fund Assets and
little or no principal. Interest Only classes have
either a nominal principal balance or a notional
amount. A nominal principal balance represents actual
principal that will be paid on the class. It is
referred to as nominal since it is extremely small
compared to other classes. A notional amount is the
amount used as a reference to calculate the amount of
interest due on an Interest Only class that is not
entitled to any distributions in respect of
principal.
Principal Only................................... A class that does not bear interest and is entitled
to receive only distributions in respect of
principal.
33
CATEGORIES OF CLASSES DEFINITION
--------------------- ----------
Partial Accrual.................................. A class that accretes a portion of the amount of
accrued interest thereon, which amount will be added
to the principal balance of that class on each
applicable distribution date, with the remainder of
the accrued interest to be distributed currently as
interest on that class. This accretion may continue
until a specified event has occurred or until the
Partial Accrual class is retired.
Accrual.......................................... A class that accretes the amount of accrued interest
otherwise distributable on that class, which amount
will be added as principal to the principal balance
of that class on each applicable distribution date.
The accretion may continue until some specified event
has occurred or until the Accrual class is retired.
Indices Applicable to Floating Rate and Inverse Floating Rate Classes
LIBOR
The applicable prospectus supplement may specify some other basis for
determining LIBOR, but if it does not, on the LIBOR determination date (as
defined in the related prospectus supplement) for each class of certificates
of a series for which the applicable interest rate is determined by reference
to an index denominated as LIBOR, the person designated in the related pooling
and servicing agreement as the calculation agent will determine LIBOR in
accordance with one of the two methods described below (which method will be
specified in the related prospectus supplement):
LIBO Method
If using this method to calculate LIBOR, the calculation agent will
determine LIBOR by reference to the quotations, as set forth on the Reuters
Screen LIBO Page, offered by the principal London office of each of the
designated reference banks meeting the criteria set forth in this prospectus
for making one-month United States dollar deposits in leading banks in the
London Interbank market, as of 11:00 a.m. (London time) on the LIBOR
determination date. In lieu of relying on the quotations for those reference
banks that appear at the time on the Reuters Screen LIBO Page, the calculation
agent will request each of the reference banks to provide the offered
quotations at the time.
Under this method LIBOR will be established by the calculation agent on each
LIBOR determination date as follows:
(a) If on any LIBOR determination date two or more reference banks
provide offered quotations, LIBOR for the next interest accrual period
shall be the arithmetic mean of the offered quotations (rounded upwards
if necessary to the nearest whole multiple of 1/32%).
(b) If on any LIBOR determination date only one or none of the
reference banks provides offered quotations, LIBOR for the next interest
accrual period shall be whichever is the higher of
o LIBOR as determined on the previous LIBOR determination date, or
o the reserve interest rate.
The reserve interest rate shall be the rate per annum which the calculation
agent determines to be either
o the arithmetic mean (rounded upwards if necessary to the nearest whole
multiple of 1/32%) of the one-month United States dollar lending rates
that New York City banks selected by the calculation agent are quoting,
on the relevant LIBOR determination date, to the principal London offices
of at least two of the reference banks to which the quotations are, in
the opinion of the calculation agent being so made, or
34
o if the calculation agent cannot determine the arithmetic mean, the lowest
one-month United States dollar lending rate which New York City banks
selected by the calculation agent are quoting on the LIBOR determination
date to leading European banks.
(c) If on any LIBOR determination date for a class specified in the
related prospectus supplement, the calculation agent is required but is
unable to determine the reserve interest rate in the manner provided in
paragraph (b) above, LIBOR for the next interest accrual period shall be
LIBOR as determined on the preceding LIBOR determination date, or, in the
case of the first LIBOR determination date, LIBOR shall be considered to
be the per annum rate specified as such in the related prospectus
supplement.
Each reference bank shall be a leading bank engaged in transactions in
Eurodollar deposits in the international Eurocurrency market; shall not
control, be controlled by, or be under common control with the calculation
agent; and shall have an established place of business in London. If a
reference bank should be unwilling or unable to act as such or if appointment
of a reference bank is terminated, another leading bank meeting the criteria
specified above will be appointed.
BBA Method
If using this method of determining LIBOR, the calculation agent will
determine LIBOR on the basis of the British Bankers' Association "Interest
Settlement Rate" for one-month deposits in United States dollars as found on
Telerate page 3750 as of 11:00 a.m. London time on each LIBOR determination
date. Interest Settlement Rates currently are based on rates quoted by eight
British Bankers' Association designated banks as being, in the view of the
banks, the offered rate at which deposits are being quoted to prime banks in
the London interbank market. The Interest Settlement Rates are calculated by
eliminating the two highest rates and the two lowest rates, averaging the four
remaining rates, carrying the result (expressed as a percentage) out to six
decimal places, and rounding to five decimal places.
If on any LIBOR determination date, the calculation agent is unable to
calculate LIBOR in accordance with the method set forth in the immediately
preceding paragraph, LIBOR for the next interest accrual period shall be
calculated in accordance with the LIBOR method described under "LIBO Method."
The establishment of LIBOR on each LIBOR determination date by the
calculation agent and its calculation of the rate of interest for the
applicable classes for the related interest accrual period shall (in the
absence of manifest error) be final and binding.
COFI
The Eleventh District Cost of Funds Index is designed to represent the
monthly weighted average cost of funds for savings institutions in Arizona,
California and Nevada that are member institutions of the Eleventh Federal
Home Loan Bank District (the "Eleventh District"). The Eleventh District Cost
of Funds Index for a particular month reflects the interest costs paid on all
types of funds held by Eleventh District member institutions and is calculated
by dividing the cost of funds by the average of the total amount of those
funds outstanding at the end of that month and of the prior month and
annualizing and adjusting the result to reflect the actual number of days in
the particular month. If necessary, before these calculations are made, the
component figures are adjusted by the Federal Home Loan Bank of San Francisco
("FHLBSF") to neutralize the effect of events such as member institutions
leaving the Eleventh District or acquiring institutions outside the Eleventh
District. The Eleventh District Cost of Funds Index is weighted to reflect the
relative amount of each type of funds held at the end of the relevant month.
The major components of funds of Eleventh District member institutions are:
savings deposits, time deposits, FHLBSF advances, repurchase agreements and
all other borrowings. Because the component funds represent a variety of
maturities whose costs may react in different ways to changing conditions, the
Eleventh District Cost of Funds Index does not necessarily reflect current
market rates.
A number of factors affect the performance of the Eleventh District Cost of
Funds Index, which may cause it to move in a manner different from indices
tied to specific interest rates, such as United States Treasury bills or
LIBOR. Because the liabilities upon which the Eleventh District Cost of Funds
Index is
35
based were issued at various times under various market conditions and with
various maturities, the Eleventh District Cost of Funds Index may not
necessarily reflect the prevailing market interest rates on new liabilities of
similar maturities. Moreover, as stated above, the Eleventh District Cost of
Funds Index is designed to represent the average cost of funds for Eleventh
District savings institutions for the month prior to the month in which it its
due to be published. Additionally, the Eleventh District Cost of Funds Index
may not necessarily move in the same direction as market interest rates at all
times, since as longer term deposits or borrowings mature and are renewed at
prevailing market interest rates, the Eleventh District Cost of Funds Index is
influenced by the differential between the prior and the new rates on those
deposits or borrowings. In addition, movements of the Eleventh District Cost
of Funds Index, as compared to other indices tied to specific interest rates,
may be affected by changes instituted by the FHLBSF in the method used to
calculate the Eleventh District Cost of Funds Index.
The FHLBSF publishes the Eleventh District Cost of Funds Index in its
monthly Information Bulletin. Any individual may request regular receipt by
mail of Information Bulletins by writing the Federal Home Loan Bank of San
Francisco, P.O. Box 7948, 600 California Street, San Francisco, California
94120, or by calling (415) 616-1000. The Eleventh District Cost of Funds Index
may also be obtained by calling the FHLBSF at (415) 616-2600.
The FHLBSF has stated in its Information Bulletin that the Eleventh District
Cost of Funds Index for a month "will be announced on or near the last working
day" of the following month and also has stated that it "cannot guarantee the
announcement" of the index on an exact date. So long as the index for a month
is announced on or before the tenth day of the second following month, the
interest rate for each class of securities of a series as to which the
applicable interest rate is determined by reference to an index denominated as
COFI (each, a class of "COFI securities") for the Interest Accrual Period
commencing in the second following month will be based on the Eleventh
District Cost of Funds Index for the second preceding month. If publication is
delayed beyond the tenth day, the interest rate will be based on the Eleventh
District Cost of Funds Index for the third preceding month.
The applicable prospectus supplement may specify some other basis for
determining COFI, but if it does not, then if on the tenth day of the month in
which any interest accrual period commences for a class of COFI certificates
the most recently published Eleventh District Cost of Funds Index relates to a
month before the third preceding month, the index for the current interest
accrual period and for each succeeding interest accrual period will, except as
described in the next to last sentence of this paragraph, be based on the
National Monthly Median Cost of Funds Ratio to SAIF-Insured Institutions (the
"National Cost of Funds Index") published by the Office of Thrift Supervision
(the "OTS") for the third preceding month (or the fourth preceding month if
the National Cost of Funds Index for the third preceding month has not been
published on the tenth day of an interest accrual period). Information on the
National Cost of Funds Index may be obtained by writing the OTS at 1700 G
Street, N.W., Washington, D.C. 20552 or calling (202) 906-6677, and the
current National Cost of Funds Index may be obtained by calling (202) 906-
6988. If on the tenth day of the month in which an interest accrual period
commences the most recently published National Cost of Funds Index relates to
a month before the fourth preceding month, the applicable index for the
interest accrual period and each succeeding interest accrual period will be
based on LIBOR, as determined by the calculation agent in accordance with the
Agreement relating to the series of certificates. A change of index from the
Eleventh District Cost of Funds Index to an alternative index will result in a
change in the index level and could increase its volatility, particularly if
LIBOR is the alternative index.
The establishment of COFI by the calculation agent and its calculation of
the rates of interest for the applicable classes for the related interest
accrual period shall (in the absence of manifest error) be final and binding.
Treasury Index
The applicable prospectus supplement may specify some other basis for
determining and defining the Treasury index, but if it does not, on the
Treasury index determination date for each class of securities of a series for
which the applicable interest rate is determined by reference to an index
denominated as a Treasury index, the calculation agent will ascertain the
Treasury index for Treasury securities of the maturity and for
36
the period (or, if applicable, date) specified in the related prospectus
supplement. The Treasury index for any period means the average of the yield
for each business day during the specified period (and for any date means the
yield for the date), expressed as a per annum percentage rate, on U.S.
Treasury securities adjusted to the "constant maturity" specified in the
prospectus supplement or if no "constant maturity" is so specified, U.S.
Treasury securities trading on the secondary market having the maturity
specified in the prospectus supplement, in each case as published by the
Federal Reserve Board in its Statistical Release No. H.15 (519). Statistical
Release No. H.15 (519) is published on Monday or Tuesday of each week and may
be obtained by writing or calling the Publications Department at the Board of
Governors of the Federal Reserve System, 21st and C Streets, Washington, D.C.
20551 (202) 452-3244. If the calculation agent has not yet received
Statistical Release No. H.15 (519) for a week, then it will use the
Statistical Release from the preceding week.
Yields on U.S. Treasury securities at "constant maturity" are derived from
the U.S. Treasury's daily yield curve. This curve, which relates the yield on
a security to its time to maturity, is based on the closing market bid yields
on actively traded Treasury securities in the over-the-counter market. These
market yields are calculated from composites of quotations reported by five
leading U.S. Government securities dealers to the Federal Reserve Bank of New
York. This method provides a yield for a given maturity even if no security
with that exact maturity is outstanding. In the event that the Treasury Index
is no longer published, a new index based upon comparable data and methodology
will be designated in accordance with the Agreement relating to the particular
series of securities. The Calculation Agent's determination of the Treasury
Index, and its calculation of the rates of interest for the applicable classes
for the related Interest Accrual Period shall (in the absence of manifest
error) be final and binding.
Prime Rate
The applicable prospectus supplement may specify the party responsible for
determining the Prime Rate, but if it does not, on the Prime Rate
Determination Date (as that term is defined in the related prospectus
supplement) for each class of securities of a series as to which the
applicable interest rate is determined by reference to an index denominated as
the Prime Rate, the calculation agent will ascertain the Prime Rate for the
related interest accrual period. The applicable prospectus supplement may
provide for the means of determining the Prime Rate, but if it does not, the
Prime Rate for an interest accrual period will be the "Prime Rate" as
published in the "Money Rates" section of The Wall Street Journal (or if not
so published, the "Prime Rate" as published in a newspaper of general
circulation selected by the calculation agent in its sole discretion) on the
related Prime Rate Determination Date. If a prime rate range is given, then
the average of the range will be used. In the event that the Prime Rate is no
longer published, a new index based upon comparable data and methodology will
be designated in accordance with the Agreement relating to the particular
series of securities. The calculation agent's determination of the Prime Rate
and its calculation of the rates of interest for the related interest accrual
period shall (in the absence of manifest error) be final and binding.
Book-entry Registration of Securities
As described in the related prospectus supplement, if not issued in fully
registered form, each class of securities will be registered as book-entry
securities. Persons acquiring beneficial ownership interests in the securities
("Security Owners") will hold their securities through the Depository Trust
Company ("DTC") in the United States, or Clearstream, Luxembourg or Euroclear
(in Europe) if they are participants of those systems, or indirectly through
organizations which are participants in those systems. The book-entry
securities will be issued in one or more certificates which equal the
aggregate principal balance of the securities and will initially be registered
in the name of Cede & Co., the nominee of DTC. Clearstream, Luxembourg and
Euroclear will hold omnibus positions on behalf of their participants through
customers' securities accounts in Clearstream, Luxembourg's and Euroclear's
names on the books of their respective depositories which in turn will hold
those positions in customers' securities accounts in the depositories' names
on the books of DTC. Citibank, N.A., will act as depositary for Clearstream,
Luxembourg and The Chase Manhattan Bank will act as depositary for Euroclear
(in those capacities, individually the "Relevant Depositary" and collectively
the "European Depositories"). Except as described below, no person acquiring a
book-entry security (each, a
37
"beneficial owner") will be entitled to receive a physical certificate
representing the security (a "Definitive Security"). Unless and until
Definitive Securities are issued, it is anticipated that the only
"securityholders" of the securities will be Cede & Co., as nominee of DTC.
Security Owners are only permitted to exercise their rights indirectly through
the participating organizations that use the services of DTC, including
securities brokers and dealers, banks and trust companies and clearing
corporations and certain other organizations and DTC.
A Security Owner's ownership of a book-entry security will be recorded on
the records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a "Financial Intermediary") that maintains the beneficial
owner's account for that purpose. In turn, the Financial Intermediary's
ownership of the book-entry security will be recorded on the records of DTC
(or of a participating firm that acts as agent for the Financial Intermediary,
whose interest will in turn be recorded on the records of DTC, if the
beneficial owner's Financial Intermediary is not a DTC participant, and on the
records of Clearstream, Luxembourg or Euroclear, as appropriate).
Security Owners will receive all distributions of principal of, and interest
on, the securities from the applicable trustee through DTC and DTC
participants. While the securities are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC must make
book-entry transfers among participants on whose behalf it acts with respect
to the securities and is required to receive and transmit distributions of
principal of, and interest on, the securities. Participants and organizations
that have indirect access to the DTC system, such as banks, brokers, dealers,
trust companies and other indirect participants that clear through or maintain
a custodial relationship with a participant, with whom Security Owners have
accounts for securities are similarly required to make book-entry transfers
and receive and transmit those distributions on behalf of their respective
Security Owners. Accordingly, although Security Owners will not possess
physical certificates, the Rules provide a mechanism by which Security Owners
will receive distributions and will be able to transfer their interest.
Security Owners will not receive or be entitled to receive certificates
representing their respective interests in the book-entry securities, except
under the limited circumstances described below. Unless and until Definitive
Securities are issued, Security Owners who are not participants may transfer
ownership of securities only through participants and indirect participants by
instructing them to transfer securities, by book-entry transfer, through DTC
for the account of the purchasers of the securities, which account is
maintained with their respective participants. Under the Rules and in
accordance with DTC's normal procedures, transfers of ownership of securities
will be executed through DTC and the accounts of the respective Participants
at DTC will be debited and credited. Similarly, the participants and indirect
participants will make debits or credits, as the case may be, on their records
on behalf of the selling and purchasing Security Owners.
Because of time zone differences, credits of securities received in
Clearstream, Luxembourg or Euroclear as a result of a transaction with a
participant will be made during subsequent securities settlement processing
and dated the business day following the DTC settlement date. Those credits or
any transactions in those securities will be reported to the relevant
Euroclear or Clearstream, Luxembourg participants on the business day
following the DTC settlement date. Cash received in Clearstream, Luxembourg or
Euroclear as a result of sales of securities by or through a Clearstream,
Luxembourg participant or Euroclear participant to a DTC participant will be
received with value on the DTC settlement date but will be available in the
relevant Clearstream, Luxembourg or Euroclear cash account only as of the
business day following settlement in DTC. For information with respect to tax
documentation procedures relating to the Notes, see "Material Federal Income
Tax Consequences -- Tax Treatment of Foreign Investors" and " -- Tax
Consequences to Holders of the Notes -- Backup Withholding" in this prospectus
and "Global Clearance, Settlement And Tax Documentation Procedures -- Certain
U.S. Federal Income Tax Documentation Requirements" in Annex I attached to
this prospectus.
Transfers between participants will occur in accordance with DTC rules.
Transfers between Clearstream, Luxembourg participants and Euroclear
participants will occur in accordance with their respective rules and
operating procedures.
38
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream,
Luxembourg participants or Euroclear participants, on the other, will be
effected in DTC in accordance with DTC rules on behalf of the relevant
European international clearing system by the Relevant Depositary. However,
these cross-market transactions will require delivery of instructions to the
relevant European international clearing system by the counterparty in that
system in accordance with its rules and procedures and within its established
deadlines (European time). The relevant European international clearing system
will, if the transaction meets its settlement requirements, deliver
instructions to the Relevant Depositary to take action to effect final
settlement on its behalf by delivering or receiving securities in DTC, and
making or receiving payment in accordance with normal procedures for same day
funds settlement applicable to DTC. Clearstream, Luxembourg participants and
Euroclear participants may not deliver instructions directly to the European
Depositories.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (or their representatives) own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC participant in the book-entry securities, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of book-entry securities will be subject to the rules,
regulations and procedures governing DTC and DTC participants as in effect
from time to time.
Clearstream Banking, societe anonyme, 67 Bd Grande-Duchesse Charlotte, L-
2967 Luxembourg ("Clearstream, Luxembourg"), was incorporated in 1970 as
"Cedel S.A," a company with limited liability under Luxembourg law (a societe
anonyme). Cedel S.A. subsequently changed its name to Cedelbank. On January 10,
2000, Cedelbank's parent company, Cedel International, societe anonyme merged
its clearing, settlement and custody business with that of Deutsche Borse
Clearing AG. The merger involved the transfer by Cedel International of
substantially all of its assets and liabilities to a new Luxembourg company,
New Cedel International, societe anonyme, which is 50% owned by Cedel
International and 50% owned by Deutsche Borse Clearing AG's parent company
Deutsche Borse AG. The shareholders of these two entities are banks,
securities dealers and financial institutions. Cedel International currently
has 92 shareholders, including U.S. financial institutions or their
subsidiaries. No single entity may own more than 5 percent of Cedel
International's stock.
Further to the merger, the Board of Directors of New Cedel International
decided to re-name the companies in the group to give them a cohesive brand
name. The new brand name that was chosen is "Clearstream." With effect from
January 14, 2000 New Cedel International has been renamed "Clearstream
International, societe anonyme." On January 18, 2000, Cedelbank was renamed
"Clearstream Banking, societe anonyme," and Cedel Global Services was renamed
"Clearstream Services, societe anonyme."
On 17 January 2000 Deutsche Borse Clearing AG was renamed "Clearstream
Banking AG." This means that there are now two entities in the corporate group
headed by Clearstream International which share the name "Clearstream
Banking," the entity previously named "Cedelbank" and the entity previously
named "Deutsche Borse Clearing AG."
Clearstream, Luxembourg holds securities for its customers and facilitates
the clearance and settlement of securities transactions between Clearstream,
Luxembourg participants through electronic book-entry changes in accounts of
Clearstream, Luxembourg participants, thereby eliminating the need for
physical movement of securities. Transactions may be settled in Clearstream,
Luxembourg in any of 36 currencies, including United States dollars.
Clearstream, Luxembourg provides to its participants, among other things,
services for safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing.
Clearstream, Luxembourg also deals with domestic securities markets in over 30
countries through established depository and custodial relationships.
Clearstream, Luxembourg is registered as a bank in Luxembourg, and as such is
subject to regulation by the Commission de Surveillance du Secteur Financier,
which supervises Luxembourg banks. Clearstream, Luxembourg's participants are
world-wide financial institutions including underwriters, securities brokers
and dealers, banks, trust companies and clearing corporations. Clearstream,
Luxembourg's U.S. participants are limited to securities brokers and dealers
and banks. Currently, Clearstream, Luxembourg has approximately 2,000
customers located in over 80 countries, including all major European
countries, Canada and the United States. Indirect access to
39
Clearstream, Luxembourg is also available to other institutions that clear
through or maintain a custodial relationship with an account holder of
Clearstream, Luxembourg. Clearstream, Luxembourg has established an electronic
bridge with Morgan Guaranty Trust Company of New York as the operator of the
Euroclear System ("MGT/EOC") in Brussels to facilitate settlement of trades
between Clearstream, Luxembourg and MGT/EOC.
Euroclear was created in 1968 to hold securities for its participants and to
clear and settle transactions between Euroclear participants through
simultaneous electronic book-entry delivery against payment, thereby
eliminating the need for physical movement of securities and any risk from
lack of simultaneous transfers of securities and cash. Transactions may be
settled in any of 32 currencies, including United States dollars. Euroclear
includes various other services, including securities lending and borrowing
and deals with domestic securities markets in several countries generally
similar to the arrangements for cross-market transfers with DTC described
above. Euroclear is operated by MGT/EOC under contract with Euroclear
Clearance Systems S.C., a Belgian cooperative corporation. All operations are
conducted by MGT/EOC, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not
Euroclear Clearance Systems, S.C. Euroclear Clearance Systems S.C. establishes
policy for Euroclear on behalf of Euroclear participants. Euroclear
Participants include banks (including central banks), securities brokers and
dealers and other professional financial intermediaries. Indirect access to
Euroclear is also available to other firms that clear through or maintain a
custodial relationship with a Euroclear participant, either directly or
indirectly.
MGT/EOC 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 MGT/EOC 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. MGT/EOC
acts under the Terms and Conditions only on behalf of Euroclear Participants,
and has no record of or relationship with persons holding through Euroclear
Participants.
Under a book-entry format, beneficial owners of the book-entry securities
may experience some delay in their receipt of payments, since those payments
will be forwarded by the trustee to Cede & Co., as nominee of DTC.
Distributions with respect to securities held through Clearstream, Luxembourg
or Euroclear will be credited to the cash accounts of Clearstream, Luxembourg
participants or Euroclear participants in accordance with the relevant
system's rules and procedures, to the extent received by the Relevant
Depositary. Those distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. See "Federal Income Tax
Consequences -- Tax Treatment of Foreign Investors" and " -- Tax Consequences
to Holders of the Notes -- Backup Withholding" in this prospectus and "Global
Clearance, Settlement And Tax Documentation Procedures -- Certain U.S. Federal
Income Tax Documentation Requirements" in Annex I attached to this prospectus.
Because DTC can only act on behalf of Financial Intermediaries, the ability of
a Security Owner to pledge book-entry securities to persons or entities that
do not participate in the depository system may be limited due to the lack of
physical certificates for the book-entry securities. In addition, issuance of
the book-entry securities in book-entry form may reduce the liquidity of those
securities in the secondary market since certain potential investors may be
unwilling to purchase securities for which they cannot obtain physical
certificates.
Monthly and annual reports on the Trust will be provided to Cede & Co., as
nominee of DTC, and may be made available by Cede & Co. to Security Owners
upon request, in accordance with the Rules, and to the Financial
Intermediaries to whose DTC accounts the book-entry securities of those
Security Owners are credited.
DTC has advised the depositor and the trustee that, unless and until
Definitive Securities are issued, DTC will take any action permitted to be
taken by the holders of the book-entry securities under the
40
applicable Agreement only at the direction of one or more Financial
Intermediaries to whose DTC accounts the book-entry securities are credited,
to the extent that the actions are taken on behalf of Financial Intermediaries
whose holdings include the book-entry securities. Clearstream, Luxembourg or
MGT/EOC, as the case may be, will take any other action permitted to be taken
by a securityholder under the Agreement on behalf of a Clearstream, Luxembourg
participant or Euroclear participant only in accordance with its relevant
rules and procedures and subject to the ability of the Relevant Depositary to
effect the actions on its behalf through DTC. DTC may take actions, at the
direction of the related participants, with respect to some securities which
conflict with actions taken with respect to other securities.
The applicable prospectus supplement may specify when and for what reasons
Definitive Securities may be issued, but if it does not, Definitive Securities
will be issued to Security Owners or their nominees, rather than to DTC, only
if
o 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 securities and the
depositor or the trustee is unable to locate a qualified successor;
o the depositor, at its sole option, elects to terminate the book-entry
system through DTC; or
o after the occurrence of an event of default under the applicable
Agreement, beneficial owners of securities representing not less than 51%
of the aggregate percentage interests evidenced by each class of
securities of the related series issued as book-entry securities advise
the trustee and the DTC through the financial intermediaries in writing
that the continuation of a book-entry system through DTC, or a successor
to it, is no longer in the best interests of the beneficial owners.
Upon the availability of Definitive Securities, the applicable trustee will
be required to notify all Security Owners of the occurrence of the event
resulting in their availability and the availability through DTC of Definitive
Securities. Upon surrender by DTC of the global certificate or certificates
representing the book-entry securities and instructions for re-registration,
the applicable trustee will issue Definitive Securities, and thereafter the
applicable trustee will recognize the holders of Definitive Securities as
securityholders under the applicable Agreement.
Although DTC, Clearstream, Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of securities among
participants of DTC, Clearstream, Luxembourg and Euroclear, they are under no
obligation to perform or continue to perform those procedures and those
procedures may be discontinued at any time.
The foregoing information with respect to DTC, Clearstream, Luxembourg and
Euroclear has been provided for informational purposes only and is not a
representation, warranty or contract modification of any kind by DTC,
Clearstream, Luxembourg or Euroclear.
None of the master servicer, the depositor or the trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the book-entry securities held by
Cede & Co., as nominee of DTC, or for maintaining, supervising or reviewing
any records relating to the beneficial ownership interests.
Credit Enhancement
General
Credit enhancement may be provided with respect to one or more classes of a
series of securities or with respect to the related Trust Fund Assets. Credit
enhancement may be in the form of a limited financial guaranty policy issued
by an entity named in the related prospectus supplement, the subordination of
one or more classes of the securities of the series, the establishment of one
or more reserve funds, the use of a cross-collateralization feature, use of a
mortgage pool insurance policy, bankruptcy bond, special hazard insurance
policy, surety bond, letter of credit, guaranteed investment contract,
overcollateralization, or another method of credit enhancement contemplated in
this prospectus or described in the related prospectus supplement, or any
combination of the foregoing. See "The Agreements -- Realization upon
Defaulted Loans -- Insurance
41
Policies, Surety Bonds and Guaranties" for a description of guaranteed
investment contracts. The applicable prospectus supplement may provide for
credit enhancement which covers all the classes of securities, or only certain
classes and such credit enhancement may not provide protection against all
risks of loss and will not guarantee repayment of the entire principal balance
of the securities and interest thereon. If losses occur which exceed the
amount covered by credit enhancement or which are not covered by the credit
enhancement, securityholders will bear their allocable share of any
deficiencies.
Subordination
If so specified in the related prospectus supplement, protection afforded to
holders of one or more classes of securities of a series by means of the
subordination feature may be accomplished by the preferential right of holders
("Senior Securityholders") of one or more other classes of the series (the
"Senior Securities") to distributions in respect of scheduled principal,
Principal Prepayments, interest or any combination thereof that otherwise
would have been payable to holders ("Subordinated Securityholders") of
subordinated securities (the "Subordinated Securities") under the
circumstances and to the extent specified in the related prospectus
supplement. Protection may also be afforded to the holders of Senior
Securities of a series by: (i) reducing the ownership interest (if applicable)
of the related Subordinated Securities; (ii) a combination of the immediately
preceding sentence and clause (i) above; or (iii) as otherwise described in
the related prospectus supplement. If so specified in the related prospectus
supplement, delays in receipt of scheduled payments on the loans and losses on
defaulted loans may be borne first by the various classes of subordinated
securities and thereafter by the various classes of Senior Securities, in each
case under the circumstances and subject to the limitations specified in the
prospectus supplement. The aggregate distributions in respect of delinquent
payments on the loans over the lives of the securities or at any time, the
aggregate losses in respect of defaulted loans which must be borne by the
Subordinated Securities by virtue of subordination and the amount of the
distributions otherwise distributable to the Subordinated Securityholders that
will be distributable to Senior Securityholders on any distribution date may
be limited as specified in the related prospectus supplement. In the event
that delinquent payments on the loans or aggregate losses in respect of the
loans were to exceed an amount specified in the related prospectus supplement,
holders of Senior Securities would experience losses or delays in payments on
the securities.
In addition to or in lieu of the foregoing, if so specified in the related
prospectus supplement, all or any portion of distributions otherwise payable
to holders of Subordinated Securities on any distribution date may instead be
deposited into one or more reserve funds established with the trustee or
distributed to holders of Senior Securities. Those deposits may be made on
each distribution date, for specified periods or until the balance in the
reserve fund has reached a specified amount and, following payments from the
reserve fund to holders of Senior Securities or otherwise, thereafter to the
extent necessary to restore the balance in the reserve fund to required
levels, in each case as specified in the related prospectus supplement.
Amounts on deposit in the reserve fund may be released to the holders of
certain classes of securities at the times and under the circumstances
specified in the prospectus supplement.
If specified in the related prospectus supplement, various classes of Senior
Securities and Subordinated Securities may themselves be subordinate in their
right to receive certain distributions to other classes of Senior and
Subordinated Securities, respectively, through a cross-collateralization
mechanism or otherwise.
As between classes of Senior Securities and as between classes of
Subordinated Securities, distributions may be allocated among those classes
(i) in the order of their scheduled final distribution dates, (ii) in
accordance with a schedule or formula, (iii) in relation to the occurrence of
events, or (iv) otherwise, in each case as specified in the related prospectus
supplement. As between classes of Subordinated Securities, payments to holders
of Senior Securities on account of delinquencies or losses and payments to any
reserve fund will be allocated as specified in the related prospectus
supplement.
Letter of Credit
The letter of credit, if any, with respect to a series of securities will be
issued by the bank or financial institution specified in the related
prospectus supplement (the "L/C Bank"). Under the letter of credit, the L/C
Bank will be obligated to honor drawings thereunder in an aggregate fixed
dollar amount, net of
42
unreimbursed payments thereunder, equal to the percentage specified in the
related prospectus supplement of the aggregate principal balance of the loans
on the related cut-off date or of one or more Classes of securities (the "L/C
Percentage"). If so specified in the related prospectus supplement, the letter
of credit may permit drawings in the event of losses not covered by insurance
policies or other credit support, such as losses arising from damage not
covered by standard hazard insurance policies, losses resulting from the
bankruptcy of a borrower and the application of certain provisions of the
federal Bankruptcy Code, or losses resulting from denial of insurance coverage
due to misrepresentations in connection with the origination of a loan. The
amount available under the letter of credit will, in all cases, be reduced to
the extent of the unreimbursed payments thereunder. The obligations of the L/C
Bank under the letter of credit for each series of securities will expire at
the earlier of the date specified in the related prospectus supplement or the
termination of the trust fund. See "The Agreements -- Termination: Optional
Termination."
Insurance Policies, Surety Bonds and Guaranties
If so provided in the prospectus supplement for a series of securities,
deficiencies in amounts otherwise payable on the securities or certain classes
thereof will be covered by insurance policies and/or surety bonds provided by
one or more insurance companies or sureties. Those instruments may cover, with
respect to one or more classes of securities of the related series, timely
distributions of interest and/or full distributions of principal on the basis
of a schedule of principal distributions set forth in or determined in the
manner specified in the related prospectus supplement. In addition, if
specified in the related prospectus supplement, a trust fund may also include
bankruptcy bonds, special hazard insurance policies, other insurance or
guaranties (including guaranteed investment contracts) for the purpose of (i)
maintaining timely payments or providing additional protection against losses
on the assets included in the trust fund, (ii) paying administrative expenses
or (iii) establishing a minimum reinvestment rate on the payments made in
respect of those assets or a principal payment rate on those assets. These
arrangements may include agreements under which securityholders are entitled
to receive amounts deposited in various accounts held by the trustee upon the
terms specified in the prospectus supplement.
Over-collateralization
If so provided in the prospectus supplement for a series of securities, a
portion of the interest payment on each loan may be applied as an additional
distribution in respect of principal to reduce the principal balance of a
certain class or classes of securities and, thus, accelerate the rate of
payment of principal on that class or those classes of securities. Reducing
the principal balance of the securities without a corresponding reduction in
the principal balance of the underlying Trust Fund Assets will result in over-
collateralization.
Reserve Accounts
If specified in the related prospectus supplement, credit support with
respect to a series of securities will be provided by the establishment and
maintenance with the trustee for the series of securities, in trust, of one or
more reserve funds for the series. The related prospectus supplement will
specify whether or not any reserve funds will be included in the trust fund
for a series.
The reserve fund for a series will be funded (i) by the deposit of cash,
United States Treasury securities, instruments evidencing ownership of
principal or interest payments thereon, letters of credit, demand notes,
certificates of deposit or a combination thereof in the aggregate amount
specified in the related prospectus supplement, (ii) by the deposit from time
to time of certain amounts, as specified in the related prospectus supplement
to which the Subordinated Securityholders, if any, would otherwise be entitled
or (iii) in such other manner as may be specified in the related prospectus
supplement.
43
Any amounts on deposit in the reserve fund and the proceeds of any other
instrument upon maturity will be held in cash or will be invested in
"Permitted Investments" which may include
(i) obligations of the United States or any agency thereof, provided
those obligations are backed by the full faith and credit of the
United States;
(ii) general obligations of or obligations guaranteed by any state of
the United States or the District of Columbia receiving the highest
long-term debt rating of each Rating Agency rating the related
series of securities, or such lower rating as will not result in
the downgrading or withdrawal of the ratings then assigned to the
securities by each Rating Agency;
(iii) commercial or finance company paper which is then receiving the
highest commercial or finance company paper rating of each Rating
Agency, or such lower rating as will not result in the downgrading
or withdrawal of the ratings then assigned to the securities by
each Rating Agency;
(iv) certificates of deposit, demand or time deposits, or bankers'
acceptances issued by any depository institution or trust company
incorporated under the laws of the United States or of any state
thereof and subject to supervision and examination by federal and/
or state banking authorities, provided that the commercial paper
and/or long term unsecured debt obligations of the depository
institution or trust company (or in the case of the principal
depository institution in a holding company system, the commercial
paper or long-term unsecured debt obligations of such holding
company, but only if Moody's Investors Service, Inc. ("Moody's") is
not a Rating Agency) are then rated one of the two highest long-
term and the highest short-term ratings of each Rating Agency for
the securities, or such lower ratings as will not result in the
downgrading or withdrawal of the rating then assigned to the
securities by any Rating Agency;
(v) demand or time deposits or certificates of deposit issued by any
bank or trust company or savings institution to the extent that the
deposits are fully insured by the FDIC;
(vi) guaranteed reinvestment agreements issued by any bank, insurance
company or other corporation containing, at the time of the
issuance of the agreements, terms and conditions that will not
result in the downgrading or withdrawal of the rating then assigned
to the securities by any Rating Agency;
(vii) repurchase obligations with respect to any security described in
clauses (i) and (ii) above, in either case entered into with a
depository institution or trust company (acting as principal)
described in clause (iv) above;
(viii)securities (other than stripped bonds, stripped coupons or
instruments sold at a purchase price in excess of 115% of the face
amount thereof) bearing interest or sold at a discount issued by
any corporation incorporated under the laws of the United States or
any state thereof which, at the time of the investment, have one of
the two highest ratings of each Rating Agency (except if the Rating
Agency is Moody's, such rating shall be the highest commercial
paper rating of Moody's for any such securities), or such lower
rating as will not result in the downgrading or withdrawal of the
rating then assigned to the securities by any Rating Agency, as
evidenced by a signed writing delivered by each Rating Agency;
(ix) short term investment funds sponsored by any trust company or
national banking association incorporated under the laws of the
United States or any state thereof which on the date of acquisition
has been rated by each Rating Agency in their respective highest
applicable rating category or such lower rating as will not result
in the downgrading or withdrawal of the ratings then assigned to
the securities by each Rating Agency;
(x) securities issued or guaranteed by GNMA, Fannie Mae or Freddie Mac;
and
(xi) other investments having a specified stated maturity and bearing
interest or sold at a discount acceptable to each Rating Agency
that will not result in the downgrading or withdrawal of the rating
then assigned to the securities by any Rating Agency, as evidenced
by a signed writing delivered by each Rating Agency; provided that
no instrument shall be a Permitted Investment if
44
the instrument evidences the right to receive interest only
payments with respect to the obligations underlying the instrument;
and provided, further, that no investment specified in clause (ix)
or clause (x) above shall be a Permitted Investment for any pre-
funding account or any related Capitalized Interest Account.
If a letter of credit is deposited with the trustee, that letter of credit
will be irrevocable and will name the trustee, in its capacity as trustee for
the holders of the securities, as beneficiary and will be issued by an entity
acceptable to each Rating Agency that rates the securities of the related
series. Additional information with respect to the instruments deposited in
the reserve funds will be set forth in the related prospectus supplement.
Any amounts so deposited and payments on instruments so deposited will be
available for withdrawal from the reserve fund for distribution to the holders
of securities of the related series for the purposes, in the manner and at the
times specified in the related prospectus supplement.
Pool Insurance Policies
If specified in the related prospectus supplement, a separate pool insurance
policy ("Pool Insurance Policy") will be obtained for the pool and issued by
the insurer (the "Pool Insurer") named in the prospectus supplement. Each Pool
Insurance Policy will, subject to the limitations described below, cover loss
by reason of default in payment on loans in the pool in an amount equal to a
percentage specified in the prospectus supplement of the aggregate principal
balance of the loans on the cut-off date which are not covered as to their
entire outstanding principal balances by Primary Mortgage Insurance Policies.
As more fully described below, the master servicer will present claims
thereunder to the Pool Insurer on behalf of itself, the trustee and the
holders of the securities of the related series. The Pool Insurance Policies,
however, are not blanket policies against loss, since claims thereunder may
only be made respecting particular defaulted loans and only upon satisfaction
of certain conditions precedent described below. The applicable prospectus
supplement may provide for the extent of coverage provided by the related Pool
Insurance Policy, but if it does not, the Pool Insurance Policies will not
cover losses due to a failure to pay or denial of a claim under a Primary
Mortgage Insurance Policy.
The applicable prospectus supplement may provide for the conditions for the
presentation of claims under a Pool Insurance Policy, but if it does not, the
Pool Insurance Policy will provide that no claims may be validly presented
unless (i) any required Primary Mortgage Insurance Policy is in effect for the
defaulted loan and a claim thereunder has been submitted and settled; (ii)
hazard insurance on the related Property has been kept in force and real
estate taxes and other protection and preservation expenses have been paid;
(iii) if there has been physical loss or damage to the Property, it has been
restored to its physical condition (reasonable wear and tear excepted) at the
time of issuance of the policy; and (iv) the insured has acquired good and
merchantable title to the Property free and clear of liens except certain
permitted encumbrances. Upon satisfaction of these conditions, the Pool
Insurer will have the option either (a) to purchase the Property securing the
defaulted loan at a price equal to the principal balance thereof plus accrued
and unpaid interest at the Loan Rate to the date of purchase and certain
expenses incurred by the master servicer on behalf of the trustee and
securityholders, or (b) to pay the amount by which the sum of the principal
balance of the defaulted loan plus accrued and unpaid interest at the Loan
Rate to the date of payment of the claim and the aforementioned expenses
exceeds the proceeds received from an approved sale of the Property, in either
case net of certain amounts paid or assumed to have been paid under the
related Primary Mortgage Insurance Policy. If any Property securing a
defaulted loan is damaged and proceeds, if any, from the related hazard
insurance policy or the applicable special hazard insurance policy are
insufficient to restore the damaged Property to a condition sufficient to
permit recovery under the Pool Insurance Policy, the master servicer will not
be required to expend its own funds to restore the damaged Property unless it
determines that (i) the restoration will increase the proceeds to
securityholders on liquidation of the loan after reimbursement of the master
servicer for its expenses and (ii) the expenses will be recoverable by it
through proceeds of the sale of the Property or proceeds of the related Pool
Insurance Policy or any related Primary Mortgage Insurance Policy.
45
The applicable prospectus supplement may provide for a Pool Insurance Policy
covering losses resulting from defaults. Primary Mortgage Insurance Policies
generally do not insure against loss sustained by reason of a default arising
from, among other things,
o fraud or negligence in the origination or servicing of a loan, including
misrepresentation by the borrower, the originator or persons involved in
the origination thereof, or
o failure to construct a Property in accordance with plans and
specifications.
A failure of coverage attributable to one of the foregoing events might
result in a breach of the related seller's representations described above and
might give rise to an obligation on the part of the related seller to
repurchase the defaulted loan if the breach cannot be cured by the related
seller. No Pool Insurance Policy will cover (and many Primary Mortgage
Insurance Policies do not cover) a claim in respect of a defaulted loan
occurring when the servicer of the loan, at the time of default or thereafter,
was not approved by the applicable insurer.
The applicable prospectus supplement may provide for a Pool Insurance Policy
featuring a fixed amount of coverage over the life of the policy, but if it
does not, the original amount of coverage under each Pool Insurance Policy
will be reduced over the life of the related securities by the aggregate
dollar amount of claims paid less the aggregate of the net amounts realized by
the Pool Insurer upon disposition of all foreclosed properties. The applicable
prospectus supplement may provide for the exclusion of specified expenses from
the coverage of the Pool Insurance Policy, but if it does not, the amount of
claims paid will include certain expenses incurred by the master servicer as
well as accrued interest on delinquent loans to the date of payment of the
claim. Accordingly, if aggregate net claims paid under any Pool Insurance
Policy reach the original policy limit, coverage under that Pool Insurance
Policy will be exhausted and any further losses will be borne by the related
securityholders.
Special Hazard Insurance Policies
If specified in the related prospectus supplement, a separate special hazard
insurance policy will be obtained for the mortgage pool and will be issued by
the insurer named in the prospectus supplement. Each special hazard insurance
policy will, subject to policy limitations, protect holders of the related
securities from loss caused by the application of the coinsurance clause
contained in hazard insurance policies and loss from damage to mortgaged
properties caused by certain hazards not insured against under the standard
form of hazard insurance policy in the states where the mortgaged properties
are located or under a flood insurance policy if the Property is located in a
federally designated flood area. Some of the losses covered include
earthquakes and, to a limited extent, tidal waves and related water damage and
other losses that may be specified in the related prospectus supplement. See
"The Agreements -- Hazard Insurance." No special hazard insurance policy will
cover losses from fraud or conversion by the trustee or master servicer, war,
insurrection, civil war, certain governmental action, errors in design, faulty
workmanship or materials (except under certain circumstances), nuclear or
chemical reaction, flood (if the Property is located in a federally designated
flood area), nuclear or chemical contamination and certain other risks. The
amount of coverage under any special hazard insurance policy will be specified
in the related prospectus supplement. Each special hazard insurance policy
will provide that no claim may be paid unless hazard and, if applicable, flood
insurance on the Property securing the mortgage loan have been kept in force
and other protection and preservation expenses have been paid.
The applicable prospectus supplement may provide for other payment coverage,
but if it does not, each special hazard policy will insure against damage to
mortgaged properties caused by special hazard losses in an amount equal to the
lesser of:
o the cost of repair to or replacement of the damaged Property, or
o upon transfer of the Property to the special hazard insurer, the unpaid
principal balance of the mortgage loan at the time of acquisition of the
Property by foreclosure or deed in lieu of foreclosure, plus accrued
interest to the date of claim settlement and certain expenses incurred by
the servicer with respect to the Property.
46
If the unpaid principal balance of a mortgage loan, plus accrued interest
and expenses, is paid by the special hazard insurer, the amount of further
coverage under the related special hazard insurance policy will be reduced by
that amount less any net proceeds from the sale of the Property. In addition,
any amount paid to repair or replace the Property will further reduce special
hazard coverage by that amount.
No special hazard policy will insure against damage that is covered by a
hazard insurance policy or flood insurance policy, if any, maintained by the
mortgagor or the servicer.
So long as a mortgage pool insurance policy remains in effect, the payment
by the special hazard insurer of the cost of repair or of the unpaid principal
balance of the related mortgage loan plus accrued interest and certain
expenses will not affect the total insurance proceeds paid to
certificateholders, but will affect the relative amounts of coverage remaining
under the related special hazard insurance policy and mortgage pool insurance
policy.
To the extent specified in the prospectus supplement, the master servicer
may deposit cash, an irrevocable letter of credit, or any other instrument
acceptable to each rating agency rating the securities of the related series
at the request of the depositor in a special trust account to provide
protection in lieu of or in addition to that provided by a special hazard
insurance policy. The amount of any special hazard insurance policy or of the
deposit to the special trust account relating to the securities may be reduced
so long as the reduction will not result in a downgrading of the rating of the
securities by a rating agency rating securities at the request of the
depositor.
Bankruptcy Bonds
If specified in the related prospectus supplement, a bankruptcy bond to
cover losses resulting from proceedings under the federal Bankruptcy Code with
respect to a mortgage loan will be issued by an insurer named in the
prospectus supplement. Each bankruptcy bond will cover, to the extent
specified in the related prospectus supplement, certain losses resulting from
a reduction by a bankruptcy court of scheduled payments of principal and
interest on a mortgage loan or a reduction by the court of the principal
amount of a mortgage loan and will cover certain unpaid interest on the amount
of a principal reduction from the date of the filing of a bankruptcy petition.
The required amount of coverage under each bankruptcy bond will be set forth
in the related prospectus supplement. Coverage under a bankruptcy bond may be
canceled or reduced by the master servicer if the cancellation or reduction
would not adversely affect the then current rating or ratings of the related
securities. See "Legal Aspects of the Mortgage Loans -- Anti-deficiency
Legislation and Other Limitations on Lenders."
To the extent specified in the prospectus supplement, the master servicer
may deposit cash, an irrevocable letter of credit or any other instrument
acceptable to each nationally recognized rating agency rating the certificates
of the related series at the request of the depositor in a special trust
account to provide protection in lieu of or in addition to that provided by a
bankruptcy bond. The amount of any bankruptcy bond or of the deposit to the
special trust account relating to the certificates may be reduced so long as
the reduction will not result in a downgrading of the rating of the
certificates by a rating agency rating certificates at the request of the
depositor.
Cross Support
If specified in the related prospectus supplement, the beneficial ownership
of separate groups of assets included in a trust fund may be evidenced by
separate classes of the related series of securities. In that case, credit
support may be provided by a cross support feature that requires that
distributions be made on securities evidencing a beneficial ownership interest
in other asset groups within the same trust fund. The related prospectus
supplement for a series that includes a cross support feature will describe
the manner and conditions for applying the cross support feature.
If specified in the related prospectus supplement, the coverage provided by
one or more forms of credit support may apply concurrently to two or more
related trust funds. If applicable, the related prospectus supplement will
identify the trust funds to which the credit support relates and the manner of
determining the amount of the coverage provided by it and of the application
of the coverage to the identified trust funds.
47
Financial Instruments
If specified in the related prospectus supplement, the trust fund may
include one or more swap arrangements or other financial instruments that are
intended to meet the following goals:
o to convert the payments on some or all of the mortgage loans, private
securities or agency securities from fixed to floating payments, or from
floating to fixed, or from floating based on a particular index to
floating based on another index;
o to provide payments in the event that any index rises above or falls
below specified levels; or
o to provide protection against interest rate changes, certain type of
losses, including reduced market value, or other payment shortfalls to
one or more classes of the related series.
If a trust fund includes financial instruments of this type, the instruments
may be structured to be exempt from the registration requirements of the
Securities Act.
Yield and Prepayment Considerations
The yields to maturity and weighted average lives of the securities will be
affected primarily by the amount and timing of principal payments received on
or in respect of the Trust Fund Assets included in the related trust fund. The
original terms to maturity of the loans in a given pool will vary depending
upon the type of loans included the pool. Each prospectus supplement will
contain information with respect to the type and maturities of the loans in
the related pool. The related prospectus supplement will specify the
circumstances, if any, under which the related loans will be subject to
prepayment penalties. The prepayment experience on the loans in a pool will
affect the weighted average life of the related series of securities.
The rate of prepayment on the loans cannot be predicted. Generally, home
equity loans are not viewed by borrowers as permanent financing. Accordingly,
home equity loans may experience a higher rate of prepayment than traditional
first mortgage loans. On the other hand, because home equity loans such as the
revolving credit line loans generally are not fully amortizing, the absence of
voluntary borrower prepayments could cause rates of principal payments lower
than, or similar to, those of traditional fully-amortizing first mortgage
loans. The prepayment experience of the related trust fund may be affected by
a wide variety of factors, including general economic conditions, prevailing
interest rate levels, the availability of alternative financing, homeowner
mobility and the frequency and amount of any future draws on any revolving
credit line loans. Other factors that might be expected to affect the
prepayment rate of a pool of junior lien home equity loans include the amounts
of, and interest rates on, the underlying senior mortgage loans, and the use
of first mortgage loans as long-term financing for home purchase and
subordinate mortgage loans as shorter-term financing for a variety of
purposes, including home improvement, education expenses and purchases of
consumer durables such as automobiles. Accordingly, these loans may experience
a higher rate of prepayment than traditional fixed-rate mortgage loans. In
addition, any future limitations on the right of borrowers to deduct interest
payments on home equity loans for federal income tax purposes may further
increase the rate of prepayments of the loans. The enforcement of a "due-on-
sale" provision (as described below) will have the same effect as a prepayment
of the related loan. See "Legal Aspects of the Loans -- Due-on-Sale Clauses".
The yield to an investor who purchases securities in the secondary market at a
price other than par will vary from the anticipated yield if the rate of
prepayment on the loans is actually different than the rate anticipated by the
investor at the time the securities were purchased.
Collections on revolving credit line loans may vary because, among other
things, borrowers may (i) make payments during any month as low as the minimum
monthly payment for that month or, during the interest-only period for certain
revolving credit line loans and, in more limited circumstances, closed-end
loans, with respect to which an interest-only payment option has been
selected, the interest and the fees and charges for that month or (ii) make
payments as high as the entire outstanding principal balance plus accrued
interest and the fees and charges thereon. It is possible that borrowers may
fail to make the required periodic payments. In addition, collections on the
loans may vary due to seasonal purchasing and the payment habits of borrowers.
48
Generally, all conventional loans will contain due-on-sale provisions
permitting the mortgagee to accelerate the maturity of the loan upon sale or
certain transfers by the borrower of the related Property. The master servicer
generally will enforce any due-on-sale or due-on-encumbrance clause, to the
extent it has knowledge of the conveyance or further encumbrance or the
proposed conveyance or proposed further encumbrance of the Property and
reasonably believes that it is entitled to do so under applicable law;
provided, however, that the master servicer will not take any enforcement
action that would impair or threaten to impair any recovery under any related
insurance policy. See "The Agreements -- Collection Procedures" and "Legal
Aspects of the Loans" for a description of certain provisions of each
Agreement and certain legal developments that may affect the prepayment
experience on the loans.
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. In general, if prevailing rates fall
significantly below the Loan Rates borne by the loans, the loans are more
likely to be subject to higher prepayment rates than if prevailing interest
rates remain at or above the Loan Rates. Conversely, if prevailing interest
rates rise appreciably above the Loan Rates borne by the loans, the loans are
more likely to experience a lower prepayment rate than if prevailing rates
remain at or below the Loan Rates. However, there can be no assurance that
this will be the case.
When a full prepayment is made on a loan, the borrower is charged interest
on the principal amount of the loan so prepaid only for the number of days in
the month actually elapsed up to the date of the prepayment, rather than for a
full month. The effect of prepayments in full will be to reduce the amount of
interest passed through or paid in the following month to holders of
securities because interest on the principal amount of any loan so prepaid
will generally be paid only to the date of prepayment. Partial prepayments in
a given month may be applied to the outstanding principal balances of the
loans so prepaid on the first day of the month of receipt or in the month
following receipt. In the latter case, partial prepayments will not reduce the
amount of interest passed through or paid in the month of receipt. The
applicable prospectus supplement may specify when prepayments are passed
through to securityholders, but if it does not, neither full nor partial
prepayments will be passed through or paid until the month following receipt.
Even assuming that the Properties provide adequate security for the loans,
substantial delays could be encountered in connection with the liquidation of
defaulted loans and corresponding delays in the receipt of related proceeds by
securityholders could occur. An action to foreclose on a Property securing a
loan is regulated by state statutes and rules and is subject to many of the
delays and expenses of other lawsuits if defenses or counterclaims are
interposed, sometimes requiring several years to complete. Furthermore, in
some states an action to obtain a deficiency judgment is not permitted
following a nonjudicial sale of a Property. In the event of a default by a
borrower, these restrictions among other things, may impede the ability of the
master servicer to foreclose on or sell the Property or to obtain liquidation
proceeds sufficient to repay all amounts due on the related loan. In addition,
the master servicer will be entitled to deduct from related liquidation
proceeds all expenses reasonably incurred in attempting to recover amounts due
on defaulted loans and not yet repaid, including payments to senior
lienholders, legal fees and costs of legal action, real estate taxes and
maintenance and preservation expenses.
Liquidation expenses with respect to defaulted mortgage loans generally do
not vary directly with the outstanding principal balance of the loan at the
time of default. Therefore, assuming that a servicer took the same steps in
realizing upon a defaulted mortgage loan having a small remaining principal
balance as it would in the case of a defaulted mortgage loan having a large
remaining principal balance, the amount realized after expenses of liquidation
would be smaller as a percentage of the remaining principal balance of the
small mortgage loan than would be the case with the other defaulted mortgage
loan having a large remaining principal balance.
Applicable state laws generally regulate interest rates and other charges,
require certain disclosures, and require licensing of certain originators and
servicers of loans. In addition, most have other laws, public policy and
general principles of equity relating to the protection of consumers, unfair
and deceptive practices and practices which may apply to the origination,
servicing and collection of the loans. Depending on the provisions of the
applicable law and the specific facts and circumstances involved, violations
of these laws, policies and principles may limit the ability of the servicer
to collect all or part of the principal of or interest
49
on the loans, may entitle the borrower to a refund of amounts previously paid
and, in addition, could subject the servicer to damages and administrative
sanctions.
If the rate at which interest is passed through or paid to the holders of
securities of a series is calculated on a loan-by-loan basis, disproportionate
principal prepayments among loans with different Loan Rates will affect the
yield on those securities. In most cases, the effective yield to
securityholders will be lower than the yield otherwise produced by the
applicable Pass-Through Rate or interest rate and purchase price, because
while interest will generally accrue on each loan from the first day of the
month, the distribution of the interest will not be made earlier than the
month following the month of accrual.
Under certain circumstances, the holders of the residual interests in a
REMIC or any person specified in the related prospectus supplement may have
the option to purchase the assets of a trust fund upon the occurrence of a
specific trigger event, such as the reduction of the principal amount of the
loans to a specified percentage of the original balance of the loans, thereby
effecting earlier retirement of the related series of securities. See "The
Agreements -- Termination; Optional Termination".
The relative contribution of the various factors affecting prepayment may
vary from time to time. There can be no assurance as to the rate of payment of
principal of the Trust Fund Assets at any time or over the lives of the
securities.
The prospectus supplement relating to a series of securities will discuss in
greater detail the effect of the rate and timing of principal payments
(including prepayments), delinquencies and losses on the yield, weighted
average lives and maturities of the securities.
50
The Agreements
Set forth below is a description of the material provisions of each
Agreement which are not described elsewhere in this prospectus. Where
particular provisions or terms used in the Agreements are referred to, the
provisions or terms are as specified in the Agreements.
Assignment of the Trust Fund Assets
Assignment of the Loans. At the time of issuance of the securities of a
series, the depositor will cause the loans comprising the related trust fund
to be assigned to the trustee, without recourse, together with all principal
and interest received by or on behalf of the depositor on or with respect to
the loans after the cut-off date, other than principal and interest due on or
before the cut-off date and other than any Retained Interest specified in the
related prospectus supplement. The trustee will, concurrently with the
assignment, deliver the securities to the depositor in exchange for the loans.
Each loan will be identified in a schedule appearing as an exhibit to the
related Agreement. This schedule will include information as to the
outstanding principal balance of each loan after application of payments due
on or before the cut-off date, as well as information regarding the Loan Rate
or APR, the maturity of the loan, the Loan-to-Value Ratios or Combined Loan-
to-Value Ratios, as applicable, at origination and certain other information.
In addition, the depositor will also deliver or cause to be delivered to the
trustee (or to the custodian) for each single family loan or home equity loan,
o the mortgage note or contract endorsed without recourse in blank or to
the order of the trustee, except that the depositor may deliver or cause
to be delivered a lost note affidavit in lieu of any original mortgage
note that has been lost,
o the mortgage, deed of trust or similar instrument (a "Mortgage") with
evidence of recording indicated thereon (except for any Mortgage not
returned from the public recording office, in which case the depositor
will deliver or cause to be delivered a copy of the Mortgage together
with a certificate that the original of the Mortgage was delivered to the
recording office),
o an assignment of the Mortgage in blank, which assignment will be in
recordable form in the case of a Mortgage assignment, and any other
security documents, including those relating to any senior liens on the
Property, as may be specified in the related prospectus supplement or the
related Agreement.
The applicable prospectus supplement may provide other arrangements for
assuring the priority of assignments, but if it does not, the depositor will
promptly cause the assignments of the related loans to be recorded in the
appropriate public office for real property records, except in those states
designated by the Rating Agencies where recording is not required to protect
the trustee's interest in those loans against the claim of any subsequent
transferee or any successor to or creditor of the depositor or the originator
of the related loans.
With respect to any loans that are cooperative loans, the depositor will
cause to be delivered to the trustee (or to the custodian) for each
cooperative loan,
o the related original cooperative note endorsed without recourse in blank
or to the order of the trustee or, to the extent the related Agreement so
provides, a lost note affidavit,
o the original security agreement,
o the proprietary lease or occupancy agreement,
o the recognition agreement,
o an executed financing agreement and the relevant stock certificate,
together with the related blank stock powers, and
o any other document specified in the related prospectus supplement.
The depositor will cause to be filed in the appropriate office an assignment
and a financing statement evidencing the trustee's security interest in each
cooperative loan.
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The trustee (or the custodian) will review the loan documents within the
time period specified in the related prospectus supplement after receipt
thereof, and the trustee will hold the loan documents in trust for the benefit
of the related securityholders. Generally, if the document is found to be
missing or defective in any material respect, the trustee (or the custodian)
will notify the depositor, and the depositor will notify the related seller.
If the seller cannot cure the omission or defect within the time period
specified in the related prospectus supplement after receipt of notice, the
seller will be obligated to either purchase the related loan from the trust
fund at the Purchase Price or if so specified in the related prospectus
supplement, remove the loan from the trust fund and substitute in its place
one or more other loans that meets certain requirements set forth in the
related prospectus supplement. There can be no assurance that a seller will
fulfill this purchase or substitution obligation. Although the trustee may be
obligated to enforce the obligation to the extent described above under "Loan
Program -- Representations by Sellers; Repurchases," neither the trustee nor
the depositor will be obligated to purchase or replace a loan if the seller
defaults on its obligation, unless the breach also constitutes a breach of the
representations or warranties of the depositor. The applicable prospectus
supplement may provide other remedies, but if it does not, this obligation to
cure, purchase or substitute constitutes the sole remedy available to the
securityholders or the trustee for omission of, or a material defect in, a
constituent document.
The trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review
the documents relating to the loans as agent of the trustee.
Assignment of Private Mortgage-Backed Securities. The depositor will cause
the private mortgage-backed securities to be registered in the name of the
trustee. The trustee or the custodian will have possession of any certificated
private mortgage-backed securities. Generally, the trustee will not be in
possession of or be assignee of record of any underlying assets for a private
mortgage-backed security. See "The Trust Fund -- Private Mortgage-Backed
Securities." Each private mortgage-backed security will be identified in a
schedule appearing as an exhibit to the related pooling and servicing
agreement which will specify the original principal amount, outstanding
principal balance as of the cut-off date, annual pass-through rate or interest
rate and maturity date and other specified pertinent information for each
private mortgage-backed security conveyed to the trustee.
Conveyance of Subsequent Loans. With respect to a series of securities for
which a Pre-Funding Arrangement is provided, in connection with any conveyance
of Subsequent loans to the trust fund after the issuance of the related
securities, the related Agreement will require the seller and the depositor to
satisfy the following conditions, among others:
o each Subsequent loan purchased after the applicable closing date must
satisfy the representations and warranties contained in the subsequent
transfer agreement to be entered into by the depositor, the seller and
the trustee and in the related Agreement;
o the seller will not select the Subsequent loans in a manner that it
believes is adverse to the interests of the securityholders;
o as of the related cut-off date, all of the loans in the loan pool at that
time, including the Subsequent loans purchased after the closing date,
will satisfy the criteria set forth in the related Agreement;
o the Subsequent loans will have been approved by any third party provider
of credit enhancement, if applicable; and
o before the purchase of each Subsequent loan the trustee will perform an
initial review of certain related loan file documentation for the loan
and issue an initial certification for which the required documentation
in the loan file has been received with respect to each Subsequent loan.
The Subsequent loans, on an aggregate basis, will have characteristics
similar to the characteristics of the initial pool of loans as described in
the related prospectus supplement. Each acquisition of any Subsequent loans
will be subject to the review of the aggregate statistical characteristics of
the related loan pool for compliance with the applicable statistical criteria
set forth in the related Agreement, which will be conducted by any third party
provider of credit enhancement, if applicable, the rating agencies and the
seller's accountants.
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Notwithstanding the foregoing provisions, with respect to a trust fund for
which a REMIC election is to be made, no purchase or substitution of a loan
will be made if the purchase or substitution would result in a prohibited
transaction tax under the Code.
Payments on Loans; Deposits to Security Account
The master servicer will establish and maintain or cause to be established
and maintained with respect to the related trust fund a separate account or
accounts for the collection of payments on the related Trust Fund Assets in
the trust fund (the "Security Account"). The applicable prospectus supplement
may provide for other requirements for the Security Account, but if it does
not, the Security Account must be either (i) maintained with a depository
institution the debt obligations of which (or in the case of a depository
institution that is the principal subsidiary of a holding company, the
obligations of which) are rated in one of the two highest rating categories by
the Rating Agency or Rating Agencies that rated one or more classes of the
related series of securities, (ii) an account or accounts the deposits in
which are fully insured by either the Bank Insurance Fund (the "BIF") of the
FDIC or the Savings Association Insurance Fund (as successor to the Federal
Savings and Loan Insurance Corporation ("SAIF")), and the uninsured deposits
in which are otherwise secured such that, as evidenced by an opinion of
counsel, the securityholders have a claim with respect to the funds in the
security account or a perfected first priority security interest against any
collateral securing those funds that is superior to the claims of any other
depositors or general creditors of the depository institution with which the
Security Account is maintained, or (iii) an account or accounts otherwise
acceptable to each Rating Agency. The collateral eligible to secure amounts in
the Security Account is limited to Permitted Investments. A Security Account
may be maintained as an interest bearing account or the funds held in a
Security Account may be invested pending each succeeding distribution date in
Permitted Investments. To the extent provided in the related prospectus
supplement, the trustee will be entitled to receive any interest or other
income earned on funds in the Security Account as additional compensation and
will be obligated to deposit in the Security Account the amount of any loss
immediately as realized. The Security Account may be maintained with the
trustee or with a depository institution that is an affiliate of the trustee,
provided it meets the standards set forth above.
The master servicer will deposit or cause to be deposited in the Security
Account for each trust fund, to the extent applicable and unless otherwise
specified in the Agreement, the following payments and collections received or
advances made by or on behalf of it subsequent to the cut-off date (other than
payments due on or before the cut-off date and exclusive of any amounts
representing Retained Interest):
o all payments on account of principal, including Principal Prepayments
and, if specified in the related prospectus supplement, any applicable
prepayment penalties, on the loans;
o all payments on account of interest on the loans, net of applicable
servicing compensation;
o all proceeds (net of unreimbursed payments of property taxes, insurance
premiums and similar items ("Insured Expenses") incurred, and
unreimbursed advances made, by the master servicer, if any) of the hazard
insurance policies and any Primary Mortgage Insurance Policies, to the
extent those proceeds are not applied to the restoration of the Property
or released to the Mortgagor in accordance with the servicer's normal
servicing procedures (collectively, "Insurance Proceeds") and all other
cash amounts (net of unreimbursed expenses incurred in connection with
liquidation or foreclosure ("Liquidation Expenses") and unreimbursed
advances made, by the servicer, if any) received and retained in
connection with the liquidation of defaulted loans, by foreclosure or
otherwise ("Liquidation Proceeds"), together with any net proceeds
received on a monthly basis with respect to any properties acquired on
behalf of the securityholders by foreclosure or deed in lieu of
foreclosure;
o all proceeds of any loan or Property in respect thereof purchased by the
servicer, the depositor or any seller as described under "Loan Program --
Representations by Sellers; Repurchases" or " -- Assignment of Trust Fund
Assets" above and all proceeds of any loan repurchased as described under
" -- Termination; Optional Termination" below;
o all payments required to be deposited in the Security Account with
respect to any deductible clause in any blanket insurance policy
described under " -- Hazard Insurance" below;
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o any amount required to be deposited by the servicer in connection with
losses realized on investments for the benefit of the servicer of funds
held in the Security Account and, to the extent specified in the related
prospectus supplement, any payments required to be made by the servicer
in connection with prepayment interest shortfalls; and
o all other amounts required to be deposited in the Security Account
pursuant to the Agreement.
The servicer (or the depositor, as applicable) may from time to time direct
the institution that maintains the Security Account to withdraw funds from the
Security Account for the following purposes:
o to pay to the servicer the servicing fees described in the related
prospectus supplement, the master servicing fees (subject to reduction)
and, as additional servicing compensation, earnings on or investment
income with respect to funds in the amounts in the Security Account
credited thereto;
o to reimburse the servicer for advances, this right of reimbursement with
respect to any loan being limited to amounts received that represent late
recoveries of payments of principal and/or interest on the loan (or
Insurance Proceeds or Liquidation Proceeds with respect thereto) with
respect to which the advance was made;
o to reimburse the servicer for any advances previously made which the
master servicer has determined to be nonrecoverable;
o to reimburse the servicer from Insurance Proceeds for expenses incurred
by the servicer and covered by the related insurance policies;
o to reimburse the servicer for unpaid servicing fees and unreimbursed out-
of-pocket costs and expenses incurred by the servicer in the performance
of its servicing obligations, this right of reimbursement being limited
to amounts received representing late recoveries of the payments for
which the advances were made;
o to pay to the servicer, with respect to each loan or Property acquired in
respect thereof that has been purchased by the servicer pursuant to the
Agreement, all amounts received thereon and not taken into account in
determining the principal balance of the repurchased loan;
o to reimburse the servicer or the depositor for expenses incurred and
reimbursable pursuant to the Agreement;
o to withdraw any amount deposited in the Security Account and not required
to be deposited therein; and
o to clear and terminate the Security Account upon termination of the
Agreement.
In addition, the Agreement will generally provide that, on or prior to the
business day immediately preceding each distribution date, the master servicer
shall withdraw from the Security Account the amount of Available Funds, to the
extent on deposit, for deposit in an account maintained by the trustee for the
related series of securities.
Pre-Funding Account
If so provided in the related prospectus supplement, the trustee will
establish and maintain an account (the "Pre-Funding Account"), in the name of
the related trustee on behalf of the related securityholders, into which the
depositor will deposit cash in an amount specified in the prospectus
supplement (the "Pre-Funded Amount") on the related Closing Date. The Pre-
Funding Account will be with the trustee for the related series of securities
and is designed solely to hold funds to be applied by the trustee during the
period from the closing date to a date not more than a year after the closing
date (the "Funding Period") to pay to the depositor the purchase price for
loans purchased during the Funding Period (the "Subsequent Loans"). Monies on
deposit in the Pre-Funding Account will not be available to cover losses on or
in respect of the related loans. The Pre-Funded Amount will not exceed 50% of
the initial aggregate principal amount of the certificates and notes of the
related series. Monies on deposit in the Pre-Funding Account may be invested
in Permitted Investments under the circumstances and in the manner described
in the related Agreement. See
54
"Credit Enhancement -- Reserve Accounts" for a description of the types of
investments which may constitute "Permitted Investments". Earnings on
investment of funds in the Pre-Funding Account will be deposited into the
related Security Account or such other trust account as is specified in the
related prospectus supplement and losses will be charged against the funds on
deposit in the Pre-Funding Account. Any amounts remaining in the Pre-Funding
Account at the end of the Funding Period will be distributed to the related
securityholders in the manner and priority specified in the related prospectus
supplement, as a prepayment of principal of the related securities. Prior to
or concurrently with each distribution on a distribution date within the
Funding Period, the trustee will furnish to each securityholder of record of
the related series of securities a statement setting forth the amounts of the
Pre-Funding Amount deployed by the trustee to purchase Subsequent Loans during
the preceding collection period. The depositor will file or cause such
statement to be filed with the SEC as an exhibit to a Current Report on Form 8-
K within 15 days after the related distribution date. See "Description of the
Securities -- Reports to Securityholders." The underwriting standards for the
Subsequent Loans will not materially differ from the underwriting standards
for the mortgage loans initially included in the trust fund.
In addition, if so provided in the related prospectus supplement, on the
related Closing Date the depositor will deposit in an account (the
"Capitalized Interest Account") cash in such amount as is necessary to cover
shortfalls in interest on the related series of securities that may arise as a
result of the Pre-Funding feature as described above. The Capitalized Interest
Account shall be maintained with the trustee for the related series of
securities and is designed solely to cover the above-mentioned interest
shortfalls. Monies on deposit in the Capitalized Interest Account will not be
available to cover losses on or in respect of the related loans. To the extent
that the entire amount on deposit in the Capitalized Interest Account has not
been applied to cover shortfalls in interest on the related series of
securities by the end of the Funding Period, any amounts remaining in the
Capitalized Interest Account will be paid to the depositor.
Sub-servicing by Sellers
Each seller of a loan or any other servicing entity may act as the sub-
servicer for the loan pursuant to a sub-servicing agreement, which will not
contain any terms inconsistent with the related Agreement. While each sub-
servicing agreement will be a contract solely between the servicer and the
sub-servicer, the Agreement pursuant to which a series of securities is issued
will provide that, if for any reason the master servicer for the series of
securities is no longer the servicer of the related loans, the trustee or any
successor servicer must recognize the sub-servicer's rights and obligations
under the sub-servicing agreement. Notwithstanding any subservicing
arrangement, unless otherwise provided in the related prospectus supplement,
the servicer will remain liable for its servicing duties and obligations under
the Sale and Servicing Agreement as if the servicer alone were servicing the
loans.
Collection Procedures
The servicer, directly or through one or more sub-servicers, will make
reasonable efforts to collect all payments called for under the loans and
will, consistent with each Agreement and any Pool Insurance Policy, Primary
Mortgage Insurance Policy, bankruptcy bond or alternative arrangements, follow
those collection procedures as are customary with respect to loans that are
comparable to the loans. Consistent with the above, the servicer may, in its
discretion, waive any assumption fee, late payment or other charge in
connection with a loan and to the extent not inconsistent with the coverage of
the loan by a Pool Insurance Policy, Primary Mortgage Insurance Policy,
bankruptcy bond or alternative arrangements, if applicable, arrange with a
borrower a schedule for the liquidation of delinquencies running for no more
than 125 days after the applicable due date for each payment.
In any case in which Property securing a loan has been, or is about to be,
conveyed by the mortgagor or obligor, the servicer will, to the extent it has
knowledge of the conveyance or proposed conveyance, exercise or cause to be
exercised its rights to accelerate the maturity of the loan under any due-on-
sale clause applicable thereto, but only if the exercise of those rights is
permitted by applicable law and will not impair or threaten to impair any
recovery under any Primary Mortgage Insurance Policy. If these conditions are
not met or if the servicer reasonably believes it is unable under applicable
law to enforce the due-on-sale clause, the servicer will enter into or cause
to be entered into an assumption and modification agreement with the
55
person to whom the Property has been or is about to be conveyed, pursuant to
which the person becomes liable for repayment of the loan and, to the extent
permitted by applicable law, the mortgagor remains liable thereon. Any fee
collected by or on behalf of the servicer for entering into an assumption
agreement will be retained by or on behalf of the servicer as additional
servicing compensation. See "Legal Aspects of the Loans -- Due-on-Sale
Clauses". In connection with the assumption of any loan, the terms of the
related loan may not be changed.
With respect to cooperative loans, any prospective purchaser will generally
have to obtain the approval of the board of directors of the relevant
cooperative before purchasing the shares and acquiring rights under the
related proprietary lease or occupancy agreement. See "Legal Aspects of the
Loans". This approval is usually based on the purchaser's income and net worth
and numerous other factors. Although the cooperative's approval is unlikely to
be unreasonably withheld or delayed, the necessity of acquiring the approval
could limit the number of potential purchasers for those shares and otherwise
limit the trust fund's ability to sell and realize the value of those shares.
Hazard Insurance
In general, the servicer will require the mortgagor or obligor on each loan
to maintain a hazard insurance policy providing for no less than the coverage
of the standard form of fire insurance policy with extended coverage customary
for the type of Property in the state in which the Property is located. This
coverage will be in an amount that is at least equal to the lesser of
o the maximum insurable value of the improvements securing the loan or the
greater of
(1) the outstanding principal balance of the loan, and
(2) an amount such that the proceeds of the policy shall be sufficient
to prevent the mortgagor and/or the mortgagee from becoming a co-
insurer.
All amounts collected by the servicer under any hazard policy (except for
amounts to be applied to the restoration or repair of the Property or released
to the mortgagor or obligor in accordance with the servicer's normal servicing
procedures) will be deposited in the related Security Account. In the event
that the servicer maintains a blanket policy insuring against hazard losses on
all the loans comprising part of a trust fund, it will conclusively be deemed
to have satisfied its obligation relating to the maintenance of hazard
insurance. This blanket policy may contain a deductible clause, in which case
the servicer will be required to deposit from its own funds into the related
Security Account the amounts which would have been deposited in the Security
Account but for that clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements securing a loan by fire,
lightning, explosion, smoke, windstorm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the loans may have been underwritten
by different insurers under different state laws in accordance with different
applicable forms and therefore may not contain identical terms and conditions,
the basic terms thereof are dictated by respective state laws, and most of
those policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-
related causes, earth movement (including earthquakes, landslides and mud
flows), nuclear reactions, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases, vandalism and hurricanes. The
foregoing list is merely indicative of certain kinds of uninsured risks and is
not intended to be all inclusive. If the Property securing a loan is located
in a federally designated special flood area at the time of origination, the
servicer will require the mortgagor or obligor to obtain and maintain flood
insurance.
The hazard insurance policies covering properties securing the loans
typically contain a clause which in effect requires the insured at all time to
carry insurance of a specified percentage of a specified percentage (generally
80% to 90%) of the full replacement value of the insured Property in order to
recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, then the insurer's liability in the event of
partial loss will not exceed the larger of
56
o the actual cash value (generally defined as replacement cost at the time
and place of loss, less physical depreciation) of the improvements
damaged or destroyed or
o such proportion of the loss as the amount of insurance carried bears to
the specified percentage of the full replacement cost of the
improvements.
Since the amount of hazard insurance the servicer may cause to be maintained
on the improvements securing the loans declines as the principal balances
owing thereon decrease, and since improved real estate generally has
appreciated in value over time in the past, the effect of this requirement in
the event of partial loss may be that hazard insurance proceeds will be
insufficient to restore fully the damaged Property. If specified in the
related prospectus supplement, a special hazard insurance policy will be
obtained to insure against certain of the uninsured risks described above. See
"Credit Enhancement".
The servicer will not require that a standard hazard or flood insurance
policy be maintained on the cooperative dwelling relating to any cooperative
loan. Generally, the cooperative itself is responsible for maintenance of
hazard insurance for the Property owned by the cooperative and the tenant-
stockholders of that cooperative do not maintain individual hazard insurance
policies. To the extent, however, that a cooperative and the related borrower
on a cooperative loan do not maintain hazard insurance or do not maintain
adequate coverage or any insurance proceeds are not applied to the restoration
of damaged Property, any damage to the borrower's cooperative dwelling or the
cooperative's building could significantly reduce the value of the collateral
securing the related cooperative loan to the extent not covered by other
credit support.
If the Property securing a defaulted loan is damaged and proceeds, if any,
from the related hazard insurance policy are insufficient to restore the
damaged Property, the servicer is not required to expend its own funds to
restore the damaged Property unless it determines (i) that restoration will
increase the proceeds to securityholders on liquidation of the loan after
reimbursement of the servicer for its expenses and (ii) that the related
expenses will be recoverable by it from related Insurance Proceeds or
Liquidation Proceeds.
If recovery on a defaulted loan under any related Insurance Policy is not
available or if the defaulted loan is not covered by an Insurance Policy, the
servicer will be obligated to follow or cause to be followed those normal
practices and procedures as it deems necessary or advisable to realize upon
the defaulted loan. If the proceeds of any liquidation of the Property
securing the defaulted loan are less than the principal balance of the related
loan plus interest accrued thereon that is payable to securityholders, the
trust fund will realize a loss in the amount of the difference plus the
aggregate of expenses incurred by the servicer in connection with the
liquidation proceedings and which are reimbursable under the Agreement. In the
unlikely event that any liquidation proceedings result in a total recovery
which is, after reimbursement to the servicer of its expenses, in excess of
the principal balance of the loan plus interest accrued thereon that is
payable to securityholders, the servicer will be entitled to withdraw or
retain from the Security Account amounts representing its normal servicing
compensation with respect to the loan and amounts representing the balance of
the excess, exclusive of any amount required by law to be forwarded to the
related borrower, as additional servicing compensation.
If the servicer or its designee recovers Insurance Proceeds which, when
added to any related Liquidation Proceeds and after deduction of certain
expenses reimbursable to the servicer, exceed the principal balance of the
loan plus interest accrued thereon that is payable to securityholders, the
servicer will be entitled to withdraw or retain from the Security Account
amounts representing its normal servicing compensation with respect to the
loan. In the event that the servicer has expended its own funds to restore the
damaged Property and those funds have not been reimbursed under the related
hazard insurance policy, it will be entitled to withdraw from the Security
Account out of related Liquidation Proceeds or Insurance Proceeds an amount
equal to those expenses incurred by it, in which event the trust fund may
realize a loss up to the amount so charged. Since Insurance Proceeds cannot
exceed deficiency claims and certain expenses incurred by the servicer, no
such payment or recovery will result in a recovery to the trust fund which
exceeds the principal balance of the defaulted loan together with accrued
interest thereon. See "Credit Enhancement".
The proceeds from any liquidation of a loan will be applied in the following
order of priority: first, to reimburse the servicer for any unreimbursed
expenses incurred by it to restore the related Property and any
57
unreimbursed servicing compensation payable to the servicer with respect to
the loan; second, to reimburse the servicer for any unreimbursed advances with
respect to the loan; third, to accrued and unpaid interest (to the extent no
advance has been made for that amount) on the loan; and fourth, as a recovery
of principal of the loan.
Realization upon Defaulted Loans
Primary Mortgage Insurance Policies. If so specified in the related
prospectus supplement, the servicer will maintain or cause to be maintained,
as the case may be, in full force and effect, a Primary Mortgage Insurance
Policy with regard to each loan for which this type of coverage is required.
Primary Mortgage Insurance Policies reimburse certain losses sustained by
reason of defaults in payments by borrowers. The servicer will not cancel or
refuse to renew any Primary Mortgage Insurance Policy in effect at the time of
the initial issuance of a series of securities that is required to be kept in
force under the applicable Agreement unless the replacement Primary Mortgage
Insurance Policy for the cancelled or nonrenewed policy is maintained with an
insurer whose claims-paying ability is sufficient to maintain the current
rating of the classes of securities of the series that have been rated.
Servicing and Other Compensation and Payment of Expenses
The principal servicing compensation to be paid to the servicer in respect
of its servicing activities for each series of securities will be equal to the
percentage per annum described in the related prospectus supplement (which may
vary under certain circumstances) of the outstanding principal balance of each
loan, and this compensation will be retained by it from collections of
interest on the loan in the related trust fund (the "Servicing Fee"). As
compensation for its servicing duties, a sub-servicer will be entitled to a
monthly sub-servicing fee as described in the related prospectus supplement.
In addition, generally, the servicer or sub-servicer will retain all
prepayment charges, assumption fees and late payment charges, to the extent
collected from borrowers, and any benefit that may accrue as a result of the
investment of funds in the applicable Security Account.
The servicer will pay or cause to be paid certain ongoing expenses
associated with each trust fund and incurred by it in connection with its
responsibilities under the related Agreement, including, without limitation,
payment of any fee or other amount payable in respect of any credit
enhancement arrangements, payment of the fees and disbursements of the
trustee, any custodian appointed by the trustee, the certificate registrar and
any paying agent, and payment of expenses incurred in enforcing the
obligations of sub-servicers and sellers. The servicer will be entitled to
reimbursement of expenses incurred in enforcing the obligations of sub-
servicers and sellers under certain limited circumstances. In addition, the
servicer will be entitled to reimbursement for certain expenses incurred by it
in connection with any defaulted mortgage loan as to which it has determined
that all recoverable liquidation proceeds and insurance proceeds have been
received, and in connection with the restoration of mortgaged properties, the
right of reimbursement being before the rights of certificateholders to
receive any related liquidation proceeds, including insurance proceeds.
Evidence as to Compliance
Each Agreement will provide that on or before a specified date in each year,
a firm of independent public accountants will furnish a statement to the
trustee to the effect that, on the basis of the examination by that firm
conducted substantially in compliance with the Uniform Single Attestation
Program for Mortgage Bankers or the Audit Program for Mortgages serviced for
FHLMC, the servicing by or on behalf of the servicer of mortgage loans or
private asset backed securities, or under pooling and servicing agreements
substantially similar to each other (including the related Agreement) was
conducted in compliance with those agreements except for any significant
exceptions or errors in records that, in the opinion of the firm, the Audit
Program for Mortgages serviced for FHLMC, or the Uniform Single Attestation
Program for Mortgage Bankers, it is required to report. In rendering its
statement the firm may rely, as to matters relating to the direct servicing of
loans by sub-servicers, upon comparable statements for examinations conducted
substantially in compliance with the Uniform Single Attestation Program for
Mortgage Bankers or the Audit Program for Mortgages serviced for FHLMC
(rendered within one year of the statement) of firms of independent public
accountants with respect to the related sub-servicer.
58
Each Agreement will also provide for delivery to the trustee, on or before a
specified date in each year, of an annual statement signed by two officers of
the servicer to the effect that the servicer has fulfilled its obligations
under the Agreement throughout the preceding year.
Copies of the annual accountants' statement and the statement of officers of
the servicer may be obtained by securityholders of the related series without
charge upon written request to the servicer at the address set forth in the
related prospectus supplement.
Certain Matters Regarding the Servicer and the Depositor
The servicer(s) will be named in the related Prospectus Supplement. The
entity(ies) acting as servicer under a Pooling and Servicing Agreement or Sale
and Servicing Agreement, as applicable, may be an affiliate(s) of the
depositor and may have normal business relationships with the depositor or the
depositor's affiliates. If there is no master servicer named in the related
Prospectus Supplement, certain references in this prospectus to the master
servicer may relate to obligations that will be required to be performed by
the servicer.
Each Agreement will provide that the servicer may not resign from its
obligations and duties under the Agreement except upon a determination that
its duties thereunder are no longer permissible under applicable law. The
servicer may, however, be removed from its obligations and duties as set forth
in the Agreement. No resignation by the servicer will become effective until
the trustee or a successor servicer has assumed the servicer's obligations and
duties under the Agreement.
Each Agreement will further provide that neither the servicer, the depositor
nor any director, officer, employee or agent of the servicer or the depositor
will be under any liability to the related trust fund or securityholders for
any action taken or for refraining from the taking of any action in good faith
pursuant to the Agreement, or for errors in judgment; provided, however, that
neither the servicer, the depositor nor any director, officer, employee or
agent of the servicer or the depositor will be protected against any liability
which would otherwise be imposed by reason of willful misfeasance, bad faith
or gross negligence in the performance of duties thereunder or by reason of
reckless disregard of obligations and duties thereunder. Each Agreement will
further provide that the servicer, the depositor and any director, officer,
employee or agent of the servicer or the depositor will be entitled to
indemnification by the related trust fund and will be held harmless against
any loss, liability or expense incurred in connection with any legal action
relating to the Agreement or the securities, other than any loss, liability or
expense related to any specific loan or loans (except for any loss, liability
or expense otherwise reimbursable pursuant to the Agreement) and any loss,
liability or expense incurred by reason of willful misfeasance, bad faith or
gross negligence in the performance of duties thereunder or by reason of
reckless disregard of obligations and duties thereunder. In addition, each
Agreement will provide that neither the servicer nor the depositor will be
under any obligation to appear in, prosecute or defend any legal action which
is not incidental to its respective responsibilities under the Agreement and
which in its opinion may involve it in any expense or liability. The servicer
or the depositor may, however, in its discretion undertake any action which it
may deem necessary or desirable with respect to the Agreement and the rights
and duties of the parties thereto and the interests of the securityholders
thereunder. In this event, the legal expenses and costs of the action and any
liability resulting therefrom will be expenses, costs and liabilities of the
trust fund and the servicer or the depositor, as the case may be, will be
entitled to be reimbursed therefor out of funds otherwise distributable to
securityholders.
In general, any person into which the servicer may be merged or
consolidated, or any person resulting from any merger or consolidation to
which the servicer is a party, or any person succeeding to the business of the
servicer, will be the successor of the servicer under each Agreement, provided
that
o that person is qualified to sell mortgage loans to, and service mortgage
loans on behalf of, Fannie Mae or Freddie Mac and
o the related merger, consolidation or succession does not adversely affect
the then current rating or ratings of the class or classes of securities
of the related series that have been rated.
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Events of Default; Rights upon Event of Default
Pooling and Servicing Agreement; Sale and Servicing Agreement. The
applicable prospectus supplement may provide for other Events of Default under
any Pooling and Servicing Agreement or Sale and Servicing Agreement, but if it
does not, the Events of Default will consist of
o any failure by the Servicer to deposit in the Security Account or remit
to the Trustee any payment required to be made under the terms of this
Agreement, which failure shall continue unremedied for one day after the
date upon which written notice of such failure shall have been given to
the Servicer by the Trustee or the Depositor or to the Master Servicer
and the Trustee by the Holders of Certificates having not less than 51%
of the Voting Rights evidenced by the Certificates; or
o any failure by the Servicer to observe or perform in any material respect
any other of the covenants or agreements on the part of the Servicer
contained in this Agreement, which failure materially affects the rights
of Certificateholders, which failure continues unremedied for a period of
60 days after the date on which written notice of such failure shall have
been given to the Servicer by the Trustee, the Master Servicer, or the
Depositor, or to the Servicer and the Trustee by the Holders of
Certificates evidencing not less than 51% of the Voting Rights evidenced
by the Certificates; provided, however, that the 60-day cure period shall
not apply to the initial delivery of the Mortgage File for Delay Delivery
Mortgage Loans nor the failure to substitute or repurchase in lieu
thereof; or
o a decree or order of a court or agency or supervisory authority having
jurisdiction in the premises for the appointment of a receiver or
liquidator in any insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings, or for the winding-up or
liquidation of its affairs, shall have been entered against the Servicer
and such decree or order shall have remained in force undischarged or
unstayed for a period of 60 consecutive days; or
o the Servicer shall consent to the appointment of a receiver or liquidator
in any insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings of or relating to the Servicer or all
or substantially all of the property of the Servicer; or
o the Servicer shall admit in writing its inability to pay its debts
generally as they become due, file a petition to take advantage of, or
commence a voluntary case under, any applicable insolvency or
reorganization statute, make an assignment for the benefit of its
creditors, or voluntarily suspend payment of its obligations.
The applicable prospectus supplement may provide for steps required to be
taken if an Event of Default remains unremedied, but if it does not, so long
as an Event of Default under an Agreement remains unremedied, the depositor,
the trustee or all of the holders of the class of certificates designated in
the prospectus supplement may, and at the direction of holders of securities
of any class evidencing not less than 25% of the aggregate percentage
interests constituting the class and under such other circumstances as may be
specified in the Agreement, the trustee shall terminate all of the rights and
obligations of the servicer under the Agreement relating to the trust fund and
in and to the related Trust Fund Assets, whereupon the trustee will succeed to
all of the responsibilities, duties and liabilities of the servicer under the
Agreement, including, if specified in the related prospectus supplement, the
obligation to make advances, and will be entitled to similar compensation
arrangements. In the event that the trustee is unwilling or unable so to act,
it may appoint, or petition a court of competent jurisdiction for the
appointment of, a mortgage loan servicing institution with a net worth of at
least $10,000,000 to act as successor to the servicer under the Agreement.
Pending that appointment, the trustee is obligated to act in that capacity.
The trustee and any successor to the servicer may agree upon the servicing
compensation to be paid, which in no event may be greater than the
compensation payable to the servicer under the Agreement.
Unless otherwise provided in the related prospectus supplement, no
securityholder, solely by virtue of the holder's status as a securityholder,
will have any right under any Agreement to institute any proceeding with
respect to the Agreement, unless the holder previously has given to the
trustee written notice of default and unless the holders of securities of any
class of the series evidencing not less than 25% of the aggregate percentage
interests constituting the class have made written request upon the trustee to
institute the
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proceeding in its own name as trustee thereunder and have offered to the
trustee reasonable indemnity, and the trustee for 60 days has neglected or
refused to institute the proceeding.
Indenture. The applicable prospectus supplement may provide for other
Events of Default, but if it does not, the Events of Default under each
Indenture will consist of:
o a default in the payment of any principal of or interest on any note of
the series which continues unremedied for five days after the giving of
written notice of the default is given as specified in the related
prospectus supplement;
o failure to perform in any material respect any other covenant of the
depositor or the trust fund in the Indenture which continues for a period
of thirty (30) days after notice thereof is given in accordance with the
procedures described in the related prospectus supplement;
o certain events of bankruptcy, insolvency, receivership or liquidation of
the depositor or the trust fund; or
o any other Event of Default provided with respect to notes of that series
including but not limited to certain defaults on the part of the issuer,
if any, of a credit enhancement instrument supporting the notes.
If an Event of Default with respect to the notes of any series at the time
outstanding occurs and is continuing, either the trustee or the holders of a
majority of the then aggregate outstanding amount of the notes of the series
may declare the principal amount (or, if the notes of the series affected
thereby, or such other class of notes specified in the applicable prospectus
supplement, have an interest rate of 0%, that portion of the principal amount
as may be specified in the terms of the series, as provided in the related
prospectus supplement) of all the notes of the series to be due and payable
immediately. This declaration may, under certain circumstances, be rescinded
and annulled by the holders of more than 50% of the percentage interests of
the notes of the series.
If, following an Event of Default with respect to any series of notes, the
notes of the series have been declared to be due and payable, the trustee may,
in its discretion, notwithstanding the acceleration, elect to maintain
possession of the collateral securing the notes of the series and to continue
to apply distributions on the collateral as if there had been no declaration
of acceleration if the collateral continues to provide sufficient funds for
the payment of principal of and interest on the notes of the series as they
would have become due if there had not been a declaration of acceleration. In
addition, the trustee may not sell or otherwise liquidate the collateral
securing the notes of a series following an Event of Default, unless
o the holders of 100% of the percentage interests of the notes of the
series consent to the sale,
o the proceeds of the sale or liquidation are sufficient to pay in full the
principal of and accrued interest, due and unpaid, on the outstanding
notes of the series at the date of the sale or
o the trustee determines that the collateral would not be sufficient on an
ongoing basis to make all payments on the notes as the payments would
have become due if the notes had not been declared due and payable, and
the trustee obtains the consent of the holders of more than 50% of the
percentage interests of the notes of the series.
In the event the principal of the notes of a series is declared due and
payable, as described above, the holders of any notes issued at a discount
from par may be entitled to receive no more than an amount equal to the unpaid
principal amount thereof less the amount of the discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of the
trustee, in case an Event of Default shall occur and be continuing with
respect to a series of notes, the trustee shall be under no obligation to
exercise any of the rights or powers under the Indenture at the request or
direction of any of the holders of notes of the series, unless the holders
offered to the trustee security or indemnity satisfactory to it against the
costs, expenses and liabilities which might be incurred by it in complying
with the request or direction. Subject to the provisions for indemnification
and certain limitations contained in the Indenture, the holders of a majority
of the then aggregate outstanding amount of the notes of the series shall have
the right to direct the time, method and place of conducting any proceeding
for any remedy available to the trustee or
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exercising any trust or power conferred on the trustee with respect to the
notes of the series, and the holders of a majority of the then aggregate
outstanding amount of the notes of the series may, in certain cases, waive any
default with respect thereto, except a default in the payment of principal or
interest or a default in respect of a covenant or provision of the Indenture
that cannot be modified without the waiver or consent of all the holders of
the outstanding notes of the series affected thereby.
Amendment
The applicable prospectus supplement may specify other amendment provisions,
but if it does not, each Agreement may be amended by the depositor and the
trustee, without the consent of any of the securityholders,
(a) to cure any ambiguity;
(b) to correct any defective provision in the Agreement or to
supplement any provision in the Agreement that may be inconsistent
with any other provision in it;
(c) to make any other revisions with respect to matters or questions
arising under the Agreement which are not inconsistent with the
provisions in it;
(d) to add to the duties of any party thereto; or
(e) to modify, alter, amend, add to or rescind any of the terms or
provisions contained in the Agreement,
provided that the action will not adversely affect in any material respect the
interests of any securityholder. An amendment will be deemed not to adversely
affect in any material respect the interests of the securityholders if the
person requesting the amendment obtains (a) an opinion of counsel to such
effect, or (b) a letter from each Rating Agency requested to rate the class or
classes of securities of the series stating that the amendment will not result
in the downgrading or withdrawal of the respective ratings then assigned to
the securities.
In addition, to the extent provided in the related Agreement, an Agreement
may be amended without the consent of any of the securityholders, to change
the manner in which the Security Account is maintained, provided that any
change does not adversely affect the then current rating on the class or
classes of securities of the series that have been rated. Moreover, the
related Agreement may be amended to modify, eliminate or add to any of its
provisions to the extent necessary to maintain the qualification of the
related trust fund as a REMIC or to avoid or minimize the risk of imposition
of any tax on the REMIC, if a REMIC election is made with respect to the trust
fund, or to comply with any other requirements of the Code, if the trustee has
received an opinion of counsel to the effect that the action is necessary or
helpful to maintain the qualification, avoid or minimize that risk or comply
with those requirements, as applicable.
The applicable prospectus supplement may specify other amendment provisions,
but if it does not, each Agreement may also be amended by the depositor and
the trustee with consent of holders of securities of the series evidencing not
less than 66% of the aggregate percentage interests of each class affected
thereby or of all classes, if all classes are so affected for the purpose of
adding any provisions to or changing in an manner or eliminating any of the
provisions of the Agreement or of modifying in any manner the rights of the
holders of the related securities; provided, however, that no amendment may
o reduce in any manner the amount of or delay the timing of, payments
received on loans which are required to be distributed on any security
without the consent of the holder of the security, or
o reduce the aforesaid percentage of securities of any class the holders of
which are required to consent to any such amendment,
in each case without the consent of the holders of all securities of the class
covered by the Agreement then outstanding.
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If a REMIC election is made with respect to a trust fund, the trustee will
not be entitled to consent to an amendment to the related Agreement without
having first received an opinion of counsel to the effect that the amendment
will not cause the trust fund to fail to qualify as a REMIC.
Termination; Optional Termination
Pooling and Servicing Agreement; Trust Agreement. The applicable prospectus
supplement may provide for the timing by which the Agreement terminates, but
if it does not, the obligations created by each Pooling and Servicing
Agreement and Trust Agreement for each series of securities will terminate
upon the payment to the related securityholders of all amounts held in the
Security Account or by the trustee and required to be paid to them pursuant to
the Agreement following the later of
(i) the final payment of or other liquidation of the last of the Trust
Fund Assets subject thereto or the disposition of all Property acquired upon
foreclosure of any Trust Fund Assets remaining in the trust fund, and
(ii) the purchase by the servicer or, if REMIC treatment has been
elected and if specified in the related prospectus supplement, by the holder
of the residual interest in the REMIC (see "Federal Income Tax Consequences"
below), or other person specified in the related prospectus supplement from
the related trust fund of all of the remaining Trust Fund Assets and all
Property acquired in respect of the Trust Fund Assets.
Any purchase of Trust Fund Assets and Property acquired in respect of Trust
Fund Assets for a series of securities will be made at the option of the
servicer, or the party specified in the related prospectus supplement,
including the holder of the REMIC residual interest, at a price specified in
the related prospectus supplement. The exercise of this right will effect
early retirement of the securities of that series, but the right of the
servicer, or the other party or, if applicable, the holder of the REMIC
residual interest, to so purchase is subject to the principal balance of the
related Trust Fund Assets being less than the percentage specified in the
related prospectus supplement of the aggregate principal balance of the Trust
Fund Assets at the cut-off date for the series. The foregoing is subject to
the provision that if a REMIC election is made with respect to a trust fund,
any repurchase pursuant to clause (ii) above will be made only in connection
with a "qualified liquidation" of the REMIC within the meaning of
Section 860F(g)(4) of the Code.
Indenture. The Indenture will be discharged with respect to a series of
notes (except with respect to certain continuing rights specified in the
Indenture) upon the delivery to the trustee for cancellation of all the notes
of the series or, with certain limitations, upon deposit with the trustee of
funds sufficient for the payment in full of all of the notes of the series.
In addition to the 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 the series (except for certain obligations relating to
temporary notes and exchange of notes, to register the transfer of or exchange
notes of the series, to replace stolen, lost or mutilated notes of the series,
to maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the trustee, in trust, of money and/or direct obligations of or
obligations guaranteed by the United States of America which through the
payment of interest and principal in respect thereof in accordance with their
terms will provide money in an amount sufficient to pay the principal of and
each installment of interest on the notes of the series on the last scheduled
distribution date for the notes and any installment of interest on the notes
in accordance with the terms of the Indenture and the notes of the series. In
the event of any defeasance and discharge of notes of a series, holders of
notes of the series would be able to look only to this money and/or direct
obligations for payment of principal and interest, if any, on their notes
until maturity.
The Trustee
The trustee under each Agreement will be named in the related Prospectus
Supplement. The commercial bank or trust company serving as trustee may have
normal banking relationships with the depositor, the master servicer, the
servicer(s) and any of their respective affiliates. If there is no master
servicer named in
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the related Prospectus Supplement, certain references in this prospectus to
the master servicer may relate to obligations that will be required to be
performed by the trustee.
The Master Servicer
The master servicer under each Agreement will be named in the related
Prospectus Supplement. The entity acting as master servicer under each
Agreement may be an affiliate of the depositor, the trustee, the servicer and
any of their respective affiliates. If the related Prospectus Supplement does
not name a master servicer, references in this prospectus to master servicer
may relate to obligations that will be required to be performed by the
servicer or the trustee.
Legal Aspects of the Loans
The following discussion contains summaries, which are general in nature, of
certain legal matters relating to the loans. Because the legal aspects are
governed primarily by applicable state law (which laws may differ
substantially), the descriptions do not, except as expressly provided below,
reflect the laws of any particular state, nor encompass the laws of all states
in which the security for the loans is situated. The descriptions are
qualified in their entirety by reference to the applicable federal laws and
the appropriate laws of the states in which loans may be originated.
General
Mortgages. The loans for a series may be secured by deeds of trust,
mortgages, security deeds or deeds to secure debt, depending upon the
prevailing practice in the state in which the Property subject to the loan is
located. Deeds of trust are used almost exclusively in California and other
jurisdictions instead of mortgages. A mortgage creates a lien upon the
Property encumbered by the mortgage, which lien is generally not prior to the
lien for real estate taxes and assessments. Priority between mortgages depends
on their terms and generally on the order of recording with a state or county
office. There are two parties to a mortgage, the mortgagor, who is the
borrower and owner of the Property, and the mortgagee, who is the lender.
Under the mortgage instrument, the mortgagor delivers to the mortgagee a note
or bond and the mortgage. Although a deed of trust is similar to a mortgage, a
deed of trust formally has three parties, the borrower-property owner called
the trustor (similar to a mortgagor), a lender (similar to a mortgagee) called
the beneficiary, and a third-party grantee called the trustee. Under a deed of
trust, the borrower grants the Property, irrevocably until the debt is paid,
in trust, generally with a power of sale, to the trustee to secure payment of
the obligation. A security deed and a deed to secure debt are special types of
deeds which indicate on their face that they are granted to secure an
underlying debt. By executing a security deed or deed to secure debt, the
grantor conveys title to, as opposed to merely creating a lien upon, the
subject Property to the grantee until the underlying debt is repaid. The
trustee's authority under a deed of trust, the mortgagee's authority under a
mortgage and the grantee's authority under a security deed or deed to secure
debt are governed by law and, with respect to some deeds of trust, the
directions of the beneficiary.
Cooperatives. Certain of the loans may be cooperative loans. The
cooperative owns all the Property that comprises the project, including the
land, separate dwelling units and all common areas. The cooperative is
directly responsible for project management and, in most cases, payment of
real estate taxes and hazard and liability insurance. If there is a blanket
mortgage on the cooperative and/or underlying land, as is generally the case,
the cooperative, as project mortgagor, is also responsible for meeting these
mortgage obligations. A blanket mortgage is ordinarily incurred by the
cooperative in connection with the construction or purchase of the
cooperative's apartment building. The interest of the occupant under
proprietary leases or occupancy agreements to which that cooperative is a
party are generally subordinate to the interest of the holder of the blanket
mortgage in that building. If the cooperative is unable to meet the payment
obligations arising under its blanket mortgage, the mortgagee holding the
blanket mortgage could foreclose on that mortgage and terminate all
subordinate proprietary leases and occupancy agreements. In addition, the
blanket mortgage on a cooperative may provide financing in the form of a
mortgage that does not fully amortize with a significant portion of principal
being due in one lump sum at final maturity. The inability of the cooperative
to refinance this mortgage and its consequent inability to make the final
payment could lead to foreclosure by
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the mortgagee providing the financing. A foreclosure in either event by the
holder of the blanket mortgage could eliminate or significantly diminish the
value of any collateral held by the lender who financed the purchase by an
individual tenant-stockholder of cooperative shares or, in the case of a trust
fund including cooperative loans, the collateral securing the cooperative
loans.
The cooperative is owned by tenant-stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive
proprietary leases or occupancy agreements which confer exclusive rights to
occupy specific units. Generally, a tenant-stockholder of a cooperative must
make a monthly payment to the cooperative representing the tenant-
stockholder's pro rata share of the cooperative's payments for its blanket
mortgage, real property taxes, maintenance expenses and other capital or
ordinary expenses. An ownership interest in a cooperative and accompanying
rights is financed through a cooperative share loan evidenced by a promissory
note and secured by a security interest in the occupancy agreement or
proprietary lease and in the related cooperative shares. The lender takes
possession of the share certificate and a counterpart of the proprietary lease
or occupancy agreement, and a financing statement covering the proprietary
lease or occupancy agreement and the cooperative shares is filed in the
appropriate state and local offices to perfect the lender's interest in its
collateral. Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in
the security agreement covering the assignment of the proprietary lease or
occupancy agreement and the pledge of cooperative shares.
Foreclosure
Deed of Trust. Foreclosure of a deed of trust is generally accomplished by
a non-judicial sale under a specific provision in the deed of trust which
authorizes the trustee to sell the Property at public auction upon any default
by the borrower under the terms of the note or deed of trust. In certain
states, the foreclosure also may be accomplished by judicial action in the
manner provided for foreclosure of mortgages. In addition to any notice
requirements contained in a deed of trust, in some states (including
California), the trustee must record a notice of default and send a copy to
the borrower-trustor, to any person who has recorded a request for a copy of
any notice of default and notice of sale, to any successor in interest to the
borrower-trustor, to the beneficiary of any junior deed of trust and to
certain other persons. In some states (including California), the borrower-
trustor has the right to reinstate the loan at any time following default
until shortly before the trustee's sale. In general, the borrower, or any
other person having a junior encumbrance on the real estate, may, during a
statutorily prescribed reinstatement period, cure a monetary default by paying
the entire amount in arrears plus other designated costs and expenses incurred
in enforcing the obligation. Generally, state law controls the amount of
foreclosure expenses and costs, including attorney's fees, which may be
recovered by a lender. After the reinstatement period has expired without the
default having been cured, the borrower or junior lienholder no longer has the
right to reinstate the loan and must pay the loan in full to prevent the
scheduled foreclosure sale. If the deed of trust is not reinstated within any
applicable cure period, a notice of sale must be posted in a public place and,
in most states (including California), published for a specific period of time
in one or more newspapers. In addition, some state laws require that a copy of
the notice of sale be posted on the Property and sent to all parties having an
interest of record in the Property. In California, the entire process from
recording a notice of default to a non-judicial sale usually takes four to
five months.
Mortgages. Foreclosure of a mortgage is generally accomplished by judicial
action. The action is initiated by the service of legal pleadings upon all
parties having an interest in the Property. Delays in completion of the
foreclosure may occasionally result from difficulties in locating necessary
parties. Judicial foreclosure proceedings are often not contested by any of
the parties. When the mortgagee's right to foreclosure is contested, the legal
proceedings necessary to resolve the issue can be time consuming. After the
completion of a judicial foreclosure proceeding, the court generally issues a
judgment of foreclosure and appoints a referee or other court officer to
conduct the sale of the Property. In some states, mortgages may also be
foreclosed by advertisement, pursuant to a power of sale provided in the
mortgage.
Although foreclosure sales are typically public sales, frequently no third
party purchaser bids in excess of the lender's lien because of the difficulty
of determining the exact status of title to the Property, the
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possible deterioration of the Property during the foreclosure proceedings and
a requirement that the purchaser pay for the Property in cash or by cashier's
check. Thus the foreclosing lender often purchases the Property from the
trustee or referee for an amount equal to the principal amount outstanding
under the loan, accrued and unpaid interest and the expenses of foreclosure in
which event the mortgagor's debt will be extinguished or the lender may
purchase for a lesser amount in order to preserve its right against a borrower
to seek a deficiency judgment in states where the judgment is available.
Thereafter, subject to the right of the borrower in some states to remain in
possession during the redemption period, the lender will assume the burden of
ownership, including obtaining hazard insurance and making the repairs at its
own expense as are necessary to render the Property suitable for sale. The
lender will commonly obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the Property. Depending
upon market conditions, the ultimate proceeds of the sale of the Property may
not equal the lender's investment in the Property. Any loss may be reduced by
the receipt of any mortgage guaranty insurance proceeds.
Courts have imposed general equitable principles upon foreclosure, which are
generally designed to mitigate the legal consequences to the borrower of the
borrower's defaults under the loan documents. Some courts have been faced with
the issue of whether federal or state constitutional provisions reflecting due
process concerns for fair notice require that borrowers under deeds of trust
receive notice longer than that prescribed by statute. For the most part,
these cases have upheld the notice provisions as being reasonable or have
found that the sale by a trustee under a deed of trust does not involve
sufficient state action to afford constitutional protection to the borrower.
When the beneficiary under a junior mortgage or deed of trust cures the
default and reinstates or redeems by paying the full amount of the senior
mortgage or deed of trust, the amount paid by the beneficiary so to cure or
redeem becomes a part of the indebtedness secured by the junior mortgage or
deed of trust. See "Junior Mortgages; Rights of Senior Mortgagees" below.
Cooperative Loans. The cooperative shares owned by the tenant-stockholder
and pledged to the lender are, in almost all cases, subject to restrictions on
transfer as set forth in the cooperative's certificate of incorporation and
bylaws, as well as the proprietary lease or occupancy agreement, and may be
cancelled by the cooperative for failure by the tenant-stockholder to pay rent
or other obligations or charges owed by the tenant-stockholder, including
mechanics' liens against the cooperative apartment building incurred by the
tenant-stockholder. The proprietary lease or occupancy agreement generally
permits the cooperative to terminate the lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder on its obligations
under the proprietary lease or occupancy agreement. A default by the tenant-
stockholder under the proprietary lease or occupancy agreement will usually
constitute a default under the security agreement between the lender and the
tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate the lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds form the sale of the cooperative apartment,
subject, however, to the cooperative's right to sums due under the proprietary
lease or occupancy agreement. The total amount owed to the cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the cooperative loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure on a
cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease. Generally, the lender
is not limited in any rights it may have to dispossess the tenant-
stockholders.
In some states, foreclosure on the cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the Uniform Commercial
Code (the "UCC") and the security agreement relating to those shares. Article
9 of the UCC requires that a sale be conducted in a "commercially reasonable"
manner.
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Whether a foreclosure sale has been conducted in a "commercially reasonable"
manner will depend on the facts in each case. In determining commercial
reasonableness, a court will look to the notice given the debtor and the
method, manner, time, place and terms of the foreclosure. Generally, a sale
conducted according to the usual practice of banks selling similar collateral
will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to
reimbursement is subject to the right of the cooperative to receive sums due
under the proprietary lease or occupancy agreement. If there are proceeds
remaining, the lender must account to the tenant-stockholder for the surplus.
Conversely, if a portion of the indebtedness remains unpaid, the tenant-
stockholder is generally responsible for the deficiency. See "Anti-Deficiency
Legislation and Other Limitations on Lenders" below.
In the case of foreclosure on a building which was converted from a rental
building to a building owned by a cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the Property
subject to rent control and rent stabilization laws which apply to certain
tenants who elected to remain in the building but who did not purchase shares
in the cooperative when the building was so converted.
Environmental Risks
Property pledged as security to a lender may be subject to unforeseen
environmental risks. Under the laws of certain states, contamination of a
Property may give rise to a lien on the Property to assure the payment of the
costs of clean-up. In several states this type of lien has priority over the
lien of an existing mortgage against the Property. In addition, under the
federal Comprehensive Environmental Response, Compensation and Liability Act
of 1980 ("CERCLA"), the EPA may impose a lien on Property where EPA has
incurred clean-up costs. However, a CERCLA lien is subordinate to pre-
existing, perfected security interests.
Under the laws of some states, and under CERCLA, it is conceivable that a
secured lender may be held liable as an "owner" or "operator" for the costs of
addressing releases or threatened releases of hazardous substances at a
Property, even though the environmental damage or threat was caused by a prior
or current owner or operator. CERCLA imposes liability for those costs on any
and all "responsible parties," including owners or operators. However, CERCLA
excludes from the definition of "owner or operator" a secured creditor who
holds indicia of ownership primarily to protect its security interest (the
"secured creditor exclusion") but without "participating in the management" of
the Property. Thus, if a lender's activities begin to encroach on the actual
management of a contaminated facility or Property, the lender may incur
liability as an "owner or operator" under CERCLA. Similarly, if a lender
forecloses and takes title to a contaminated facility or Property, the lender
may incur CERCLA liability in various circumstances, including, but not
limited to, when it holds the facility or Property as an investment (including
leasing the facility or Property to third party), or fails to market the
Property in a timely fashion.
Whether actions taken by a lender would constitute participation in the
management of a Property, or the business of a borrower, so as to render the
secured creditor exemption unavailable to a lender has been a matter of
judicial interpretation of the statutory language, and court decisions have
been inconsistent. In 1990, the Court of Appeals for the Eleventh Circuit
suggested that the mere capacity of the lender to influence a borrower's
decisions regarding disposal of hazardous substances was sufficient
participation in the management of the borrower's business to deny the
protection of the secured creditor exemption to the lender.
This ambiguity appears to have been resolved by the enactment of the Asset
Conservation, Lender Liability and Deposit Insurance Protection Act of 1996,
which was signed into law by President Clinton on September 30, 1996. This
legislation provides that in order to be deemed to have participated in the
management of a Property, a lender must actually participate in the
operational affairs of the Property or the borrower. The legislation also
provides that participation in the management of the Property does not include
"merely having the capacity to influence, or unexercised right to control"
operations. Rather, a lender will lose the protection of the secured creditor
exemption only if it exercises decision-making control over the
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borrower's environmental compliance and hazardous substance handling and
disposal practices, or assumes day-to-day management of all operational
functions of the Property.
If a lender is or becomes liable, it can bring an action for contribution
against any other "responsible parties," including a previous owner or
operator, who created the environmental hazard, but those persons or entities
may be bankrupt or otherwise judgment proof. The costs associated with
environmental cleanup may be substantial. It is conceivable that the costs
arising from the circumstances set forth above would result in a loss to
certificateholders.
CERCLA does not apply to petroleum products, and the secured creditor
exclusion does not govern liability for cleanup costs under federal laws other
than CERCLA, in particular Subtitle I of the federal Resource Conservation and
Recovery Act ("RCRA"), which regulates underground petroleum storage tanks
(except heating oil tanks). The EPA has adopted a lender liability rule for
underground storage tanks under Subtitle I of RCRA. Under that rule, a holder
of a security interest in an underground storage tank or real property
containing an underground storage tank is not considered an operator of the
underground storage tank as long as petroleum is not added to, stored in or
dispensed from the tank. Moreover, under the Asset Conservation Act, the
protections accorded to lenders under CERCLA are also accorded to holders of
security interests in underground petroleum storage tanks. It should be noted,
however, that liability for cleanup of petroleum contamination may be governed
by state law, which may not provide for any specific protection for secured
creditors.
In general, at the time the loans were originated no environmental
assessment, or a very limited environmental assessment, of the Properties was
conducted.
Rights of Redemption
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the Property from the foreclosure sale. In certain
other states (including California), this right of redemption applies only to
sales following judicial foreclosure, and not to sales pursuant to a non-
judicial power of sale. In most states where the right of redemption is
available, statutory redemption may occur upon payment of the foreclosure
purchase price, accrued interest and taxes. In other states, redemption may be
authorized if the former borrower pays only a portion of the sums due. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed Property. The exercise of a right of redemption
would defeat the title of any purchaser from the lender subsequent to
foreclosure or sale under a deed of trust. Consequently, the practical effect
of the redemption right is to force the lender to retain the Property and pay
the expenses of ownership until the redemption period has run. In some states,
there is no right to redeem Property after a trustee's sale under a deed of
trust.
Anti-deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory and judicial restrictions that limit
the remedies of a beneficiary under a deed of trust or a mortgagee under a
mortgage. In some states, including California, statutes and case law limit
the right of the beneficiary or mortgagee to obtain a deficiency judgment
against borrowers financing the purchase of their residence or following sale
under a deed of trust or certain other foreclosure proceedings. A deficiency
judgment is a personal judgment against the borrower equal in most cases to
the difference between the amount due to the lender and the fair market value
of the Property at the time of the foreclosure sale. In certain states,
including California, if a lender simultaneously originates a loan secured by
a senior lien on a particular Property and a loan secured by a junior lien on
the same Property, the lender, as the holder of the junior lien, may be
precluded from obtaining a deficiency judgment with respect to the excess of
the aggregate amount owed under both loans over the proceeds of any sale under
a deed of trust or other foreclosure proceedings. As a result of these
prohibitions, it is anticipated that in most instances the master servicer
will utilize the non-judicial foreclosure remedy and will not seek deficiency
judgments against defaulting borrowers.
Some state statutes require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an
attempt to satisfy the full debt before bringing a personal action against
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the borrower. In certain other states, the lender has the option of bringing a
personal action against the borrower on the debt without first exhausting the
security; however, in some of these states, the lender, following judgment on
the personal action, may be deemed to have elected a remedy and may be
precluded from exercising remedies with respect to the security. Consequently,
the practical effect of the election requirement, when applicable, is that
lenders will usually proceed first against the security rather than bringing a
personal action against the borrower. In some states, exceptions to the anti-
deficiency statutes are provided for in certain instances where the value of
the lender's security has been impaired by acts or omissions of the borrower,
for example, in the event of waste of the Property. Finally, other statutory
provisions limit any deficiency judgment against the former borrower following
a foreclosure sale to the excess of the outstanding debt over the fair market
value of the Property at the time of the public sale. The purpose of these
statutes is generally to prevent a beneficiary or a mortgagee from obtaining a
large deficiency judgment against the former borrower as a result of low or no
bids at the foreclosure sale.
Generally, Article 9 of the UCC governs foreclosure on cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
cooperative loan, would be the shares of the cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
and state laws affording relief to debtors, may interfere with or affect the
ability of the secured mortgage lender to realize upon its security. For
example, in a proceeding under the federal Bankruptcy Code, a lender may not
foreclose on a Property without the permission of the bankruptcy court. The
rehabilitation plan proposed by the debtor may provide, if the Property is not
the debtor's principal residence and the court determines that the value of
the Property is less than the principal balance of the mortgage loan, for the
reduction of the secured indebtedness to the value of the Property as of the
date of the commencement of the bankruptcy, rendering the lender a general
unsecured creditor for the difference, and also may reduce the monthly
payments due under the mortgage loan, change the rate of interest and alter
the mortgage loan repayment schedule. The effect of these types of proceedings
under the federal Bankruptcy Code, including but not limited to any automatic
stay, could result in delays in receiving payments on the loans underlying a
series of securities and possible reductions in the aggregate amount of the
payments.
The federal tax laws provide priority to certain tax liens over the lien of
a mortgage or secured party.
Due-on-sale Clauses
Generally, each conventional loan will contain a due-on-sale clause which
will generally provide that if the mortgagor or obligor sells, transfers or
conveys the Property, the loan or contract may be accelerated by the mortgagee
or secured party. Court decisions and legislative actions have placed
substantial restriction on the right of lenders to enforce due-on-sale clauses
in many states. However, the Garn-St Germain Depository Institutions Act of
1982 (the "Garn-St Germain Act"), subject to certain exceptions, preempts
state constitutional, statutory and case law prohibiting the enforcement of
due-on-sale clauses. As a result, due-on-sale clauses have become generally
enforceable except in those states whose legislatures exercised their
authority to regulate the enforceability of those clauses with respect to
mortgage loans that were (i) originated or assumed during the "window period"
under the Garn-St Germain Act which ended in all cases not later than
October 15, 1982, and (ii) originated by lenders other than national banks,
federal savings institutions and federal credit unions. FHLMC has taken the
position in its published mortgage servicing standards that, out of a total of
eleven "window period states," five states (Arizona, Michigan, Minnesota, New
Mexico and Utah) have enacted statutes extending, on various terms and for
varying periods, the prohibition on enforcement of due-on-sale clauses with
respect to certain categories of window period loans. Also, the Garn-St
Germain Act does "encourage" lenders to permit assumption of loans at the
original rate of interest or at some other rate less than the average of the
original rate and the market rate.
As to loans secured by an owner-occupied residence, the Garn-St Germain Act
sets forth nine specific instances in which a mortgagee covered by the Act may
not exercise its rights under a due-on-sale clause,
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notwithstanding the fact that a transfer of the Property may have occurred.
The inability to enforce a due-on-sale clause may result in transfer of the
related Property to an uncreditworthy person, which could increase the
likelihood of default or may result in a mortgage bearing an interest rate
below the current market rate being assumed by a new home buyer, which may
affect the average life of the loans and the number of loans which may extend
to maturity.
In addition, under federal bankruptcy law, due-on-sale clauses may not be
enforceable in bankruptcy proceedings and may, under certain circumstances, be
eliminated in any modified mortgage resulting from the bankruptcy proceeding.
Enforceability of Prepayment and Late Payment Fees
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states,
there are or may be specific limitations upon the late charges which a lender
may collect from a borrower for delinquent payments. Certain states also limit
the amounts that a lender may collect from a borrower as an additional charge
if the loan is prepaid. Under certain state laws, prepayment charges may not
be imposed after a certain period of time following the origination of
mortgage loans with respect to prepayments on loans secured by liens
encumbering owner-occupied residential properties. Since many of the
Properties will be owner-occupied, it is anticipated that prepayment charges
may not be imposed with respect to many of the loans. The absence of a
prepayment penalty, particularly with respect to fixed rate loans having
higher Loan Rates, may increase the likelihood of refinancing or other early
retirement of the those loans or contracts. Late charges and prepayment
penalties are typically retained by servicers as additional servicing
compensation.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control Act
of 1980, enacted in March 1980 ("Title V") provides that state usury
limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. The Office of Thrift
Supervision, as successor to the Federal Home Loan Bank Board, is authorized
to issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute authorized the states to reimpose
interest rate limits by adopting, before April 1, 1983, a law or
constitutional provision which expressly rejects an application of the federal
law. Fifteen states adopted these laws prior to the April 1, 1983 deadline. In
addition, even where Title V is not so rejected, any state is authorized by
the law to adopt a provision limiting discount points or other charges on
mortgage loans covered by Title V. Certain states have taken action to
reimpose interest rate limits and/or to limit discount points or other
charges.
Soldiers' and Sailors' Civil Relief Act
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act of
1940, as amended (the "Relief Act"), a borrower who enters military service
after the origination of the borrower's loan (including a borrower who is a
member of the National Guard or is in reserve status at the time of the
origination of the loan and is later called to active duty) may not be charged
interest above an annual rate of 6% during the period of the borrower's active
duty status, unless a court orders otherwise upon application of the lender.
It is possible that the interest rate limitation could have an effect, for an
indeterminate period of time, on the ability of the master servicer to collect
full amounts of interest on certain of the loans. Unless otherwise provided in
the related prospectus supplement, any shortfall in interest collections
resulting from the application of the Relief Act could result in losses to
securityholders. The Relief Act also imposes limitations which would impair
the ability of the master servicer to foreclose on an affected loan during the
borrower's period of active duty status. Moreover, the Relief Act permits the
extension of a loan's maturity and the re-adjustment of its payment schedule
beyond the completion of military service. Thus, in the event that a loan that
is subject to the Relief Act goes into default, there may be delays and losses
occasioned by the inability to realize upon the Property in a timely fashion.
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Junior Mortgages and Rights of Senior Mortgagees
To the extent that the loans comprising the trust fund for a series are
secured by mortgages which are junior to other mortgages held by other lenders
or institutional investors, the rights of the trust fund (and therefore the
securityholders), as mortgagee under the junior mortgage, are subordinate to
those of any mortgagee under any senior mortgage. The senior mortgagee has the
right to receive hazard insurance and condemnation proceeds and to cause the
Property securing the loan to be sold upon default of the mortgagor, thereby
extinguishing the junior mortgagee's lien unless the junior mortgagee asserts
its subordinate interest in the Property in foreclosure litigation and,
possibly, satisfies the defaulted senior mortgage. A junior mortgagee may
satisfy a defaulted senior loan in full and, in some states, may cure a
default and bring the senior loan current, in either event adding the amounts
expended to the balance due on the junior loan. In most states, absent a
provision in the mortgage or deed of trust, no notice of default is required
to be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders confers
on the mortgagee the right both to receive all proceeds collected under any
hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply these proceeds and awards to any indebtedness
secured by the mortgage, in the order determined by the mortgagee. Thus, in
the event improvements on the Property are damaged or destroyed by fire or
other casualty, or in the event the Property is taken by condemnation, the
mortgagee or beneficiary under senior mortgages will have the prior right to
collect any insurance proceeds payable under a hazard insurance policy and any
award of damages in connection with the condemnation and to apply the same to
the indebtedness secured by the senior mortgages. Proceeds in excess of the
amount of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed of
trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the Property and, when due, all
encumbrances, charges and liens on the Property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
Property, to maintain and repair the Property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the Property or the rights of the mortgagee under the mortgage. Upon
a failure of the mortgagor to perform any of these obligations, the mortgagee
is given the right under certain mortgages to perform the obligation itself,
at its election, with the mortgagor agreeing to reimburse the mortgagee for
any sums expended by the mortgagee on behalf of the mortgagor. All sums so
expended by the mortgagee become part of the indebtedness secured by the
mortgage.
The form of credit line trust deed or mortgage generally used by most
institutional lenders which make revolving credit line loans typically
contains a "future advance" clause, which provides, in essence, that
additional amounts advanced to or on behalf of the borrower by the beneficiary
or lender are to be secured by the deed of trust or mortgage. Any amounts so
advanced after the cut-off date with respect to any Mortgage will not be
included in the trust fund. The priority of the lien securing any advance made
under the clause may depend in most states on whether the deed of trust or
mortgage is called and recorded as a credit line deed of trust or mortgage. If
the beneficiary or lender advances additional amounts, the advance is entitled
to receive the same priority as amounts initially advanced under the trust
deed or mortgage, notwithstanding the fact that there may be junior trust
deeds or mortgages and other liens which intervene between the date of
recording of the trust deed or mortgage and the date of the future advance,
and notwithstanding that the beneficiary or lender had actual knowledge of the
intervening junior trust deeds or mortgages and other liens at the time of the
advance. In most states, the trust deed or mortgage lien securing mortgage
loans of the type which includes home equity credit lines applies
retroactively to the date of the original recording of the trust deed or
mortgage, provided that the total amount of advances under the home equity
credit line does not exceed the maximum specified principal amount of the
recorded trust deed or mortgage, except as to advances made after receipt by
the lender of a written notice of lien from a judgment lien creditor of the
trustor.
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Consumer Protection Laws
Numerous federal and state consumer protection laws impose substantive
requirements upon mortgage lenders in connection with the origination,
servicing and enforcement of loans secured by Single Family Properties. These
laws include the federal Truth-in-Lending Act and Regulation Z promulgated
thereunder, Real Estate Settlement Procedures Act and Regulation B promulgated
thereunder, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit
Reporting Act and related statutes and regulations. In particular, Regulation
Z, requires certain disclosures to the borrowers regarding the terms of the
loans; the Equal Credit Opportunity Act and Regulation B promulgated
thereunder prohibit discrimination on the basis of age, race, color, sex,
religion, marital status, national origin, receipt of public assistance or the
exercise of any right under the Consumer Credit Protection Act, in the
extension of credit; the Fair Credit Reporting Act regulates the use and
reporting of information related to the borrower's credit experience. Certain
provisions of these laws impose specific statutory liabilities upon lenders
who fail to comply therewith. In addition, violations of these laws may limit
the ability of the sellers to collect all or part of the principal of or
interest on the loans and could subject the sellers and in some cases their
assignees to damages and administrative enforcement.
Home Ownership and Equity Protection Act of 1994
Some loans and contracts, known as "High Cost Loans", may be subject to
special rules, disclosure requirements and other provisions that were added to
the federal Truth-in-Lending Act by the Home Ownership and Equity Protection
Act of 1994, or "Homeownership Act", if such trust assets were originated on
or after October 1, 1995, are not loans made to finance the purchase of the
mortgaged property and have interest rates or origination costs in excess of
certain prescribed levels. The Homeownership Act requires certain additional
disclosures, specifies the timing of those disclosures and limits or prohibits
inclusion of certain provisions in mortgages subject to the Homeownership Act.
Purchasers or assignees of any High Cost Loan, including any trust fund, could
be liable under federal law for all claims and subject to all defenses that
the borrower could assert against the originator of the High Cost Loan, under
the federal Truth-in-Lending Act or any other law, unless the purchaser or
assignee did not know and could not with reasonable diligence have determined
that the loan was subject to the provisions of the Homeownership Act. Remedies
available to the borrower include monetary penalties, as well as recision
rights if appropriate disclosures were not given as required or if the
particular mortgage includes provisions prohibited by law. The maximum damages
that may be recovered under these provisions from an assignee, including the
trust fund, is the remaining amount of indebtedness plus the total amount paid
by the borrower in connection with the home loan.
In addition to the Homeownership Act, a number of legislative proposals have
been introduced at both the federal and state level that are designed to
discourage predatory lending practices. Some states have enacted, or may
enact, laws or regulations that prohibit inclusion of some provisions in home
loans that have interest rates or origination costs in excess of consummation
of the home loans. In some cases, state law may impose requirements and
restrictions greater than those in the Homeownership Act. An originators'
failure to comply with these laws could subject the trust fund, and other
assignees of the home loans, to monetary penalties and could result in the
borrowers rescinding the home loans against either the trust fund or
subsequent holders of the home loans.
Lawsuits have been brought in various states making claims against assignees
of High Cost Loans for violations of state law allegedly committed by the
originator. Named defendants in these cases include numerous participants
within the secondary mortgage market, including some securitization trusts.
Material Federal Income Tax Consequences
The following is a general discussion of certain anticipated material
federal income tax consequences of the purchase, ownership and disposition of
the securities. This discussion has been prepared with the advice of McKee
Nelson LLP, as special counsel to the depositor. This discussion is based on
authorities that are subject to change or differing interpretations. Any such
change or differing interpretation could be applied retroactively. No rulings
have been or will be sought from the IRS with respect to any of the matters
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discussed below, and no assurance can be given that the views of the IRS with
respect to those matters will not differ from that described below.
This discussion is directed solely to Security Owners that purchase
securities at issuance and hold them as "capital assets" within the meaning of
Section 1221 of the Code. The discussion does not purport to cover all federal
income tax consequences applicable to particular investors, some of which may
be subject to special rules. Investors subject to such special rules include
dealers in securities, certain traders in securities, financial institutions,
tax-exempt organizations, insurance companies, persons who hold securities as
part of a hedging transaction or as a position in a straddle or conversion
transaction, persons whose functional currency is not the U.S. dollar, or
persons who elect to treat gain recognized on the disposition of a security as
investment income under Section 163(d)(4)(B)(iii) of the Code.
In addition, this discussion does not address the state, local or other tax
consequences of the purchase, ownership, and disposition of securities. We
recommend that you consult your own tax advisor in determining the state,
local and other tax consequences of the purchase, ownership, and disposition
of securities. Moreover, this discussion may be supplemented by a discussion
in the applicable prospectus supplement.
In this discussion, when we use the term:
o "Security Owner," we mean any person holding a beneficial ownership
interest in securities;
o "Code," we mean the Internal Revenue Code of 1986, as amended;
o "IRS," we mean the Internal Revenue Service;
o "AFR," we mean the applicable federal rate, which is an average of
current yields for U.S. Treasury securities with specified ranges of
maturities and which is computed and published monthly by the IRS for use
in various tax calculations;
o "Foreign Person," we mean any person other than a U.S. Person; and
o "U.S. Person," we mean (i) a citizen or resident of the United States;
(ii) a corporation (or entity treated as a corporation for tax purposes)
created or organized in the United States or under the laws of the United
States or of any state thereof, including, for this purpose, the District
of Columbia; (iii) a partnership (or entity treated as a partnership for
tax purposes) organized in the United States or under the laws of the
United States or of any state thereof, including, for this purpose, the
District of Columbia (unless provided otherwise by future Treasury
regulations); (iv) an estate whose income is includible in gross income
for United States income tax purposes regardless of its source; or (v) a
trust, if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more U.S.
Persons have authority to control all substantial decisions of the trust.
Notwithstanding the preceding clause, to the extent provided in Treasury
regulations, certain trusts that were in existence on August 20, 1996,
that were treated as U.S. Persons prior to such date, and that elect to
continue to be treated as U.S. Persons, also are U.S. Persons.
Types of Securities
This discussion addresses the following four types of securities:
o REMIC certificates,
o FASIT certificates,
o notes issued by a trust, including a trust for which a REIT election has
been made, and
o trust certificates issued by trusts for which a REMIC or FASIT election
is not made.
The prospectus supplement for each series of securities will indicate the
tax characterization of each security issued pursuant to that supplement. Set
forth below is a general description of each type of tax characterization,
with references to more detailed discussions regarding particular securities.
The discussions under "-- Special Tax Attributes" and "-- Backup Withholding"
below address all types of securities.
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REMIC Certificates Generally. With respect to each series of REMIC
certificates, McKee Nelson LLP ("Company Counsel") will deliver its opinion
that, assuming compliance with all provisions of the related trust agreement,
the related trust will comprise one or more "REMICs" within the meaning of
Section 860D of the Code and the classes of interests offered will be
considered to be "regular interests" or "residual interests" in a REMIC within
the meaning set out in Section 860G(a) of the Code. The prospectus supplement
for REMIC certificates will identify the regular interests and residual
interest in the REMIC.
A REMIC may issue one or more classes of regular interests and must issue
one and only one class of residual interest. We refer to a REMIC certificate
representing a regular interest in a REMIC as a "REMIC regular certificate."
REMIC regular certificates generally will be treated for federal income tax
purposes as debt instruments issued by the REMIC. The tax treatment of
securities treated as debt instruments, including REMIC regular certificates,
is discussed under "-- Taxation of Securities Treated as Debt Instruments"
below. You should be aware, however, that although you normally would take
interest income on a debt instrument into account under your regular method of
accounting, you must include interest accrued on a REMIC regular certificate
in income under the accrual method of accounting regardless of the method of
accounting you otherwise use for tax purposes.
We refer to a REMIC certificate representing a residual interest in a REMIC
as a "REMIC residual certificate" and the owner of a beneficial interest in a
REMIC residual certificate as a "Residual Owner." The tax treatment of REMIC
residual certificates is discussed under "-- REMIC Residual Certificates"
below.
A REMIC is subject to tax at a rate of 100 percent on the net income the
REMIC derives from prohibited transactions. In general, a "prohibited
transaction" means the disposition of a qualified mortgage other than pursuant
to certain specified exceptions, the receipt of income from a source other
than a qualified mortgage or certain other permitted investments, the receipt
of compensation for services, or gain from the disposition of an asset
purchased with the payments on the qualified mortgages for temporary
investment pending distribution on the REMIC certificates. The Code also
imposes a 100 percent tax on the value of any contribution of assets to the
REMIC after the closing date other than pursuant to specified exceptions, and
subjects "net income from foreclosure property" to tax at the highest
corporate rate. We do not anticipate that any REMIC in which we will offer
certificates will engage in any such transactions or receive any such income.
If an entity elects to be treated as a REMIC but fails to comply with one or
more of the ongoing requirements of the Code for REMIC status during any
taxable year, the entity will not qualify as a REMIC for such year and
thereafter. In this event, the entity may be subject to taxation as a separate
corporation, and the certificates issued by the entity may not be accorded the
status described under "-- Special Tax Attributes" below. In the case of an
inadvertent termination of REMIC status, the Treasury Department has authority
to issue regulations providing relief; however, sanctions, such as the
imposition of a corporate tax on all or a portion of the entity's income for
the period during which the requirements for REMIC status are not satisfied,
may accompany any such relief.
To the extent provided in the applicable prospectus supplement, a
certificate may represent not only the ownership of a REMIC regular interest
but also an interest in a notional principal contract. This can occur, for
instance, if the applicable trust agreement provides that the rate of interest
payable by the REMIC on the regular interest is subject to a cap based on the
weighted average of the net interest rates payable on the qualified mortgages
held by the REMIC. In these instances, the trust agreement may provide for a
reserve fund that will be held as part of the trust fund but not as an asset
of any REMIC created pursuant to the trust agreement (an "outside reserve
fund"). The outside reserve fund would typically be funded from monthly excess
cashflow. If the interest payments on a regular interest were limited due to
the above-described cap, payments of any interest shortfall due to application
of that cap would be made to the regular interest holder to the extent of
funds on deposit in the outside reserve fund. For federal income tax purposes,
payments from the outside reserve fund will be treated as payments under a
notional principal contract written by the owner of the outside reserve fund
in favor of the regular interest holders.
FASIT Certificates Generally. With respect to each series of FASIT
certificates, Company Counsel will deliver its opinion that, assuming
compliance with all provisions of the related trust agreement, the related
trust will qualify as a "FASIT" within the meaning of Section 860L of the
Code. In such case, the
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certificates will represent one or more classes of FASIT regular interests,
which we refer to herein as "FASIT regular certificates," and a single
ownership interest, which we refer to herein as the "Ownership certificate."
The prospectus supplement for FASIT certificates will identify the regular
interests and ownership interest in the FASIT.
FASIT regular certificates generally will be treated as debt instruments for
federal income tax purposes, and a Security Owner must report income from such
certificates under an accrual method of accounting, even if it otherwise would
have used another method. The tax treatment of securities treated as debt
instruments, including FASIT regular certificates, is discussed under
"-- Taxation of Securities Treated as Debt Instruments" below.
Certain FASIT regular interests, referred to as "High-Yield Interests," are
subject to special rules. The applicable prospectus supplement will identify
those FASIT regular certificates, if any, that are High-Yield Interests.
Generally, High-Yield Interests may be held only by domestic "C" corporations,
other FASITs, and dealers in securities who hold such interests in inventory.
If a securities dealer (other than a domestic "C" corporation) initially
acquires a High-Yield Interest as inventory, but later begins to hold it for
investment or ceases to be a dealer, the dealer will become subject to an
excise tax equal to the income from the High-Yield Interest multiplied by the
highest corporate income tax rate. In addition, the transfer of a High-Yield
Interest to a disqualified holder will be disregarded for federal income tax
purposes, and the transferor will continue to be taxed as the holder of the
High-Yield Interest.
The beneficial owner of a High-Yield Interest may not use non-FASIT current
losses or net operating loss carryforwards or carrybacks to offset any income
derived from the High-Yield Interest, for either regular income tax purposes
or alternative minimum tax purposes. In addition, the FASIT provisions contain
an anti-abuse rule under which corporate income tax could be imposed on income
derived from a FASIT regular certificate that is held by a pass through entity
(other than another FASIT) that issues debt or equity securities backed by the
FASIT regular certificate that have the same features as High-Yield Interests.
The Ownership certificate in a FASIT must be held by an "eligible
corporation" within the meaning of Section 860L(a)(2) of the Code (generally,
a domestic, taxable "C" corporation other than a REIT, regulated investment
company or cooperative). The tax treatment of Ownership certificates is
discussed under "-- FASIT Ownership Certificates" below.
Qualification as a FASIT requires ongoing compliance with certain
conditions. If a trust for which a FASIT election has been made fails to
comply with one or more of the Code's ongoing requirements for FASIT status
during any taxable year, the Code provides that its FASIT status may be lost
for that year and thereafter. If FASIT status is lost, the treatment of the
former FASIT and the interests therein for federal income tax purposes is
uncertain. The former FASIT might be treated as a trust, as a separate
association taxable as a corporation, or as a partnership. The FASIT regular
certificates could be treated as debt instruments for federal income tax
purposes or as equity interests in the former FASIT. Although the Code
authorizes the Treasury to issue regulations that address situations where a
failure to meet the requirements for FASIT status occurs inadvertently and in
good faith, such regulations have not yet been issued. It is possible that
disqualification relief might be accompanied by sanctions, such as the
imposition of a corporate tax on all or a portion of the FASIT's income for a
period of time in which the requirements for FASIT status are not satisfied.
On February 7, 2000, the IRS released proposed regulations interpreting the
provisions of the Code applicable to FASITs. Subject to certain exceptions,
the proposed regulations would only become effective at the time the
regulations are issued in final form. Accordingly, definitive guidance
addressing the qualification of a trust as a FASIT and the tax consequences to
beneficial owners of interests in FASITs does not exist.
Issuance of Notes Generally. For each issuance of notes by a trust (which
does not make a REMIC or FASIT election), Company Counsel will deliver its
opinion that, assuming compliance with the trust agreement and the indenture,
the notes will constitute debt instruments for federal income tax purposes. No
regulations, published rulings, or judicial decisions may exist that discuss
the characterization for federal income tax purposes of securities with terms
substantially the same as the notes. The depositor and the trustee will agree,
and the beneficial owners of notes will agree by their purchase of the notes,
to treat the notes as
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debt for all tax purposes. The tax treatment of securities treated as debt
instruments is discussed under "-- Taxation of Securities Treated as Debt
Instruments" below. If, contrary to the opinion of Company Counsel, the IRS
successfully asserted that the notes were not debt instruments for federal
income tax purposes, the notes might be treated as equity interests in the
trust, and the timing and amount of income allocable to beneficial owners of
those notes might be different than as described under "-- Taxation of
Securities Treated as Debt Instruments."
With respect to certain trusts that issue notes, an election may be made to
treat the trust as a "real estate investment trust" within the meaning of
Section 856(a) of the Code (a "REIT"). In general, a REIT receives certain tax
benefits, provided the REIT complies with requirements relating to its assets,
its income and its operations, all as further provided in the Code. The
classification of the trust issuing notes as a REIT generally will not have
any tax consequences for a beneficial owner of a note.
Classification of Trust Certificates Generally. With respect to each series
of trust certificates for which no REMIC or FASIT election is made, Company
Counsel will deliver its opinion (unless otherwise limited by the related
prospectus supplement) that, assuming compliance with the trust agreement,
either: (1) the trust will be classified as a trust under applicable Treasury
regulations and will not be taxable as a corporation and that each beneficial
owner of a certificate will be an owner of the trust under the provisions of
subpart E, part I, of subchapter J of the Code (we refer to such a trust
herein as a "Grantor Trust" and to the certificates issued by the trust as
"Grantor Trust Certificates"); or (2) the trust will be classified as a
partnership for federal income tax purposes that is not taxable as a
corporation under the taxable mortgage pool rules of Section 7701(i) of the
Code or the publicly traded partnership rules of Section 7704 of the Code and
that each beneficial owner of a certificate issued by the trust will be a
partner in that partnership (we refer to such certificates as "Partner
Certificates"). The depositor and the trustee will agree, and the beneficial
owners of Grantor Trust Certificates or Partner Certificates will agree by
their purchase of such securities, to treat the trust and the related
securities consistent with the manner provided in the related supplement for
all tax purposes. The proper characterization of the arrangement involving
Grantor Trust Certificates or Partner Certificates may not be clear, because
there may be no authority on closely comparable transactions. For a discussion
of the tax treatment of Grantor Trust Certificates, see "-- Grantor Trust
Certificates" below, and for a discussion of the tax treatment of Partner
Certificates, see "Partner Certificates" below.
Taxation of Securities Treated as Debt Instruments
When we refer to "Debt Securities" in the discussion that follows, we mean
(i) REMIC regular certificates, (ii) FASIT regular certificates, and (iii)
notes issued by a trust that does not make a REMIC or FASIT election. This
discussion is based in part on the regulations applicable to original issue
discount (the "OID Regulations) and in part on the provisions of the Tax
Reform Act of 1986 (the "1986 Act"). Prospective investors should be aware,
however, that the OID Regulations do not adequately address certain issues
relevant to prepayable securities, such as the Debt Securities. To the extent
that those issues are not addressed in the OID Regulations, the trustee
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 because of the applicable
statutory provisions. A tax result will not be considered unreasonable under
the anti-abuse rule in the absence of a substantial effect on the present
value of a taxpayer's tax liability. Prospective 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 ("OID")
with respect to Debt Securities.
Interest Income and OID. Debt Securities may be treated as having been
issued with OID. A debt instrument is issued with OID to the extent its stated
redemption price at maturity exceeds its issue price by more than a de minimis
amount. Although not clear, the de minimis amount for a class of Debt
Securities would appear to equal the product of (1) 0.25 percent, (2) the
stated redemption price at maturity of the class and (3) the weighted average
maturity of the class, computed by taking into account the prepayment
assumption discussed below. A beneficial owner of a Debt Security generally
must report de minimis OID
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with respect to that Debt Security pro rata as principal payments are
received, and that income will be capital gain if the Debt Security is held as
a capital asset.
For OID purposes, the issue price of a Debt Security generally is the first
price at which a substantial amount of that class is sold to the public
(excluding bond houses, brokers and underwriters). Although unclear under the
OID Regulations, it is anticipated that the trustee will treat the issue price
of a Debt Security 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 Debt Security also includes
any amount paid by an beneficial owner of that Debt Security for accrued
interest that relates to a period before the issue date of the Debt Security,
unless the Security Owner elects on its federal income tax return to exclude
that amount from the issue price and to recover it on the first distribution
date.
The stated redemption price at maturity of a debt instrument includes all
payments, other than interest unconditionally payable at fixed intervals of
one year or less at either a fixed rate or a variable rate ("Qualified Stated
Interest"). Interest is unconditionally payable only if either (1) reasonable
legal remedies exist to compel the timely payment of interest or (2) the terms
or conditions under which the debt instrument is issued make the late payment
or nonpayment of interest a remote likelihood. Because a portion of the
interest payable on the Debt Securities may be deferred, it is possible that
some or all of such interest may not be treated as unconditionally payable.
Nevertheless, for tax information reporting purposes, unless disclosed
otherwise in the applicable prospectus supplement, the trustee or other person
responsible for tax information reporting will treat all stated interest on
each class of Debt Securities as Qualified Stated Interest, provided that
class is not an interest-only class, a class the interest on which is not
payable currently in all accrual periods (an "accrual class"), or a class the
interest on which is substantially disproportionate to its principal amount (a
"super-premium class").
To the extent stated interest payable on a class of Debt Securities, other
than a class of REMIC regular certificates or FASIT regular certificates, is
Qualified Stated Interest, such interest will be taxable as ordinary income to
a Security Owner in accordance with such Security Owner's method of tax
accounting. If, however, all or a portion of the stated interest payable on
the class of Debt Securities is not Qualified Stated Interest, then the stated
interest, or portion thereof, would be included in the Debt Security's stated
redemption price at maturity. Qualified Stated Interest payable on a REMIC
regular certificate or FASIT regular certificate must be included in the
income of the Security Owner under an accrual method of accounting, regardless
of the method otherwise used by the Security Owner.
If a Debt Security is issued with OID, a Security Owner will be required to
include in income, as ordinary income, the daily portion of such OID
attributable to each day it holds such Debt Security. This requirement
generally will result in the accrual of income before the receipt of cash
attributable to that income.
The daily portion of such OID will be determined on a constant yield to
maturity basis in accordance with Section 1272(a)(6) of the Code (the "PAC
Method"). Under the PAC Method, the amount of OID allocable to any accrual
period for a class of Debt Securities will equal (1) the sum of (i) the
adjusted issue price of that class of Debt Securities at the end of the
accrual period and (ii) any payments made on that class of Debt Securities
during the accrual period of amounts included in the stated redemption price
at maturity of that class of Debt Securities, minus (2) the adjusted issue
price of that class of Debt Securities at the beginning of the accrual period.
The OID so determined is allocated ratably among the days in the accrual
period to determine the daily portion for each such day. The trustee will
treat the monthly period (or shorter period from the date of original issue)
ending on the day before each Distribution Date as the accrual period.
The adjusted issue price of a class of Debt Securities at the beginning of
its first accrual period will be its issue price. The adjusted issue price at
the end of any accrual period (and, therefore, at the beginning of the
subsequent accrual period) is determined by discounting the remaining payments
due on that class of Debt Securities at their yield to maturity. The remaining
payments due are determined based on the prepayment assumption made in pricing
the Debt Securities, but are adjusted to take into account the effect of
payments actually made on the trust's assets.
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For this purpose, the yield to maturity of a class of Debt Securities is
determined by projecting payments due on that class of Debt Securities based
on a prepayment assumption made with respect to the trust's assets. The yield
to maturity of a class of Debt Securities is the discount rate that, when
applied to the stream of payments projected to be made on that class of Debt
Securities as of its issue date, produces a present value equal to the issue
price of that class of Debt Securities. The Code requires that the prepayment
assumption be determined in the manner prescribed in Treasury Department
regulations. To date, no such regulations have been issued. The legislative
history of this Code provision indicates that the regulations will provide
that the assumed prepayment rate must be the rate used by the parties in
pricing the particular transaction. The prospectus supplement related to each
series will describe the prepayment assumption to be used for tax reporting
purposes. No representation, however, is made as to the rate at which
principal payments or recoveries on the trust's assets actually will occur.
Under the PAC Method, accruals of OID will increase or decrease (but never
below zero) to reflect the fact that payments on the trust's assets are
occurring at a rate that is faster or slower than that assumed under the
prepayment assumption. If the OID accruing on a class of Debt Securities is
negative for any period, a beneficial owner of a Debt Security of that class
will be entitled to offset such negative accruals only against future positive
OID accruals on that Debt Security.
Variable Rate Securities. Debt Securities may provide for interest based on
a variable rate. The amount of OID for a Debt Security bearing a variable rate
of interest will accrue in the manner described under "--Interest Income and
OID" above, with the yield to maturity and future payments on that Debt
Security generally to be determined by assuming that interest will be payable
for the life of the Debt Security based on the initial rate (or, if different,
the value of the applicable variable rate as of the pricing date) for that
Debt Security. It is anticipated that the trustee will treat interest payable
at a variable rate as Qualified Stated Interest, other than variable interest
on an interest-only class, super-premium class or accrual class. OID
reportable for any period will be adjusted based on subsequent changes in the
applicable interest rate index.
Acquisition Premium. If a Security Owner purchases a Debt Security for a
price that is greater that its adjusted issue price but less than its stated
redemption price at maturity, the Security Owner will have acquired the Debt
Security at an "acquisition premium" as that term is defined in
Section 1272(a)(7) of the Code. The Security Owner must reduce future accruals
of OID on the Debt Security by the amount of the acquisition premium.
Specifically, a Security Owner must reduce each future accrual of OID on the
Debt Security by an amount equal to the product of the OID accrual and a fixed
fraction, the numerator of which is the amount of the acquisition premium and
the denominator of which is the OID remaining to be accrued on the Debt
Security at the time the Security Owner purchased the Debt Security. Security
Owners should be aware that this fixed fraction methodology will not always
produce the appropriate recovery of acquisition premium in situations where
stated interest on a Debt Security is included in the Debt Security's stated
redemption price at maturity because the total amount of OID remaining to be
accrued on such a Debt Security at the time of purchase is not fixed.
Market Discount. If a purchaser acquires a Debt Security at a discount from
its outstanding principal amount (or, if the Debt Security is issued with OID,
its adjusted issue price), the purchaser will acquire the Debt Security with
market discount (a "market discount bond"). If the market discount is less
than a statutorily defined de minimis amount (presumably equal to the product
of (i) 0.25 percent, (ii) the stated redemption price at maturity of the Debt
Security and (iii) the remaining weighted average maturity of the Debt
Security), the market discount will be considered to be zero. It appears that
de minimis market discount would be reported in a manner similar to de minimis
OID. See "--Interest Income and OID" above.
Treasury regulations interpreting the market discount rules have not yet
been issued; therefore, we recommend that prospective investors consult their
own tax advisors regarding the application of those rules and the advisability
of making any of the elections described below.
Unless the beneficial owner of a market discount bond elects under
Section 1278(b) of the Code to include market discount in income as it
accrues, any principal payment (whether a scheduled payment or a prepayment)
or any gain on disposition of the market discount bond will be treated as
ordinary income to the extent that it does not exceed the accrued market
discount at the time of such payment. If the beneficial owner makes the
election under Section 1278(b) of the Code, the election will apply to all
market discount
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bonds acquired by the beneficial owner at the beginning of the first taxable
year to which the election applies and all market discount bonds thereafter
acquired by it. The election may be revoked only with the consent of the IRS.
The Code grants the Treasury Department authority to issue regulations
providing for the computation of accrued market discount on debt instruments,
such as the Debt Securities, the principal of which is payable in more than
one installment, but no regulations have been issued. The relevant legislative
history provides that, until such regulations are issued, the beneficial owner
of a market discount bond may elect to accrue market discount either on the
basis of a constant interest rate or according to a pro rata method described
in the legislative history. Under that method, the amount of market discount
that accrues in any accrual period in the case of a Debt Security issued with
OID equals the product of (i) the market discount that remains to be accrued
as of the beginning of the accrual period and (ii) a fraction, the numerator
of which is the OID accrued during the accrual period and the denominator of
which is the sum of the OID accrued during the accrual period and the amount
of OID remaining to be accrued as of the end of the accrual period. In the
case of a Debt Security that was issued without OID, the amount of market
discount that accrues in any accrual period will equal the product of (i) the
market discount that remains to be accrued as of the beginning of the accrual
period and (ii) a fraction, the numerator of which is the amount of stated
interest accrued during the accrual period and the denominator of which is the
total amount of stated interest remaining to be accrued at the beginning of
the accrual period. For purposes of determining the amount of OID or interest
remaining to be accrued with respect to a class of Debt Securities, the
prepayment assumption applicable to calculating the accrual of OID on such
Debt Securities applies.
If a beneficial owner of a Debt Security incurred or continues indebtedness
to purchase or hold Debt Securities with market discount, the beneficial owner
may be required to defer a portion of its interest deductions for the taxable
year attributable to any such indebtedness. Any such deferred interest expense
would not exceed the market discount that accrues during such taxable year and
is, in general, allowed as a deduction not later than the year in which such
market discount is includible in income. If such beneficial owner elects to
include market discount in income currently as it accrues under Section 1278(b)
of the Code, the interest deferral rule will not apply.
Amortizable Bond Premium. A purchaser of a Debt Security that purchases the
Debt Security for an amount (net of accrued interest) greater than its stated
redemption price at maturity will have premium with respect to that Debt
Security in the amount of the excess. Such a purchaser need not include in
income any remaining OID with respect to that Debt Security and may elect to
amortize the premium under Section 171 of the Code. If a Security Owner makes
this election, the amount of any interest payment that must be included in the
Security Owner's income for each period will be reduced by a portion of the
premium allocable to the period based on a constant yield method. In addition,
the relevant legislative history states that premium should be amortized in
the same manner as market discount. The election under Section 171 of the Code
also will apply to all debt instruments (the interest on which is not
excludable from gross income) held by the Security Owner at the beginning of
the first taxable year to which the election applies and to all such taxable
debt instruments thereafter acquired by it. The election may be revoked only
with the consent of the IRS.
Non-Pro Rata Securities. A Debt Security may provide for certain amounts of
principal to be distributed upon the request of a Security Owner or by random
lot (a "non-pro rata security"). In the case of a non-pro rata security, it is
anticipated that the trustee will determine the yield to maturity based upon
the anticipated payment characteristics of the class as a whole under the
prepayment assumption. In general, the OID accruing on each non-pro rata
security in an accrual period would be its allocable share of the OID for the
entire class, as determined in accordance with the discussion of OID above.
However, in the case of a distribution in retirement of the entire unpaid
principal balance of any non-pro rata security (or portion of the unpaid
principal balance), (a) the remaining unaccrued OID allocable to the security
(or to that portion) will accrue at the time of the distribution, and (b) the
accrual of OID allocable to each remaining security of that class will be
adjusted by reducing the present value of the remaining payments on that class
and the adjusted issue price of that 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
OID determined based on the
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prepayment assumption for the class as a whole. Prospective investors are
advised to consult their tax advisors as to this treatment.
Election to Treat All Interest as OID. The OID Regulations permit a
beneficial owner of a Debt Security to elect to accrue all interest, discount
(including de minimis OID and de minimis market discount), and premium in
income as interest, based on a constant yield method (a "constant yield
election"). 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 Security Owner's acquisition would apply. If such an election were
to be made and the Debt Securities were acquired at a premium, such a Security
Owner would be deemed to have made an election to amortize bond premium under
Section 171 of the Code, which is described above. Similarly, if the Security
Owner had acquired the Debt Securities with market discount, the Security
Owner would be considered to have made the election in Section 1278(b) of the
Code, which is described above. A constant yield election may be revoked only
with the consent of the IRS.
Treatment of Losses. Security Owners that own REMIC regular certificates or
FASIT regular certificates, or in the case of Debt Securities for which a
REMIC of FASIT election is not made, Security Owners that use the accrual
method of accounting, will be required to report income with respect to such
Debt Securities on the accrual method without giving effect to delays and
reductions in distributions attributable to defaults or delinquencies on any
of the trust's assets, except possibly, in the case of income that constitutes
Qualified Stated Interest, to the extent that it can be established that such
amounts are uncollectible. In addition, potential investors are cautioned that
while they may generally cease to accrue interest income if it reasonably
appears that the interest will be uncollectible, the IRS may take the position
that OID must continue to be accrued in spite of its uncollectibility until
the Debt Security is disposed of in a taxable transaction or becomes worthless
in accordance with the rules of Section 166 of the Code. As a result, the
amount of income required to be reported by a Security Owner in any period
could exceed the amount of cash distributed to such Security Owner in that
period.
Although not entirely clear, it appears that: (a) a Security Owner who holds
a Debt Security in the course of a trade or business or a Security Owner that
is a corporation generally should be allowed to deduct as an ordinary loss any
loss sustained on account of the Debt Security's partial or complete
worthlessness and (b) a noncorporate Security Owner who does not hold the Debt
Security in the course of a trade or business generally should be allowed to
deduct as a short-term capital loss any loss sustained on account of the Debt
Security's complete worthlessness. Security Owners should consult their own
tax advisors regarding the appropriate timing, character and amount of any
loss sustained with respect to a Debt Security, particularly subordinated Debt
Securities.
Sale or Other Disposition. If a beneficial owner of a Debt Security sells,
exchanges or otherwise disposes of the Debt Security, or the Debt Security is
redeemed, the beneficial owner will recognize gain or loss in an amount equal
to the difference between the amount realized by the beneficial owner upon the
sale, exchange, redemption or other disposition and the beneficial owner's
adjusted tax basis in the Debt Security. The adjusted tax basis of a Debt
Security to a particular beneficial owner generally will equal the beneficial
owner's cost for the Debt Security, increased by any market discount and OID
previously included by such beneficial owner in income with respect to the
Debt Security and decreased by the amount of bond premium, if any, previously
amortized and by the amount of payments that are part of the Debt Security's
stated redemption price at maturity previously received by such beneficial
owner. Any such gain or loss will be capital gain or loss if the Debt Security
was held as a capital asset, except for gain representing accrued interest and
accrued market discount not previously included in income. Capital losses
generally may be used only to offset capital gains.
Gain from the sale of a REMIC regular certificate that might otherwise be
treated as capital gain will be treated as ordinary income to the extent that
such gain does not exceed the excess of (1) the amount that would have been
includible in the Security Owner's income had the income accrued at a rate
equal to 110 percent of the AFR as of the date of purchase, over (2) the
amount actually includible in such Security Owner's income.
Foreign Persons. Interest (including OID) paid to or accrued by a
beneficial owner of a Debt Security who is a Foreign Person generally will be
considered "portfolio interest" and generally will not be subject to
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United States federal income tax or withholding tax, provided the interest is
not effectively connected with the conduct of a trade or business within the
United States by the Foreign Person and the Foreign Person (i) is not actually
or constructively a 10 percent shareholder of the issuer of the Debt
Securities or a controlled foreign corporation with respect to which the
issuer of the Debt Securities is a related person (all within the meaning of
the Code) and (ii) provides the trustee or other person who is otherwise
required to withhold U.S. tax with respect to the Debt Securities (the
"withholding agent") with an appropriate statement on Form W-8 BEN
(Certificate of Foreign Status of Beneficial Owner for United States Tax
Withholding). If a Debt Security is held through a securities clearing
organization or certain other financial institutions, the organization or
institution may provide the relevant signed statement to the withholding
agent; in that case, however, the signed statement must be accompanied by a
Form W-8BEN provided by the Foreign Person that owns the Debt Security. If the
information shown on Form W-8BEN changes, a new Form W-8BEN must be filed. If
the foregoing requirements are not met, then interest (including OID) on the
Debt Securities will be subject to United States federal income and
withholding tax at a rate of 30 percent, unless reduced or eliminated pursuant
to an applicable tax treaty.
Under Treasury regulations relating to withholding obligations, a payment to
a foreign partnership is treated, with some exceptions, as a payment directly
to the partners, so that the partners are required to provide any required
certifications. We recommend that Foreign Persons that intend to hold a Debt
Security through a partnership or other pass-through entity consult their own
tax advisors regarding the application of those Treasury regulations to an
investment in a Debt Security.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Debt Security by a Foreign Person will be exempt from
United States federal income and withholding tax, provided that (i) such gain
is not effectively connected with the conduct of a trade or business in the
United States by the Foreign Person and (ii) in the case of a Foreign Person
who is an individual, the Foreign Person is not present in the United States
for 183 days or more in the taxable year.
Information Reporting. Payments of interest (including OID, if any) on a
Debt Security held by a U.S. Person other than a corporation or other exempt
holder are required to be reported to the IRS. Moreover, each trust is
required to make available to Security Owners that hold beneficial interests
in Debt Securities issued by that trust information concerning the amount of
OID and Qualified Stated Interest accrued for each accrual period for which
the Debt Securities are outstanding, the adjusted issue price of the Debt
Securities as of the end of each accrual period, and information to enable a
Security Owner to compute accruals of market discount or bond premium using
the pro rata method described under "-- Market Discount" above.
Payments of interest (including OID, if any) on a Debt Security held by a
Foreign Person (other than payments of interest that is effectively connected
with the Foreign Person's conduct of a United States trade or business) are
required to be reported annually on IRS Form 1042-S, which the withholding
agent must file with the IRS and furnish to the recipient of the income.
REMIC Residual Certificates
If you are a Residual Owner, you will be required to report the daily
portion of the taxable income or, subject to the limitation described under
"-- Basis Rules and Distributions" below, the net loss of the REMIC for each
day during a calendar quarter that you are a Residual Owner. The requirement
that Residual Owners report their pro rata share of taxable income or net loss
of the REMIC will continue until there are no certificates of any class of the
related series outstanding. For this purpose, the daily portion will be
determined by allocating to each day in the calendar quarter a ratable portion
of the taxable income or net loss of the REMIC for the quarter. The daily
portions then will be allocated among the Residual Owners in accordance with
their percentage of ownership on each day. Any amount included in the gross
income of, or allowed as a loss to, any Residual Owner will be treated as
ordinary income or loss.
Taxable Income or Net Loss of the REMIC. Generally, a REMIC determines its
taxable income or net loss for a given calendar quarter in the same manner as
would an individual having the calendar year as his taxable year and using the
accrual method of accounting. There are, however, certain modifications.
First, a deduction is allowed for accruals of interest and OID on the REMIC
regular certificates issued by the REMIC. Second, market discount will be
included in income as it accrues, based on a constant yield to
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maturity method. Third, no item of income, gain, loss or deduction allocable
to a prohibited transaction is taken into account. Fourth, the REMIC generally
may deduct only items that would be allowed in calculating the taxable income
of a partnership under Section 703(a) of the Code. Fifth, the limitation on
miscellaneous itemized deductions imposed on individuals by Section 67 of the
Code does not apply at the REMIC level to investment expenses such as trustee
fees or servicing fees. See, however, "-- Pass Through of Certain Expenses"
below. If the deductions allowed to the REMIC exceed its gross income for a
calendar quarter, such excess will be the net loss for the REMIC for that
calendar quarter. For purposes of determining the income or loss of a REMIC,
the regulations applicable to REMICs provide that a REMIC has a tax basis in
its assets equal to the total of the issue prices of all regular and residual
interests in the REMIC.
Pass Through of Certain Expenses. A Residual Owner who is an individual,
estate, or trust will be required to include in income a share of the expenses
of the related REMIC and may deduct those expenses subject to the limitations
of Sections 67 and 68 of the Code. See "-- Grantor Trust Certificates -- Trust
Expenses" below for a discussion of the limitations of Sections 67 and 68 of
the Code. Those expenses may include the servicing fees and all administrative
and other expenses relating to the REMIC. In addition, those expenses are not
deductible for purposes of computing the alternative minimum tax, and may
cause those investors to be subject to significant additional tax liability.
Similar rules apply to individuals, estates and trusts holding a REMIC
residual certificate through certain pass-through entities.
Excess Inclusions. Excess inclusions with respect to a REMIC residual
certificate are subject to special tax rules. For any Residual Owner, the
excess inclusion for any calendar quarter will generally equal the excess of
the sum of the daily portions of the REMIC's taxable income allocated to the
Residual Owner over the amount of income that the Residual Owner would have
accrued if the REMIC residual certificate were a debt instrument having a
yield to maturity equal to 120 percent of the long-term AFR in effect at the
time of issuance of the REMIC residual certificate. If the issue price of a
REMIC residual certificate is zero, which would be the case if the REMIC
residual certificate had no economic value at issuance, then all of the daily
portions of income allocated to the Residual Owner will be excess inclusions.
The issue price of a REMIC residual certificate issued for cash generally will
equal the price paid by the first buyer, and if the REMIC residual certificate
is issued for property, the issue price will be its fair market value at
issuance.
For Residual Owners, an excess inclusion may not be offset by deductions,
losses, or loss carryovers. Thus, a Residual Owner that has losses in excess
of income for a taxable year would, nevertheless, be required to pay tax on
excess inclusions. For Residual Owners that are subject to tax on unrelated
business taxable income (as defined in Section 511 of the Code), an excess
inclusion is treated as unrelated business taxable income. For Residual Owners
that are nonresident alien individuals or foreign corporations generally
subject to United States withholding tax, even if interest paid to such
Residual Owners is generally eligible for exemptions from such tax, an excess
inclusion will be subject to such tax and no tax treaty rate reduction or
exemption may be claimed with respect thereto.
Alternative minimum taxable income for a Residual Owner is determined
without regard to the special rule that taxable income may not be less than
the sum of the Residual Owner's excess inclusions for the year. Alternative
minimum taxable income cannot, however, be less than the sum of a Residual
Owner's excess inclusions for the year. Also, the amount of any alternative
minimum tax net operating loss deduction must be computed without regard to
any excess inclusions.
Finally, if a REIT or a regulated investment company owns a REMIC residual
certificate, a portion (allocated under Treasury regulations yet to be issued)
of dividends paid by the REIT 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.
Taxable Income May Exceed Distributions. In light of the tax consequences
to a Residual Owner, the taxable income from a REMIC residual certificate may
exceed cash distributions with respect thereto in any taxable year. The
taxable income recognized by a Residual Owner in any taxable year will be
affected by, among other factors, the relationship between the timing of
recognition of interest, OID or market discount income or amortization of
premium for the mortgage loans, on the one hand, and the timing of deductions
for interest (including OID) or income from amortization of issue premium on
the regular interests, on the other
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hand. If an interest in the mortgage loans is acquired by the REMIC at a
discount, and one or more of these mortgage loans is prepaid, the proceeds of
the prepayment may be used in whole or in part to make distributions in
reduction of principal on the regular interests, and (2) the discount on the
mortgage loans that is includible in income may exceed the deduction allowed
upon those distributions on those regular interests on account of any
unaccrued OID relating to those regular interests. When there is more than one
class of regular interests that distribute principal sequentially, this
mismatching of income and deductions is particularly likely to occur in the
early years following issuance of the regular interests when distributions in
reduction of principal are being made in respect of earlier classes of regular
interests to the extent that those classes are not issued with substantial
discount or are issued at a premium. If taxable income attributable to that
mismatching is realized, in general, losses would be allowed in later years as
distributions on the later maturing classes of regular interests are made.
Taxable income also may be greater in earlier years that in later years as a
result of the fact that interest expense deductions, expressed as a percentage
of the outstanding principal amount of that series of regular interests, may
increase over time as distributions in reduction of principal are made on the
lower yielding classes of regular interests, whereas, to the extent the REMIC
consists of fixed rate mortgage loans, interest income for any particular
mortgage loan will remain constant over time as a percentage of the
outstanding principal amount of that loan. Consequently, Residual Owners must
have sufficient other sources of cash to pay any federal, state, or local
income taxes due as a result of that mismatching or unrelated deductions
against which to offset that income, subject to the discussion of excess
inclusions under "-- Excess Inclusions" above. The timing of mismatching of
income and deductions described in this paragraph, if present for a series of
REMIC certificates, may have a significant adverse effect upon a Residual
Owner's after-tax rate of return.
Basis Rules and Distributions. A Residual Owner's adjusted basis in a REMIC
residual certificate will equal the amount paid for the REMIC residual
certificate, increased by the sum of the daily portions of REMIC income taken
into account by the Residual Owner, and decreased by the sum of (i) the daily
portions of REMIC net loss taken into account by the Residual Owner and (ii)
distributions made by the REMIC to the Residual Owner.
A distribution by a REMIC to a Residual Owner will not be includible in
gross income by the Residual Owner if the distribution does not exceed the
Residual Owner's adjusted basis in the REMIC residual certificate immediately
before the distribution. The distribution will reduce the Residual Owner's
adjusted basis of such interest, but not below zero. To the extent a
distribution exceeds the Residual Owner's adjusted basis in the REMIC residual
certificate, the excess will be treated as gain from the sale of the REMIC
residual certificate. See "-- Sales of REMIC Residual Certificates" below.
A Residual Owner is not allowed to take into account any net loss for any
calendar quarter to the extent such net loss exceeds such Residual Owner's
adjusted basis in its REMIC residual certificate as of the close of such
calendar quarter, determined without regard to such net loss. Any loss
disallowed by reason of this limitation may be carried forward indefinitely to
future calendar quarters and, subject to the same limitation, may be used by
that Residual Owner to offset income from the REMIC residual certificate.
The effect of these basis and distribution rules is that a Residual Owner
may not amortize its basis in a REMIC residual certificate but may only
recover its basis through distributions, through the deduction of any net
losses of the REMIC, or upon the sale of its REMIC residual certificate. See
"-- Sales of REMIC Residual Certificates."
Sales of REMIC Residual Certificates. If a Residual Owner sells a REMIC
residual certificate, the Residual Owner will recognize gain or loss equal to
the difference between the amount realized on the sale and its adjusted basis
in the REMIC certificate. If a Residual Owner sells a REMIC residual
certificate at a loss, the loss will not be recognized if, within six months
before or after the sale of the REMIC residual certificate, the Residual Owner
purchases another residual interest in any REMIC or any interest in a taxable
mortgage pool (as defined in Section 7701(i) of the Code) comparable to a
residual interest in a REMIC. Such disallowed loss will be allowed upon the
sale of the other residual interest (or comparable interest) if the rule
referred to in the preceding sentence does not apply to that sale.
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Inducement Payments. The tax treatment of any payments made by a transferor
of a REMIC residual certificate to a transferee to induce the transferee to
acquire the REMIC residual certificate is unclear. We recommend, therefore,
that you consult your tax advisor concerning the tax treatment of such
payments.
Disqualified Organizations. If a Residual Owner were to transfer a REMIC
residual certificate to a disqualified organization, the Residual Owner would
be subject to a tax in an amount equal to the maximum corporate tax rate
applied to the present value (using a discount rate equal to the applicable
AFR) of the total anticipated excess inclusions with respect to such residual
interest for the periods after the transfer. For this purpose, disqualified
organizations include the United States, any state or political subdivision of
a state, any foreign government or international organization or any agency or
instrumentality of any of the foregoing; any tax-exempt entity (other than a
Section 521 cooperative) which is not subject to the tax on unrelated business
income; and any rural electrical or telephone cooperative. However, a
transferor of a REMIC residual certificate would in no event be liable for the
tax for a transfer if the transferee furnished to the transferor an affidavit
stating that the transferee is not a disqualified organization and, as of the
time of the transfer, the transferor does not have actual knowledge that the
affidavit is false.
The anticipated excess inclusions must be determined as of the date that the
REMIC residual certificate is transferred and must be based on events that
have occurred up to the time of such transfer, the prepayment assumption (see
"-- Taxation of Securities Treated as Debt Instruments -- Interest Income and
OID," for a discussion of the prepayment assumption), and any required or
permitted clean up calls or required liquidation provided for in the trust
agreement. The tax generally is imposed on the transferor of the REMIC
residual certificate, except that it is imposed on an agent for a disqualified
organization if the transfer occurs through such agent. The trust agreement
for each series of REMIC certificates will require, as a prerequisite to any
transfer of a REMIC residual certificate, the delivery to the trustee of an
affidavit of the transferee to the effect that it is not a disqualified
organization and will contain other provisions designed to render any
attempted transfer of a REMIC residual certificate to a disqualified
organization void.
In addition, if a pass through entity includes in income excess inclusions
with respect to a REMIC residual certificate, and a disqualified organization
is the record holder of an interest in such entity at any time during any
taxable year of such entity, then a tax will be imposed on the entity equal to
the product of (1) the amount of excess inclusions on the REMIC residual
certificate for such taxable year that are allocable to the interest in the
pass through entity held by such disqualified organization and (2) the highest
marginal federal income tax rate imposed on corporations. A pass through
entity will not be subject to this tax for any period with respect to an
interest in such entity, however, if the record holder of such interest
furnishes to such entity (1) such holder's social security number and a
statement under penalties of perjury that such social security number is that
of the record holder or (2) a statement under penalties of perjury that such
record holder is not a disqualified organization. For these purposes, a "pass
through entity" means any regulated investment company, REIT, trust,
partnership or certain other entities described in Section 860E(e)(6) of the
Code. In addition, a person holding an interest in a pass through entity as a
nominee for another person shall, with respect to such interest, be treated as
a pass through entity. Moreover, in the case of any "electing large
partnership," within the meaning of Section 775 of the Code, all record
holders are considered to be disqualified organizations so that the
partnership itself will be subject to tax on the excess inclusions and such
excess inclusions will be excluded in determining partnership income. Finally,
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 those affidavits are false, is not available to an electing
large partnership.
Noneconomic REMIC Residual Certificates. A transfer of a "noneconomic"
REMIC residual certificate will be disregarded for all federal income tax
purposes if a significant purpose of the transfer was to enable the transferor
to impede the assessment or collection of tax. If such transfer is
disregarded, the purported transferor will continue to be treated as the
Residual Owner and will, therefore, be liable for any taxes due with respect
to the daily portions of income allocable to such noneconomic REMIC residual
certificate.
A REMIC residual certificate is noneconomic for this purpose unless, at the
time of its transfer, (1) the present value of the expected future
distributions on the REMIC residual certificate at least equals the product of
the present value of the anticipated excess inclusions and the highest tax
rate applicable to corporations for
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the year of the transfer and (2) the transferor reasonably expects that the
transferee will receive distributions with respect to the REMIC residual
certificate at or after the time the taxes accrue on the anticipated excess
inclusions in an amount sufficient to satisfy the accrued taxes. The present
value computations are based on a discount rate equal to the applicable AFR
and a prepayment assumption used in computing income on the mortgage loans
held by the trust. See "-- Taxation of Securities Treated as Debt
Instruments -- Interest Income and OID," for a discussion concerning
prepayment assumptions.
All transfers of REMIC residual certificates will be subject to certain
restrictions under the terms of the related trust agreement that are intended
to reduce the possibility of any such transfer being disregarded. Such
restrictions will require each party to a transfer to provide an affidavit
that no purpose of such transfer is to impede the assessment or collection of
tax, including certain representations as to the financial condition of the
prospective transferee.
Prior to purchasing a REMIC residual certificate, prospective purchasers
should consider the possibility that a purported transfer of such REMIC
residual certificate by such a purchaser to another purchaser at some future
date may be disregarded in accordance with the above-described rules, which
would result in the retention of tax liability by such purchaser. The
applicable prospectus supplement will disclose whether offered REMIC residual
certificates may be considered noneconomic residual interests; provided,
however, that any disclosure that a REMIC residual certificate will or will
not be considered noneconomic will be based upon certain assumptions, and the
depositor will make no representation that a REMIC residual certificate will
not be considered noneconomic for purposes of the above-described rules or
that a Residual Owner will receive distributions calculated pursuant to such
assumptions.
Treasury regulations provide a safe harbor for transfers of REMIC residual
certificates and if the safe harbor is satisfied, the transfer is presumed to
be a valid transfer that will be respected for federal income tax purposes. To
qualify under the safe harbor set out in the regulations, the transferor must
perform a reasonable investigation of the financial status of the transferee
and determine that the transferee has historically paid its debts as they come
due and find no evidence to indicate that the transferee will not continue to
pay its debts as they come due, and the transferor must obtain a
representation from the transferee to the effect that the transferee
understands that as the holder of the REMIC residual certificate the
transferee will recognize taxable income in excess of cash flow and that the
transferee intends to pay taxes on the income as those taxes become due.
Proposed Treasury regulations issued on February 4, 2000 (the "New Proposed
Regulations") would modify the safe harbor under which transfers of
noneconomic residual interests are treated as not disregarded for federal
income tax purposes. Under the New Proposed Regulations, a transfer of a
noneconomic residual interest would not qualify under the existing safe harbor
unless the present value of the anticipated tax liabilities associated with
holding the residual interest does not exceed the sum of the present value of
the sum of (i) any consideration given to the transferee to acquire the
interest, (ii) future distribution on the interest, and (iii) any anticipated
tax savings associated with holding the interest as the REMIC generates
losses. For purposes of this calculation, the present value generally is
calculated using a discount rate equal to the AFR. The New Proposed
Regulations have a proposed effective date of February 4, 2000.
Following the issuance of the New Proposed Regulations, the IRS issued
Revenue Procedure 2001-12, which creates two additional safe harbors for
transfers of non-economic residual interests. Each safe harbor imposes
requirements in addition to the two requirements in the existing REMIC
regulations. Under the first safe harbor, the transferor is required to comply
with the New Proposed Regulations. Under the second safe harbor, the
transferee also must be an "eligible corporation" within the meaning of
Section 860L(a)(2) of the Code (generally, a domestic, taxable "C" corporation
other than a REIT, regulated investment company or cooperative) having, at the
time of the transfer and at the close of each of the transferee's two fiscal
years preceding the year of transfer, gross assets of more than $100 million
and net assets of more than $10 million and that transferee must represent
that it will only transfer the residual interest to another domestic "C"
corporation. To qualify under this alternative, the facts and circumstances at
the time of transfer cannot reasonably indicate that the taxes associated with
holding the REMIC residual certificate will not be paid. Moreover, the
transferee cannot be a foreign branch of an eligible corporation that would be
subject to tax on a net basis in the foreign jurisdiction on the income
associated with the REMIC residual certificate.
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The safe harbor rules contain additional detail regarding their application.
If you are a Residual Owner, we recommend that you consult your tax advisor
concerning the safe harbor rules before undertaking a transfer of a REMIC
residual certificate.
Restrictions on Transfers of Residual Certificates to Foreign
Persons. Transfers to a Foreign Person of REMIC residual certificates that
have tax avoidance potential are disregarded for all federal income tax
purposes. If such a transfer is disregarded, the purported transferor of the
REMIC residual certificate to the Foreign Person continues to remain liable
for any taxes due with respect to the income on such REMIC residual
certificate. A transfer of a REMIC residual certificate has tax avoidance
potential unless, at the time of the transfer, the transferor reasonably
expects (1) that the REMIC will distribute to the transferee of the REMIC
residual certificate amounts that will equal at least 30 percent of each
excess inclusion and (2) that such amounts will be distributed at or after the
time at which the excess inclusion accrues and not later than the close of the
calendar year following the calendar year of accrual. This rule does not apply
to transfers if the income from the REMIC residual certificate is taxed in the
hands of the transferee as income effectively connected with the conduct of a
U.S. trade or business. Moreover, if a Foreign Person transfers a REMIC
residual certificate to a U.S. Person (or to a Foreign Person in whose hands
income from the REMIC residual certificate would be effectively connected
income) and the transfer has the effect of allowing the transferor to avoid
tax on accrued excess inclusions, that transfer is disregarded for all federal
income tax purposes and the purported Foreign Person transferor continues to
be treated as the owner of the REMIC residual certificate. The trust agreement
for each series will preclude the transfer of a REMIC residual certificate to
a Foreign Person, other than a Foreign Person in whose hands the income from
the REMIC residual certificate would be effectively connected with a U.S.
trade or business.
Foreign Persons. The Conference Committee Report to the 1986 Act indicates
that amounts paid to Residual Owners who are Foreign Persons generally should
be treated as interest for purposes of the 30 percent (or lower treaty rate)
United States withholding tax. Treasury regulations provide that amounts
distributed to Residual Owners may qualify as "portfolio interest," subject to
the conditions described in "-- Taxation of Securities Treated as Debt
Instruments -- Foreign Persons" above, but only to the extent that (i) the
mortgage loans were issued after July 18, 1984, and (ii) the trust fund to
which the REMIC residual certificate relates consists of obligations issued in
"registered form" within the meaning of Section 163 (f)(1) of the Code.
Generally, mortgage loans will not be, but regular interests in another REMIC
will be, considered obligations issued in registered form. Furthermore,
Residual Owners will not be entitled to any exemption from the 30 percent
withholding tax (or lower treaty rate) to the extent of that portion of REMIC
taxable income that constitutes an "excess inclusion." See "-- Excess
Inclusions" above. If the amounts paid to Residual Owners who are Foreign
Persons are effectively connected with the conduct of a trade or business
within the United States by those Foreign Persons, the 30 percent (or lower
treaty rate) withholding will not apply. Instead, the amounts paid to those
Foreign Persons will be subject to United States federal income tax at regular
rates. If the 30 percent (or lower treaty rate) withholding is applicable,
those amounts generally will be taken into account for purposes of withholding
only when paid or otherwise distributed (or when the REMIC residual
certificate is disposed of ) under rules similar to withholding upon
disposition of Debt Securities that have OID. See "-- Restrictions on
Transfers of Residual Certificates to Foreign Investors" above concerning the
disregard of certain transfers having "tax avoidance potential." Potential
investors who are Foreign Persons should consult their own tax advisors
regarding the specific tax consequences to them of owning REMIC residual
certificates.
Administrative Provisions. The REMIC will be required to maintain its books
on a calendar year basis and to file federal income tax returns for federal
income tax purposes in a manner similar to a partnership. The form for the
income tax return is Form 1066, U.S. Real Estate Mortgage Investment Conduit
Income Tax Return. The trustee will be required to sign the REMIC's returns.
Treasury regulations provide that, except where there is a single Residual
Owner for an entire taxable year, the REMIC 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, for the REMIC as agent
of the Residual Owners holding the largest percentage interest in the REMIC's
residual interest. If the Code or applicable Treasury regulations do
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not permit the master servicer to act as tax matters person in its capacity as
agent of the Residual Owner, the Residual Owner or any other person specified
pursuant to Treasury regulations will be required to act as tax matters
person. The tax mattes person generally has responsibility for overseeing and
providing notice to the other Residual Owner of certain administrative and
judicial proceedings regarding the REMIC's tax affairs, although other holders
of the REMIC residual certificates of the same series would be able to
participate in those proceedings in appropriate circumstances.
Treasury regulations provide that a Residual Owner is not required to treat
items on its return consistently with their treatment on the REMIC's return if
the holder owns 100 percent of the REMIC residual certificates for the entire
calendar year. Otherwise, each Residual Owner is required to treat items on
its returns for the entire calendar year. Otherwise, each Residual Owner is
required to treat items on its returns consistently with their treatment on
the REMIC'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. The IRS may access a deficiency resulting
from a failure to comply with the consistency requirement without instituting
an administrative proceeding at the REMIC level. A REMIC 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 REMIC residual certificate as a nominee for
another person may be required to furnish the related REMIC, in a manner to be
provided in Treasury regulations, with the name and address of that person and
other specified information.
The IRS 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 a Schedule Q be furnished by the REMIC Pool
to each Residual Owner 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 is in existence. Treasury regulations require
that, in addition to the foregoing requirements, information must be furnished
quarterly to Residual Owners and filed annually with the IRS concerning
Section 67 of the Code expenses (see "-- Pass Through of Certain Expenses"
above) allocable to those holders. Furthermore, under those regulations,
information must be furnished quarterly to Residual Owners and filed annually
with the IRS concerning the percentage of the REMIC's assets meeting the
qualified asset tests described under "-- Special Tax Attributes -- REMIC
Certificates" below.
Mark-to-Market Rules. Section 475 of the Code generally requires that
securities dealers include securities in inventory at their fair market value,
recognizing gain or loss as if the securities were sold at the end of each tax
year. The Treasury regulations provide that a REMIC residual certificate is
not treated as a security for purposes of the mark-to-market rules and thus
may not be marked to market.
FASIT Ownership Certificates
An Ownership certificate represents the residual equity interest in a FASIT.
As such, the beneficial owner of an Ownership certificate determines its
taxable income by taking into account all assets, liabilities and items of
income, gain, deduction, loss and credit of the FASIT (other than those
allocable to prohibited transactions as described below). In general, the
character of the income to the beneficial owner of an Ownership certificate
will be the same as the character of such income of the FASIT, except that any
tax-exempt interest income taken into account by the beneficial owner of an
Ownership certificate is treated as ordinary income. In determining that
taxable income, the beneficial owner of an Ownership certificate must
determine the amount of interest, OID, market discount and premium recognized
with respect to the FASIT's assets and the FASIT regular certificates issued
by the FASIT according to a constant yield methodology and under an accrual
method of accounting. In addition, the beneficial owner of the Ownership
certificate is subject to the same limitations on its ability to use losses to
offset income from the FASIT as are the beneficial owners of High-Yield
Interests. See "-- Types of Securities -- FASIT Certificates Generally" above.
A Security Owner that holds an Ownership certificate will recognize gain,
but not loss, upon the contribution of assets to a FASIT to support one or
more FASIT regular certificates to the extent the value of the assets exceeds
the Security Owner's basis in those assets. Moreover, in the case of debt
instruments that are not publicly traded, the value for purposes of the gain
computation will be determined by reference to a
87
formula set out in Section 860I(d) of the Code that will likely overstate the
market value of those debt instruments. Any gain recognized will increase the
Security Owner's basis in the assets held in the FASIT. Proposed Treasury
Regulations would, if issued in final form, provide that the Security Owner
holding the Ownership certificate would not be allowed to use non-FASIT losses
to offset the gain recognized.
Rules similar to the wash sale rules applicable to REMIC residual
certificates also will apply to the Ownership certificate. Accordingly, losses
on dispositions of an Ownership certificate generally will be disallowed
where, within six months before or after the disposition, the seller of such
security acquires any other Ownership certificate or, in the case of a FASIT
holding mortgage assets, any REMIC residual interest or interest in a taxable
mortgage pool that is economically comparable to an Ownership certificate.
The beneficial owner of an Ownership certificate will be subject to a tax
equal to 100 percent of the net income derived by the FASIT from any
"prohibited transactions." Prohibited transactions include:
o the receipt of income derived from assets that are not permitted assets,
o certain dispositions of permitted assets,
o the receipt of any income derived from any loan originated by a FASIT,
and
o in certain cases, the receipt of income representing a servicing fee or
other compensation.
Any trust for which a FASIT election will be made will be structured in order
to avoid application of the prohibited transaction tax.
Grantor Trusts Certificates
For purposes of this discussion, we refer to two types of certificates
issued by a Grantor Trust: "Standard Certificates" and "Stripped
Certificates." Each certificate issued by a Grantor Trust that is not a
Stripped Certificate is a Standard Certificate.
Classification of Stripped Certificates. There generally are three
situations in which a Grantor Trust Certificate will be classified as a
Stripped Certificate. First, if the trust holds assets that pay principal and
interest but issues interest-only or principal-only certificates, all the
certificates of that trust likely will be Stripped Certificates. Second, if
the seller, depositor, or some other person retains the right to receive a
portion of the interest payments on assets held in the trust, all the
certificates issued by the trust could be Stripped Certificates. Finally, if a
portion of a servicing or guarantee fee were recharacterized under rules
established by the IRS as ownership interests in stripped coupons, all the
certificates of the trust could be Stripped Certificates.
Taxation of Stripped Certificates. Stripped Certificates will be treated
under rules contained in Section 1286 of the Code (the "Stripped Bond Rules").
Pursuant to the Stripped Bond Rules, the separation of ownership of some or
all of the interest payments on a debt instrument from ownership of some or
all of the principal payments results in the creation of "stripped bonds" with
respect to principal payments and "stripped coupons" with respect to interest
payments. A beneficial owner of a Stripped Certificate will be treated as
owning "stripped bonds" to the extent of its share of principal payments and
"stripped coupons" to the extent of its share of interest payments.
Generally, if a taxpayer acquires an interest in "stripped coupons" or
"stripped bonds," the taxpayer will be treated as having purchased a newly
issued debt instrument on the date of purchase for an issue price equal to the
purchase price paid. As a result, a beneficial owner of a Stripped Certificate
would be taxed as holding a newly issued debt instrument. The tax consequences
of holding a debt instrument are discussed generally under "-- Taxation of
Securities Treated as Debt Instruments" above.
Although a Stripped Certificate may represent a beneficial ownership
interest in stripped coupons from all or several of the assets held in the
trust, for information reporting purposes, the trustee will aggregate all such
interests and treat each class of Stripped Certificates as a single issue of
debt instruments. Moreover, the trustee will apply the PAC Method to compute
accruals of any OID on the Stripped Certificates, as described herein under
"-- Taxation of Securities Treated as Debt Instruments -- Interest Income and
OID," and will comply with any tax information reporting obligations with
respect to Stripped Certificates in the manner
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described under "-- Taxation of Securities Treated as Debt Instruments --
Information Reporting." Whether aggregation of stripped coupons from several
assets acquired in a single purchase is appropriate, and whether the PAC
Method should apply to compute OID accruals on Stripped Certificates are not
free from doubt. We recommend, therefore, that a prospective investor in
Stripped Certificates consult their tax advisor concerning the application of
these rules to Stripped Certificates.
For this purpose, the tax information will include the amount of OID accrued
on Stripped Certificates. However, the amount required to be reported by the
trustee may not be equal to the proper amount of OID required to be reported
as taxable income by a Security Owner, other than an original Security Owner
who purchased at the issue price. In particular, in the case of Stripped
Securities, the reporting will be based upon a representative initial offering
price of each class of Stripped Securities, except as set forth in the
prospectus supplement. It is not clear for this purpose whether the assumed
prepayment rate that is to be used in the case of an owner other than a
Security Owner that acquires its Stripped Certificate at original issue should
be the prepayment assumption or a new rate based on the circumstances at the
date of subsequent purchase.
A beneficial owner of a Stripped Certificate, particularly any Stripped
Certificate that is subordinate to another class, may deduct losses incurred
for the Stripped Certificate as described under "-- Taxation of Standard
Certificates" below. In addition, if the mortgage loans prepay at a rate
either faster or slower than that under the prepayment assumption, a Security
Owner's recognition of OID either will be accelerated or decelerated and the
amount of that OID either will be increased or decreased depending on the
relative interests in principal and interest on each mortgage loan represented
by that Security Owner's Stripped Certificate. While the matter is not free
from doubt, the beneficial owner of a Stripped Certificate should be entitled
to recognize a loss (which may be a capital loss) in the year that it becomes
certain (assuming no further prepayments) that the Security Owner will not
recover a portion of its adjusted basis in the Stripped Certificate, such loss
being equal to that portion of unrecoverable basis.
In addition, each beneficial owner of a Stripped Certificate will be
required to include in income its share of the expenses of the trust,
including the servicing fees with respect to any assets held by the trust.
Although not free from doubt, for purposes of reporting to Security Owners of
Stripped Certificates, the trust expenses will be allocated to the classes of
Stripped Certificates in proportion to the distributions to those classes for
the related period. The beneficial owner of a Stripped Certificate generally
will be entitled to a deduction in respect of the trust expenses, as described
under "-- Trust Expenses" below, subject to the limitation described therein.
Purchase of More Than One Class of Stripped Certificates. When an investor
purchases more than one class of Stripped Certificates, it is currently
unclear whether for federal income tax purposes those classes of Stripped
Certificates should be treated separately or aggregated for purposes of the
rules described above.
Taxation of Standard Certificates. For federal income tax purposes, a
Standard Certificate will represent an undivided beneficial ownership interest
in the assets of the Grantor Trust. As a result, each Security Owner holding
an interest in a Standard Certificate must include in income its proportionate
share of the entire income from the assets represented by its Standard
Certificate. Thus, for example, in the case of a Standard Certificate
representing ownership of mortgage loans, a beneficial owner of the
certificate would be required to include in income interest at the coupon rate
on the mortgage loans, OID (if any), and market discount (if any), and any
prepayment fees, assumption fees, and late payment charges received by the
servicer, in accordance with the beneficial owner's method of accounting. In
addition, beneficial owners of Standard Certificates, particularly any class
of a series that is subordinate to other classes, may incur losses of interest
or principal with respect to the trust's assets. Those losses would be
deductible generally only as described under "-- Taxation of Securities
Treated as Debt Instruments -- Treatment of Losses" above.
For information reporting purposes, although not free from doubt, the
trustee will report information concerning income accruals and principal
payments on the assets of the trust in the aggregate.
Trust Expenses. Each Security Owner that holds an interest in a Grantor
Trust Certificate must include in income its share of the trust's expenses, as
described above. Each Security Owner may deduct its share of those expenses at
the same time, to the same extent, and in the same manner as such items would
have been reported and deducted had it held directly interests in the trust's
assets and paid directly its share of the
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servicing and related fees and expenses. Investors who are individuals,
estates or trusts who own Grantor Trust Certificates, either directly or
indirectly through certain pass-through entities, will be subject to
limitations for certain itemized deductions described in Section 67 of the
Code, including deductions for the servicing fees and all administrative and
other expenses of the trust. In general, such an investor can deduct those
expenses only to the extent that those expenses, in total, exceed 2 percent of
the investor's adjusted gross income. In addition, Section 68 of the Code
provides that itemized deductions otherwise allowable for a taxable year will
be reduced by the lesser of (i) 3 percent 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 for post-1991 inflation), and
(ii) 80 percent of the amount of itemized deductions otherwise allowable for
that year. This reduction is currently scheduled to be phased-out over a five
year period beginning 2006. As a result of the limitations set forth in
Sections 67 and 68 of the Code, those investors holding Grantor Trust
Certificates, directly or indirectly through a pass-through entity, may have
total taxable income in excess of the total amount of cash received on the
Grantor Trust Certificates. In addition, those investors cannot deduct the
expenses of the trust for purposes of computing the alternative minimum tax,
and thus those investors may be subject to significant additional tax
liability.
Sales of Grantor Trust Certificates. If a Grantor Trust Certificate is
sold, gain or loss will be recognized by the Security Owner in an amount equal
to the difference between the amount realized on the sale and the Security
Owner's adjusted tax basis in the Grantor Trust Certificate. Such tax basis
will equal the Security Owner's cost for the Grantor Trust Certificate,
increased by any OID or market discount previously included in income and
decreased by any premium previously taken into account and by the amount of
payments, other than payments of Qualified Stated Interest, previously
received with respect to such Grantor Trust Certificate. The portion of any
such gain attributable to accrued market discount not previously included in
income will be ordinary income. See "-- Taxation of Securities Treated as Debt
Instruments -- Sale or Other Disposition." Any remaining gain or any loss will
be capital gain or loss. Capital losses generally may be used only to offset
capital gains
Trust Reporting. Each registered holder of a Grantor Trust Certificate will
be furnished with each distribution a statement setting forth the allocation
of such distribution to principal and interest. In addition, within a
reasonable time after the end of each calendar year each registered holder of
a Grantor Trust Certificate at any time during such year will be furnished
with information regarding the amount of servicing compensation and other
trust expenses to enable beneficial owners of Grantor Trust Certificates to
prepare their tax returns. The trustee also will file any required tax
information with the IRS, to the extent and in the manner required by the
Code.
Foreign Persons. The tax and withholding rules that apply to Foreign
Persons who acquire an interest in Grantor Trust Certificates generally are
the same as those that apply to a Foreign Person who acquires an interest in
Debt Securities. See the discussion of the tax and withholding rules under
"-- Taxation of Securities Treated as Debt Instruments -- Foreign Persons."
Partner Certificates
If a trust is classified as a partnership for federal income tax purposes,
the trust will not be subject to an entity level federal income tax. Instead,
pursuant to the terms of the trust agreement, the trustee will compute taxable
income for each taxable year for the trust and will allocate the income so
computed among the Security Owners owning Partner Certificates. Each such
Security Owner must take into account in computing its taxable income for
federal income tax purposes its allocable share of the trust's income for the
taxable year of the trust that ends with or within the Security Owner's
taxable year. The trust will adopt the calendar year as its taxable year
unless otherwise specified in the applicable prospectus supplement.
Security Owner's Distributive Share. The trust will compute taxable income
for each taxable year in the same manner as would an individual, except that
certain deductions specified in Section 703(a)(2) of the Code are not allowed.
The trustee will allocate that taxable income among the Partner Certificates.
The method of allocation will be described in the applicable prospectus
supplement.
A share of expenses of the partnership (including fees of the master
servicer but not interest expense) allocable to a beneficial owner who is an
individual, estate or trust would constitute miscellaneous itemized
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deductions subject to the limitations described under "- Grantor Trust
Certificates - Trust Expenses" above. Accordingly, those deductions might be
disallowed to the individual in whole or in part and might result in that
holder being taxed on an amount of income that exceeds the amount of cash
actually distributed to that holder over the life of the partnership.
Distributions. A distribution of cash to a Security Owner owning a Partner
Certificate will not be taxable to the Security Owner to the extent that the
amount distributed does not exceed the Security Owner's adjusted basis in the
Partner Certificate. If the amount of cash distributed exceeds a Security
Owner's basis in a Partner Certificate, the excess will be treated as though
it were gain from the sale of the Partner Certificate. If, upon receipt of a
cash distribution in liquidation of a Security Owner's interest in the trust,
the Security Owner's adjusted basis exceeds the amount distributed, the excess
will be treated as though it were a loss from the sale of the Partner
Certificate.
A Security Owner's adjusted basis in a Partner Certificate at any time will
equal the purchase price paid by the Security Owner for the Partner
Certificate, increased by allocations of income made to the Security Owner by
the trust, and decreased by distributions previously made by the trust on the
Partner Certificate and any losses allocated by the trust to the Security
Owner with respect to the Partner Certificate.
If a trust distributes its assets in-kind to a Security Owner in liquidation
of the trust, neither the trust nor the Security Owner will recognize gain or
loss on the distribution. The Security Owner would be required to allocate its
adjusted basis in its Partner Certificate among the assets it received in the
liquidating distribution.
Sale or Exchange of a Partner Certificate. If a Security Owner sells a
Partner Certificate, the Security Owner will recognize gain or loss equal to
the difference between the amount realized on the sale and the Security
Owner's adjusted basis in the Partner Certificate at the time of sale.
Generally, except to the extent provided otherwise in the applicable
prospectus supplement, any gain or loss will be capital gain or loss.
Section 708 Terminations. Under Section 708 of the Code, the trust will be
deemed to have terminated for federal income tax purpose if 50 percent of the
capital and profits interests in the trust are sold or exchanged within a 12-
month period. If a termination were to occur, it would result in the deemed
contribution by the trust of its assets to a newly formed trust in exchange
for interests in such newly formed trust, which the terminated trust would be
deemed to distribute to the Security Owners. The series of deemed transactions
would not result in recognition of gain or loss to the trust or to the
Security Owners. If the Partner Certificates are Book Entry Certificates, the
trust most likely will not be able to comply with the termination provisions
of Section 708 of the Code due to lack of information concerning the transfer
of interests in the trust.
Section 754 Election. If a Security Owner were to sell its Partner
Certificate at a profit (loss), the purchaser would have a higher (lower)
adjusted basis in the Certificate than did the seller. The trust's adjusted
basis in its assets would not be adjusted to reflect this difference unless
the trust made an election under Section 754 of the Code. To avoid the
administrative complexities that would be involved if such an election were to
be made, a trust that is classified as a partnership will not make an election
under Section 754 of the Code unless otherwise provided in the applicable
prospectus supplement. As a result, a beneficial owner of a Partner
Certificate might be allocated a greater or lesser amount of partnership
income than would be appropriate based on its own purchase price for its
Partner Certificate.
Foreign Persons. Unless otherwise provided in the applicable prospectus
supplement, income allocated and distributions made by the trust to a Security
Owner who is a Foreign Person will be subject to United States federal income
tax and withholding tax, if the income attributable to a security is not
effectively connected with the conduct of a trade or business within the
United States by the Foreign Person.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a beneficial interest in a Partner Certificate by a
Foreign Person will be exempt from United States federal income and
withholding tax, provided that (i) such gain is not effectively connected with
the conduct of a trade or business in the United States by the Foreign Person
and (ii) in the case of an individual, the individual is not present in the
United States for 183 days or more in the taxable year.
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Information Reporting. Each trust classified as a partnership will file a
partnership tax return on IRS Form 1065 with the IRS for each taxable year of
the trust. The trust will report each Security Owner's allocable share of the
trust's items of income and expense to the Security Owner and to the IRS on
Schedules K-1. The trust will provide the Schedules K-1 to nominees that fail
to provide the trust with the information statement described below and the
nominees then will be required to forward that information to the beneficial
owners of the Partner Certificates. Generally, a Security Owner must file tax
returns that are consistent with the information reported on the Schedule K-1
or be subject to penalties, unless the Security Owner notifies the IRS of the
inconsistencies.
Under Section 6031 of the Code, any person that holds a Partner Certificate
as a nominee at any time during a calendar year is required to furnish to the
trust a statement containing certain information concerning the nominee and
the beneficial owner of the Partner Certificates. In addition, brokers and
financial institutions that hold Partner Certificates through a nominee are
required to furnish directly to the trust information as to the beneficial
ownership of the Partner Certificates. The information referred to above for
any calendar year is to be provided to the trust by January 31 of the
following year. Brokers and nominees who fail to provide the information may
be subject to penalties. However, a clearing agency registered under
Section 17A of the Securities Exchange Act of 1934 is not required to furnish
that information statement to the trust.
Administrative Matters. Unless another designation is made, the depositor
will be designated as the tax matters partner in the trust agreement and, as
the tax matters partner, will be responsible for representing the beneficial
owners of Partner Certificates 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 by the appropriate taxing
authorities could result in an adjustment of the returns of the beneficial
owners of Partner Certificates, and, under certain circumstances, a beneficial
owner may be precluded from separately litigating a proposed adjustment to the
items of the partnership. An adjustment also could result in an audit of a
beneficial owner's returns and adjustments of items not related to the income
and losses of the partnership.
Special Tax Attributes
In certain cases, securities are afforded special tax attributes under
particular sections of the Code, as discussed below.
REMIC Certificates. REMIC certificates held by a domestic building and loan
association will constitute "regular or residual interests in a REMIC" within
the meaning of Section 7701(a)(19)(C)(xi) of the Code in proportion to the
assets of the REMIC that are described in Section 7701(a)(19)(C)(i) through
(x). If, however, at least 95 percent of the assets of the REMIC are described
in Section 7701(a)(19)(C)(i) through (x), the entire REMIC certificates in
that REMIC will so qualify.
In addition, REMIC certificates held by a REIT will constitute "real estate
assets" within the meaning of Section 856(c)(5)(B) of the Code. If at any time
during a calendar year less than 95 percent of the assets of a REMIC consist
of "real estate assets," then the portion of the REMIC certificates that are
real estate assets under Section 856(c)(5)(B) during the calendar year will be
limited to the portion of the assets of the REMIC that are real estate assets.
Similarly, income on the REMIC certificates will be treated as "interest on
obligations secured by mortgages on real property" within the meaning of
Section 856(c)(3)(B) of the Code, subject to the same limitation as set forth
in the preceding sentence.
REMIC regular certificates also will be "qualified mortgages" within the
meaning of Section 860G(a)(3) of the Code with respect to other REMICs,
provided they are transferred to the other REMIC within the periods required
by the Code, and will be "permitted assets" within the meaning of
Section 860L(c)(1) of the Code with respect to FASITs.
The determination as to the percentage of the REMIC's assets that constitute
assets described in the foregoing sections of the Code will be made for each
calendar quarter based on the average adjusted basis of each category of the
assets held by the REMIC during that calendar quarter. The REMIC will report
those determinations in the manner and at the times required by applicable
Treasury regulations. The Small
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Business Job Protection Act of 1996 (the "SBJPA of 1996") repealed the reserve
method for 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 Section 593(d) of the Code for taxable years
beginning after December 31, 1995. The requirements in the SBJPA of 1996 that
these 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 Section 7701(a)(19)(C)(v) of the Code, but only if
those loans were made to acquire, construct or improve the related real
property and not for the purpose of refinancing. However, no effort will be
made to identify the portion of the mortgage loans of any series meeting this
requirement, and no representation is made in this regard.
The assets of the REMIC will include, in addition to mortgage loans,
payments on mortgage loans held pending distribution on the REMIC certificates
and property acquired by foreclosure held pending sale, and may include
amounts in reserve accounts. It is unclear whether property acquired by
foreclosure held pending sale and amounts in reserve accounts would be
considered to be part of the mortgage loans, or whether those assets (to the
extent not invested in assets described in the foregoing sections) otherwise
would receive the same treatment as the mortgage loans for purposes of all of
the foregoing sections. Under the regulations applicable to REITs, however,
mortgage loan payments held by a REMIC pending distribution are real estate
assets for purposes of Section 856(c)(5)(B) of the Code. Furthermore,
foreclosure property generally will qualify as real estate assets under
Section 856(c)(5)(B) of the Code.
For some series of REMIC certificates, 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. Solely for purposes of determining
whether the REMIC certificates will be "real estate assets" within the meaning
of Section 856(c)(5)(B) of the Code and "loans secured by an interest in real
property" under Section 7701(a)(19)(C) of the Code, and whether the income on
those Securities is interest described in Section 856(c)(3)(B) of the Code,
the Tiered REMICs will be treated as one REMIC.
As described above, certain REMIC regular certificates will evidence
ownership of a REMIC regular interest and a notional principal contract, as
further described in the accompanying supplement. See "Types of Securities --
REMIC Certificates Generally" above. Any such notional principal contract (and
any income therefrom) will not be afforded any of the special tax attributes
described in this section.
FASIT Regular Certificates. FASIT regular certificates held by a REIT will
qualify as "real estate assets" within the meaning of Section 856(c)(5)(B) of
the Code, and interest on such certificates will be considered "interest on
obligations secured by mortgages on real property" within the meaning of
Section 856(c)(3)(B) of the Code to the same extent that REMIC certificates
would be so considered. Likewise, FASIT regular certificates held by a
domestic building and loan association will represent qualifying assets for
purposes of the qualification requirements set forth in Section 7701(a)(19)(C)
of the Code to the same extent that REMIC certificates would be so considered.
See "-- REMIC Certificates" above.
Non-REMIC and non-FASIT Debt Securities. Debt Securities that are not REMIC
regular certificates or FASIT regular certificates and that are owned by
domestic building and loan associations and other thrift institutions will not
be considered "loans secured by an interest in real property" or "qualifying
real property loans." Moreover, such Debt Securities owned by a REIT will not
be treated as "real estate assets" nor will interest on the Debt Securities be
considered "interest on obligations secured by mortgages on real property." In
addition, such Debt Securities will not be "qualified mortgages" for REMICs.
Grantor Trust Certificates. Standard Certificates held by a domestic
building and loan association will constitute "loans secured by interests in
real property" within the meaning of Section 7701(a)(19)(C)(v) of the Code;
Standard Certificates held by a REIT will constitute "real estate assets"
within the meaning of Section 856(c)(5)(B) of the Code; amounts includible in
gross income with respect to Standard Certificates held by a REIT will be
considered "interest on obligations secured by mortgages on real property"
within the meaning of Section 856(c)(3)(B) of the Code; and Standard
Certificates transferred to a REMIC within the prescribed time periods will
qualify as "qualified mortgage" within the meaning of Section 860G(a)(3) of
the Code; provided in each case that the related assets of the trust (or
income therefrom, as applicable) would so qualify.
93
Although there appears to be no policy reason not to accord to Stripped
Certificates the treatment described above for Standard Certificates, there is
no authority addressing such characterization for instruments similar to
Stripped Certificates. We recommend that prospective investors in Stripped
Certificates consult their own tax advisers regarding the characterization of
Stripped Certificates, and the income therefrom, if the characterization of
the Stripped Certificates under the above-referenced rules is relevant.
Partner Certificates. For federal income tax purposes, Partner Certificates
held by a domestic building and loan association will not constitute "loans
secured by an interest in real property" within the meaning of Code
Section 7701(a)(19)(C)(v), but, for purposes of the provisions applicable to
REITs, a REIT holding a Partnership Certificate will be deemed to hold its
proportionate share of each of the assets of the partnership and will be
deemed to be entitled to the income of the partnership attributable to such
share, based in each case on the capital accounts.
Backup Withholding
Distributions on securities, as well as payment of proceeds from the sale of
securities, may be subject to the backup withholding tax under Section 3406 of
the Code if recipients fail to furnish certain information, including their
taxpayer identification numbers, or otherwise fail to establish an exemption
from such tax. Any amounts deducted and withheld from a recipient would be
allowed as a credit against such recipient's federal income tax. Furthermore,
certain penalties may be imposed by the IRS on a recipient that is required to
supply information but that does not do so in the manner required.
State and Local Tax Considerations
In addition to the federal income tax consequences described above,
potential investors should consider the state and local income tax
consequences of the acquisition, ownership and disposition of securities.
State and local income tax law may differ substantially from the corresponding
federal law, and this discussion does not purport to describe any aspect of
the income tax laws of any state or locality.
For example, a REMIC or FASIT or Non-REMIC or Non-FASIT trust may be
characterized as a corporation, a partnership, or some other entity for
purposes of state income tax law. Such characterization could result in entity
level income or franchise taxation of the trust. We recommend that potential
investors consult their own tax advisors with respect to the various state and
local tax consequences of an investment in securities.
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ERISA Considerations
General
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and the Code impose certain requirements in connection with the investment of
plan assets on employee benefit plans and on certain other retirement plans
and arrangements, including individual retirement accounts and annuities,
Keogh plans and collective investment funds and separate accounts in which
these plans, accounts or arrangements are invested, that are subject to Title
I of ERISA or to Section 4975 of the Code ("Plans") and on persons who are
fiduciaries for those Plans. Some 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. Therefore, assets of these
plans may be invested in certificates without regard to the ERISA
considerations described below, subject to the provisions of other applicable
federal, state and local law. Any of these plans that is qualified and exempt
from taxation under Sections 401(a) and 501(a) of the Code, however, is
subject to the prohibited transaction rules set forth in Section 503 of the
Code.
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, regulatory 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, regulatory 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 certificates may cause the 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 the 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, employee benefit plans not subject to ERISA, and
entities whose underlying assets include plan assets by reason of a Plan's
investment in the entity) 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 certificates 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 certificate, 25% or more of any class of certificates is held by benefit
plan investors.
Any person who has discretionary authority or control respecting the
management or disposition of assets of a Plan, and any person who provides
investment advice for those assets for a fee, is a fiduciary of the Plan. If
the assets included in a trust fund constitute plan assets of an investing
Plan, then any party exercising management or discretionary control regarding
those assets, such as the servicer or master servicer, may be deemed to be a
"fiduciary" of the Plan 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 assets included in a trust
fund constitute plan assets, the purchase of certificates by a Party in
Interest of the Plan, as well as the operation of the trust fund, may
constitute or involve a prohibited transaction under ERISA and the Code.
The DOL has issued individual exemptions to various underwriters as
indicated in the related prospectus supplement (the "Exemption") that
generally exempt from the application of the prohibited transaction provisions
of Sections 406(a) and 407(a) of ERISA, and the excise taxes imposed on those
prohibited transactions pursuant to Section 4975(a) and (b) of the Code,
certain transactions relating to the servicing and operation of mortgage pools
and the purchase, sale and holding of certificates underwritten by an
underwriter, as defined below, that (1) represent a beneficial ownership
interest in the assets of an issuer which is a trust
95
and entitle the holder to pass-through payments of principal, interest and/or
other payments made with respect to the assets of the trust fund or (2) are
denominated as a debt instrument and represent an interest in the issuer,
provided that certain conditions set forth in the Exemption are satisfied.
For purposes of this Section "ERISA Considerations," the term "underwriter"
will include (a) the underwriter specified in the related prospectus
supplement, (b) any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with that
underwriter, 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 for a
class of certificates.
Among the general conditions that must be satisfied for a transaction
involving the purchase, sale and holding of certificates to be eligible for
exemptive relief under the Exemption are:
o The acquisition of certificates by a Plan must be 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;
o Unless the investment pool contains only certain types of assets, such as
mortgage loans fully secured by real property (a "Designated
Transaction"), the Exemption only applies to certificates evidencing
rights and interests not subordinated to the rights and interests
evidenced by the other certificates of the trust fund;
o The certificates at the time of acquisition by the Plan must be rated in
one of the three highest generic rating categories (four, in a Designated
Transaction) by Standard & Poor's Rating Services, a division of The
McGraw-Hill Companies, Inc. ("S&P"), Moody's Investors Service, Inc.
("Moody's") or Fitch, Inc. ("Fitch") (each, a "Rating Agency");
o The trustee may not be an affiliate of any other member of the Restricted
Group, as defined below;
o The sum of all payments made to and retained by the underwriter(s) must
represent not more than reasonable compensation for underwriting the
certificates; the sum of all payments made to and retained by the
depositor pursuant to the assignment of the assets to the issuer must
represent not more than the fair market value of those obligations; and
the sum of all payments made to and retained by the master servicer and
any other servicer must represent not more than reasonable compensation
for that person's services under the related agreement and reimbursement
of that person's reasonable expenses in connection therewith;
o The Plan investing in the certificates must be an accredited investor as
defined in Rule 501(a)(1) of Regulation D of the Commission under the
Securities Act of 1933, as amended;
o For certain types of issuers, the documents establishing the issuer and
governing the transaction must contain provisions intended to protect the
assets of the issuer from creditors of the seller.
Moreover, the Exemption provides relief from certain self-dealing/conflict
of interest prohibited transactions that may arise under Sections 406(b)(1)
and 406(b)(2) of ERISA (as well as from the excise taxes imposed by
Sections 4975(a) and 4975(b) of the Code, by reason of Section 4975(c)(1)(E)
of the Code) when a fiduciary causes a Plan to invest in an issuer that holds
obligations on which the fiduciary (or its affiliate) is an obligor only if,
among other requirements: (1) the fiduciary (or its affiliate) is an obligor
with respect to no more than five percent of the fair market value of the
obligations contained in the trust fund; (2) the Plan's investment in each
class of certificates does not exceed twenty-five percent of all of the
certificates of that class outstanding at the time of the acquisition and
(3) immediately after the acquisition, no more than twenty-five percent of the
assets of any Plan for which the fiduciary serves as a fiduciary are invested
in securities representing an interest in one or more trusts containing assets
sold or serviced by the same entity; (4) in the case of an acquisition of
certificates in connection with their initial issuance, at least 50% of each
class of certificates in which Plans have invested and at least 50% of the
aggregate interest in the issuer is acquired by persons independent of the
Restricted Group; and (5) the Plan is not an Excluded Plan. An "Excluded Plan"
is one that is sponsored by a member of the Restricted Group, which consists
of the trustee, each underwriter, any insurer of the issuer, the sponsor, each
servicer, any obligor with respect to obligations included in the issuer
constituting more than 5 percent of the aggregate unamortized principal
96
balance of the assets of the issuer on the date of the initial issuance of
certificates, each counterparty in any eligible swap transactions and any
affiliate of any such persons.
A fiduciary of a Plan contemplating purchasing a certificate must make its
own determination that the general conditions set forth above will be
satisfied for that certificate.
The rating of a certificate may change. If the rating of a certificate
declines below the lowest permitted rating, the certificate will no longer be
eligible for relief under the Exemption, (although a Plan that had purchased
the certificate when the certificate had a permitted rating would not be
required by the Exemption to dispose of it). Consequently, a certificate may
not be purchased by or sold to a Plan in such circumstances other than to an
insurance company general account pursuant to Prohibited Transaction Class
Exemption ("PTCE") 95-60.
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(a) 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
certificates 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 certificate on behalf of an Excluded Plan by any person who has
discretionary authority or renders investment advice with respect to the
assets of that Excluded 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(a) 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 for the certificates so
that the Exemption would provide an exemption from the restrictions imposed by
Sections 406(a), 406(b) and 407(a) 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.
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 those 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 that person) solely as a result of the Plan's ownership of
certificates.
The Exemption extends exemptive relief to certain mortgage-backed and asset-
backed securities transactions that use pre-funding accounts and that
otherwise meet the requirements of the exemption. Obligations in an investment
pool supporting payments to securityholders, and having a value equal to no
more than 25% of the total initial principal balance of the related
certificates, may be transferred to the trust fund within the pre-funding
period, instead of being required to be either identified or transferred on or
before the closing date. The relief is available if the following conditions
are met:
(1) The ratio of the amount allocated to the pre-funding account to
purchase mortgage loans that have not yet been identified to the
total principal amount of the certificates being offered (the "Pre-
Funding Limit") must not exceed 25%.
(2) All assets transferred after the closing date (the "Subsequent
Assets") must meet the same terms and conditions for eligibility as
the original assets used to create the issuer, which terms and
conditions have been approved by at least one rating agency.
(3) The transfer of the Subsequent Assets to the issuer during the pre-
funding period must not result in the certificates that are to be
covered by the Exemption receiving a lower credit rating from a
97
rating agency upon termination of the pre-funding period than the
rating that was obtained at the time of the initial issuance of the
certificates by the issuer.
(4) The weighted average annual percentage interest rate for all of the
assets in the issuer at the end of the pre-funding period must not
be more than 100 basis points lower than the average interest rate
for the assets transferred to the issuer on the closing date.
(5) In order to ensure that the characteristics of the Subsequent
Assets are substantially similar to the original assets that were
transferred to the issuer:
o the characteristics of the Subsequent Assets must be monitored by an
insurer or other credit support provider that is independent of the
depositor; or
o an independent accountant retained by the depositor must provide the
depositor with a letter (with copies provided to each rating agency
rating the certificates, the underwriter and the trustee) stating whether
or not the characteristics of the Subsequent Assets conform to the
characteristics described in the related prospectus supplement and/or the
related agreement. In preparing this letter, the independent accountant
must use the same type of procedures as were applicable to the assets
transferred to the issuer as of the closing date.
(6) The pre-funding period must end no later than the later of three months
or 90 days after the closing date (or earlier if the pre-funding account falls
below the minimum level specified in the related agreement or an event of
default occurs).
(7) Amounts transferred to the pre-funding account and/or the capitalized
interest account used in connection with the pre-funding may be invested only
in certain permitted investments.
(8) The prospectus or prospectus supplement must describe:
o the pre-funding account and/or capitalized interest account used in
connection with the pre-funding account;
o the duration of the pre-funding period;
o the percentage and/or dollar amount of the pre-funding limit for the
issuer; and
o that the amounts remaining in the pre-funding account at the end of the
pre-funding period will be remitted to securityholders as repayments of
principal.
(9) The related agreement must describe the permitted investments for the
pre-funding account and/or capitalized interest account and, if not disclosed
in the prospectus supplement, the terms and conditions for eligibility of
Subsequent Assets.
With respect to each transaction specified in a related prospectus
supplement, there will be sufficient obligations identified prior to the
closing date so that these obligations, if transferred to the trust after the
closing date, in exchange for amounts credited to the pre-funding account,
would result in a ratio that is within the pre-funding limit. In addition,
these obligations would meet the same terms and conditions for eligibility as
the original obligations used to create the trust and other conditions
required under the Exemption.
The certificates may have features, such as put option rights or mandatory
purchase features, that are not eligible for exemptive relief under the
Exemption. In this case, the prospectus supplement related to a series of
certificates will identify any additional considerations and conditions for a
fiduciary investing assets of a Plan in a class of certificates that includes
such features.
To the extent the certificates are not treated as equity interests for
purposes of DOL regulations Section 2510.3-101, a Plan's investment in those
certificates ("Non-Equity Certificates") would not cause the assets included
in a related trust fund to be deemed Plan assets. However, the depositor, the
master servicer, the servicer, the trustee, or underwriter may be the sponsor
of or investment advisor with respect to one or more Plans. Because these
parties may receive certain benefits in connection with the sale of Non-Equity
Certificates, the purchase of Non-Equity Certificates using Plan assets over
which any of these parties has
98
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 Certificates may not be purchased using the
assets of any Plan if any of the depositor, the servicer, the trustee or
underwriter has investment authority for those assets, or is an employee
maintaining or contributing to the Plan.
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
certificates, 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 that holder. In either
case, the acquisition or holding of Non-Equity Certificates by or on behalf of
that 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, regulatory or administrative exemptions such as PTCE
84-14, which exempts certain transactions effected on behalf of a Plan by a
"qualified professional asset manager," PTCE 90-1, which exempts certain
transactions involving insurance company pooled separate accounts, PTCE 91-38,
which exempts certain transactions involving bank collective investment funds,
PTCE 95-60, which exempts certain transactions involving insurance company
general accounts, or PTCE 96-23, which exempts certain transactions effected
on behalf of a Plan by certain "in-house" asset managers. It should be noted,
however, that even if the conditions specified in one or more of these
exemptions are met, the scope of relief provided by these exemptions may not
necessarily cover all acts that might be construed as prohibited transactions.
Any Plan fiduciary that proposes to cause a Plan to purchase certificates
should consult with its counsel with respect to the potential applicability of
ERISA and the Code to that 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 that proposes to cause a Plan to purchase certificates
representing a beneficial ownership interest in a pool of single-family
residential first mortgage loans should consider the applicability of PTCE 83-
1, which provides exemptive relief for certain transactions involving mortgage
pool investment trusts. The prospectus supplement for a series of certificates
may contain additional information regarding the application of the Exemption,
PTCE 83-1 or any other exemption, with respect to the certificates offered
thereby. In addition, any Plan fiduciary that proposes to cause a Plan to
purchase certain types of certificates should consider the federal income tax
consequences of that investment.
Any Plan fiduciary considering whether to purchase a certificate on behalf
of a Plan should consult with its counsel regarding the application of the DOL
regulations Section 2510.3-101 and the fiduciary responsibility and prohibited
transaction provisions of ERISA and the Code to that investment.
The sale of certificates to a Plan is in no respect a representation by the
depositor or the underwriter that the investment meets all relevant legal
requirements for investments by Plans generally or any particular Plan, or
that the investment is appropriate for Plans generally or any particular Plan.
Legal Investment
The prospectus supplement for each series of securities will specify which,
if any, of the classes of securities offered thereby constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA"). Classes of securities that qualify as "mortgage related
securities" will be legal investments for persons, trusts, corporations,
partnerships, associations, business trusts, and business entities (including
depository institutions, life insurance companies and pension funds) created
pursuant to or existing under the laws of the United States or of any state
(including the District of Columbia and Puerto Rico) whose authorized
investments are subject to state regulations to the same extent as, under
applicable law, obligations issued by or guaranteed as to principal and
interest by the United States or any of those entities. Under SMMEA, if a
state enacted legislation prior to October 4, 1991 specifically limiting the
legal investment authority of any of those entities with respect to "mortgage
related securities", securities will constitute legal investments for entities
subject to the legislation only to the extent provided in the legislation.
Approximately twenty-one states adopted this legislation prior to the
October 4, 1991 deadline. SMMEA provides, however, that in no event will the
enactment of any such legislation affect the validity of any contractual
commitment to purchase, hold or invest in securities, or require the sale or
other
99
disposition of securities, so long as the contractual commitment was made or
the securities were acquired prior to the enactment of the legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in securities
without limitations as to the percentage of their assets represented thereby,
federal credit unions may invest in mortgage related securities, and national
banks may purchase securities for their own account without regard to the
limitations generally applicable to investment securities set forth in 12
U.S.C. 24 (Seventh), subject in each case to such regulations as the
applicable federal authority may prescribe. In this connection, federal credit
unions should review the National Credit Union Administration ("NCUA") Letter
to Credit Unions No. 96, as modified by Letter to Credit Unions No. 108, which
includes guidelines to assist federal credit unions in making investment
decisions for mortgage related securities and the NCUA's regulation
"Investment and Deposit Activities" (12 C.F.R. Part 703), which sets forth
certain restrictions on investment by federal credit unions in mortgage
related securities (in each case whether or not the class of securities under
consideration for purchase constituted a "mortgage related security"). The
NCUA issued final regulations effective December 2, 1991 that restrict and in
some instances prohibit the investment by Federal Credit Unions in certain
types of mortgage related securities.
All depository institutions considering an investment in the securities
(whether or not the class of securities under consideration for purchase
constitutes a "mortgage related security") should review the Federal Financial
Institutions Examination Council's Supervisory Policy Statement on the
Securities Activities (to the extent adopted by their respective regulators)
(the "Policy Statement") setting forth, in relevant part, certain securities
trading and sales practices deemed unsuitable for an institution's investment
portfolio, and guidelines for (and restrictions on) investing in mortgage
derivative products, including "mortgage related securities", which are "high-
risk mortgage securities" as defined in the Policy Statement. According to the
Policy Statement, such "high-risk mortgage securities" include securities such
as securities not entitled to distributions allocated to principal or
interest, or Subordinated Securities. Under the Policy Statement, it is the
responsibility of each depository institution to determine, prior to purchase
(and at stated intervals thereafter), whether a particular mortgage derivative
product is a "high-risk mortgage security", and whether the purchase (or
retention) of such a product would be consistent with the Policy Statement.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders guidelines or agreements generally
governing investments made by a particular investor, including, but not
limited to "prudent investor" provisions, percentage-of-assets limits and
provisions which may restrict or prohibit investment in securities which are
not "interest bearing" or "income paying," or in securities which are issued
in book-entry form.
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase securities or to
purchase securities representing more than a specified percentage of the
investor's assets. Investors should consult their own legal advisors in
determining whether and to what extent the securities constitute legal
investments for them.
Method of Distribution
Securities are being offered hereby in series from time to time (each series
evidencing or relating to a separate trust fund) through any of the following
methods:
o by negotiated firm commitment underwriting and public reoffering by
underwriters;
o by agency placements through one or more placement agents primarily with
institutional investors and dealers; and
o by placement directly by the depositor with institutional investors.
A prospectus supplement will be prepared for each series which will describe
the method of offering being used for that series and will set forth the
identity of any underwriters thereof and either the price at which that series
is being offered, the nature and amount of any underwriting discounts or
additional
100
compensation to the underwriters and the proceeds of the offering to the
depositor, or the method by which the price at which the underwriters will
sell the securities will be determined. Each prospectus supplement for an
underwritten offering will also contain information regarding the nature of
the underwriters' obligations, any material relationship between the depositor
and any underwriter and, where appropriate, information regarding any
discounts or concessions to be allowed or reallowed to dealers or others and
any arrangements to stabilize the market for the securities so offered. In
firm commitment underwritten offerings, the underwriters will be obligated to
purchase all of the securities of the series if any securities are purchased.
Securities may be acquired by the underwriters for their own accounts and may
be resold from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices determined
at the time of sale.
It is anticipated that the underwriting agreement pertaining to the sale of
offered securities of any series will provide that the obligations of the
underwriters will be subject to conditions precedent, that the underwriters
will be obligated to purchase all the securities if any are purchased, other
than in connection with an underwriting on a best efforts basis, and that, in
limited circumstances, the depositor will indemnify the several underwriters
and the underwriters will indemnify the depositor against certain civil
liabilities, including liabilities under the securities Act of 1933 or will
contribute to payments required to be made in respect thereof.
Underwriters and agents may be entitled under agreements entered into with
the depositor to indemnification by the depositor against certain civil
liabilities, including liabilities under the Securities Act or to contribution
with respect to payments which those underwriters or agents may be required to
make in respect thereof.
If a series is offered other than through underwriters, the prospectus
supplement relating thereto will contain information regarding the nature of
the offering and any agreements to be entered into between the depositor and
purchasers of securities of the series.
Legal Matters
The validity of the securities of each series, including certain federal
income tax consequences with respect thereto, will be passed upon for the
depositor by Mckee Nelson LLP, 1919 M Street, N.W., Washington, D.C. 20036.
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 the securities of each series offered
hereby and by the prospectus supplement that they shall have been rated in one
of the four highest rating categories by the nationally recognized statistical
rating agency or agencies (each, a "Rating Agency") specified in the related
prospectus supplement.
A rating is based on, among other things, the adequacy of the value of the
Trust Fund Assets and any credit enhancement with respect to a class of
securities and will reflect the Rating Agency's assessment solely of the
likelihood that holders of that class of securities will receive payments to
which the holders are entitled under the related Agreement. A rating will not
constitute an assessment of the likelihood that principal prepayments on the
related loans will be made, the degree to which the rate of those prepayments
might differ from that originally anticipated or the likelihood of early
optional termination of the series of securities.
101
A rating should not be deemed a recommendation to purchase, hold or sell
securities, inasmuch as it does not address market price or suitability for a
particular investor. Each security rating should be evaluated independently of
any other security rating. A rating will not address the possibility that
prepayment at higher or lower rates than anticipated by an investor may cause
the investor to experience a lower than anticipated yield or that an investor
purchasing a security at a significant premium might fail to recoup its
initial investment under certain prepayment scenarios.
There is also no assurance that any rating will remain in effect for any
given period of time or that it may not be lowered or withdrawn entirely by
the Rating Agency in the future if in its judgment circumstances in the future
so warrant. In addition to being lowered or withdrawn due to any erosion in
the adequacy of the value of the Trust Fund Assets or any credit enhancement
with respect to a series, a rating might also be lowered or withdrawn among
other reasons, because of an adverse change in the financial or other
condition of a credit enhancement provider or a change in the rating of the
credit enhancement provider's long term debt.
The amount, type and nature of credit enhancement, if any, established with
respect to a series of securities will be determined on the basis of criteria
established by each Rating Agency rating classes of such series. These
criteria are sometimes based upon an actuarial analysis of the behavior of
mortgage loans in a larger group. This analysis is often the basis upon which
each Rating Agency determines the amount of credit enhancement required with
respect to each class of securities. There can be no assurance that the
historical data supporting any such actuarial analysis will accurately reflect
future experience nor any assurance that the data derived from a large pool of
mortgage loans accurately predicts the delinquency, foreclosure or loss
experience of any particular pool of loans. No assurance can be given that
values of any Properties have remained or will remain at their levels on the
respective dates of origination of the related loans. If the residential real
estate markets should experience an overall decline in property values such
that the outstanding principal balances of the loans in a particular trust
fund and any secondary financing on the related Properties become equal to or
greater than the value of the Properties, the rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced
in the mortgage lending industry. In additional, adverse economic conditions
(which may or may not affect real property values) may affect the timely
payment by mortgagors of scheduled payments of principal and interest on the
loans and, accordingly, the rates of delinquencies, foreclosures and losses
with respect to any trust fund. To the extent that those losses are not
covered by credit enhancement, they will be borne, at least in part, by the
holders of one or more classes of the securities of the related series.
102
ANNEX I
Global Clearance, Settlement and Tax
Documentation Procedures
Except in certain limited circumstances, the book-entry securities will be
available only in book-entry form. Investors in the book-entry securities may
hold them through any of The Depository Trust Company ("DTC"), Clearstream,
Luxembourg or Euroclear. The book-entry securities will be tradeable 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 interests in book-entry
securities through Clearstream, Luxembourg and Euroclear will be conducted in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice. Secondary market trading between
investors holding interests in book-entry securities through DTC will be
conducted according to the rules and procedures applicable to U.S. corporate
debt obligations.
Secondary cross-market trading between investors holding interests in book-
entry securities through Clearstream, Luxembourg or Euroclear and investors
holding interests in book-entry securities through DTC participants will be
effected on a delivery-against-payment basis through the respective
depositories of Clearstream, Luxembourg and Euroclear (in that capacity) and
other DTC participants.
Although DTC, Euroclear and Clearstream, Luxembourg are expected to follow
the procedures described below to facilitate transfers of interests in the
book-entry securities among participants of DTC, Euroclear and Clearstream,
Luxembourg, they are under no obligation to perform or continue to perform
those procedures, and those procedures may be discontinued at any time.
Neither the Issuer nor the indenture trustee will have any responsibility for
the performance by DTC, Euroclear and Clearstream, Luxembourg or their
respective participants or indirect participants of their respective
obligations under the rules and procedures governing their obligations.
Non-U.S. holders (as described below) of book-entry securities will be
subject to U.S. withholding taxes unless the holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
Initial Settlement
The book-entry securities will be registered in the name of Cede & Co. as
nominee of DTC. Investors' interests in the book-entry securities will be
represented through financial institutions acting on their behalf as direct
and indirect participants in DTC. Clearstream, Luxembourg and Euroclear will
hold positions on behalf of their participants through their respective
depositories, which in turn will hold the positions in accounts as DTC
participants.
Investors electing to hold interests in book-entry securities through DTC
participants, rather than through Clearstream, Luxembourg or Euroclear
accounts, will be subject to the settlement practices applicable to similar
issues of pass-through notes. Investors' securities custody accounts will be
credited with their holdings against payment in same-day funds on the
settlement date.
Investors electing to hold interests in book-entry securities through
Clearstream, Luxembourg or Euroclear accounts will follow the settlement
procedures applicable to conventional eurobonds, except that there will be no
temporary global security and no "lock-up" or restricted period. Interests in
book-entry securities will be credited to the securities custody accounts on
the settlement date against payment in same-day funds.
103
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.
Transfers between DTC Participants. Secondary market trading between DTC
participants will be settled using the DTC procedures applicable to similar
issues of pass-through notes in same-day funds.
Transfers between Clearstream, Luxembourg and/or Euroclear Participants.
Secondary market trading between Clearstream, Luxembourg participants or
Euroclear participants and/or investors holding interests in book-entry
securities through them will be settled using the procedures applicable to
conventional eurobonds in same-day funds.
Transfers between DTC seller and Clearstream, Luxembourg or Euroclear
purchaser. When interests in book-entry securities are to be transferred on
behalf of a seller from the account of a DTC participant to the account of a
Clearstream, Luxembourg participant or a Euroclear participant or a purchaser,
the purchaser will send instructions to Clearstream, Luxembourg or Euroclear
through a Clearstream, Luxembourg participant or Euroclear participant at
least one business day before settlement. Clearstream, Luxembourg or the
Euroclear operator will instruct its respective depository to receive an
interest in the book-entry securities against payment. Payment will include
interest accrued on the book-entry securities from and including the last
distribution date to but excluding the settlement date. Payment will then be
made by the respective depository to the DTC participant's account against
delivery of an interest in the book-entry securities. After settlement has
been completed, the interest will be credited to the respective clearing
system, and by the clearing system, in accordance with its usual procedures,
to the Clearstream, Luxembourg participant's or Euroclear participant's
account. The credit of the interest will appear on the next business day and
the cash debit will be back-valued to, and the interest on the book-entry
securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed through
DTC on the intended value date (i.e., the trade fails), the Clearstream,
Luxembourg or Euroclear cash debit will be valued instead as of the actual
settlement date.
Clearstream, Luxembourg participants and Euroclear participants will need to
make available to the respective clearing system the funds necessary to
process same-day funds settlement. The most direct means of doing so is to
pre-position funds for settlement from cash on hand, in which case the
Clearstream, Luxembourg participants or Euroclear participants will take on
credit exposure to Clearstream, Luxembourg or the Euroclear operator until
interests in the book-entry securities are credited to their accounts one day
later.
As an alternative, if Clearstream, Luxembourg or the Euroclear operator has
extended a line of credit to them, Clearstream, Luxembourg participants or
Euroclear participants can elect not to pre-position funds and allow that
credit line to be drawn upon. Under this procedure, Clearstream, Luxembourg
participants or Euroclear participants receiving interests in book-entry
securities for purchasers would incur overdraft charges for one day, to the
extent they cleared the overdraft when interests in the book-entry securities
were credited to their accounts. However, interest on the book-entry
securities would accrue from the value date. Therefore, the investment income
on the interest in the book-entry securities earned during that one-day period
would tend to offset the amount of the overdraft charges, although this result
will depend on each Clearstream, Luxembourg participant's or Euroclear
participant's particular cost of funds.
Since the settlement through DTC will take place during New York business
hours, DTC participants are subject to DTC procedures for transferring
interests in book-entry securities to the respective depository of
Clearstream, Luxembourg or Euroclear for the benefit of Clearstream,
Luxembourg participants or Euroclear participants. The sale proceeds will be
available to the DTC seller on the settlement date. Thus, to the seller
settling the sale through a DTC participant, a cross-market transaction will
settle no differently than a sale to a purchaser settling through a DTC
participant.
Finally, intra-day traders that use Clearstream, Luxembourg participants or
Euroclear participants to purchase interests in book-entry securities from DTC
participants or sellers settling through them for delivery
104
to Clearstream, Luxembourg participants or Euroclear participants should note
that these trades will automatically fail on the sale side unless affirmative
action is taken. At least three techniques should be available to eliminate
this potential condition:
(a) borrowing interests in book-entry securities through Clearstream,
Luxembourg or Euroclear for one day (until the purchase side of the
intra-day trade is reflected in the relevant Clearstream,
Luxembourg or Euroclear accounts) in accordance with the clearing
system's customary procedures;
(b) borrowing interests in book-entry securities in the United States
from a DTC participant no later than one day before settlement,
which would give sufficient time for the interests to be reflected
in the relevant Clearstream, Luxembourg or Euroclear accounts 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 before the value date for the sale to the
Clearstream, Luxembourg participant or Euroclear participant.
Transfers between Clearstream, Luxembourg or Euroclear seller and DTC
purchaser. Due to time zone differences in their favor, Clearstream,
Luxembourg participants and Euroclear participants may employ their customary
procedures for transactions in which interests in book-entry securities are to
be transferred by the respective clearing system, through the respective
depository, to a DTC participant. The seller will send instructions to
Clearstream, Luxembourg or the Euroclear operator through a Clearstream,
Luxembourg participant or Euroclear participant at least one business day
before settlement. Clearstream, Luxembourg or Euroclear will instruct its
respective depository to credit an interest in the book-entry securities to
the DTC participant's account against payment. Payment will include interest
accrued on the book-entry securities from and including the last distribution
date to but excluding the settlement date. The payment will then be reflected
in the account of the Clearstream, Luxembourg participant or Euroclear
participant the following business day, and receipt of the cash proceeds in
the Clearstream, Luxembourg participant's or Euroclear participant's account
would be back-valued to the value date (which would be the preceding day, when
settlement occurred through DTC in New York). If settlement is not completed
on the intended value date (i.e., the trade fails), receipt of the cash
proceeds in the Clearstream, Luxembourg participant's or Euroclear
participant's account would instead be valued as of the actual settlement
date.
105
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of book-entry securities holding securities through
Clearstream, Luxembourg or Euroclear (or through DTC if the holder has an
address outside the United States) 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 the beneficial owner and the U.S. entity required to withhold tax
complies with applicable certification requirements and (ii) the beneficial
owner takes one of the following steps to obtain an exemption or reduced tax
rate:
Exemption for non-U.S. Persons (Form W-8 or W-8BEN). Beneficial owners of
Notes that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8BEN (Note of Foreign Status of
Beneficial Ownership 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
the 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 (Note of Foreign Person's Claim
for Exemption from Withholding or 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 beneficial 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
(Note of Foreign Status of Beneficial Ownership for United States Tax
Withholding).
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).
Form W-8BEN and Form W-8ECI are effective until the last day of the third
succeeding calendar year from the date the form is signed, unless a change in
circumstance makes any information on the form incorrect.
The term "U.S. Person" means (i) a citizen or resident of the United States,
(ii) a corporation or partnership or other entity treated as a corporation or
partnership for federal income tax purposes created or organized in or under
the laws of the United States, any State thereof or the District of Columbia
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 of the
administration of the trust and one or more United States persons have the
authority to control all substantial decisions of the trust. This discussion
does not deal with all aspects of U.S. Federal income tax withholding that may
be relevant to foreign holders of the book-entry securities. Investors are
advised to consult their own tax advisors for specific tax advice concerning
their holding and disposing of the book-entry securities.
106
INDEX OF DEFINED TERMS
Page
----
Agreement ............................................................... 14
APR ..................................................................... 17
Available Funds ......................................................... 29
beneficial owner ........................................................ 38
benefit plan investors .................................................. 95
BIF ..................................................................... 53
Capitalized Interest Account ............................................ 55
CERCLA .................................................................. 67
Class Security Balance .................................................. 29
Clearstream, Luxembourg ................................................. 39
Code .................................................................... 28
COFI securities ......................................................... 36
Collateral Value ........................................................ 18
Combined Loan-to-Value Ratio ............................................ 17
cooperative loans ....................................................... 15
cooperatives ............................................................ 15
Cut-off Date Principal Balance .......................................... 27
Definitive Security ..................................................... 38
Designated Transaction .................................................. 96
Detailed Description .................................................... 15
DOL ..................................................................... 95
DTC ..................................................................... 37
Eleventh District ....................................................... 35
ERISA ................................................................... 95
European Depositories ................................................... 37
Exemption ............................................................... 95
FHLBSF .................................................................. 35
fiduciary ............................................................... 95
Financial Intermediary .................................................. 38
Fitch ................................................................... 96
Funding Period .......................................................... 54
Garn-St Germain Act ..................................................... 69
Guide ................................................................... 21
Indenture ............................................................... 26
Insurance Proceeds ...................................................... 53
Insured Expenses ........................................................ 53
L/C Bank ................................................................ 42
L/C Percentage .......................................................... 43
Liquidation Expenses .................................................... 53
Liquidation Proceeds .................................................... 53
Loan Rate ............................................................... 15
Loan-to-Value Ratio ..................................................... 17
MGT/EOC ................................................................. 40
Moody's ................................................................. 44
Mortgage ................................................................ 51
National Cost of Funds Index ............................................ 36
NCUA .................................................................... 108
Non-Equity Certificates ................................................. 98
OTS ..................................................................... 36
Page
----
Parties in Interest ..................................................... 95
Pass-Through Rate ....................................................... 14
Permitted Investments ................................................... 44
Plans ................................................................... 95
Policy Statement ........................................................ 100
Pool Insurance Policy ................................................... 45
Pool Insurer ............................................................ 45
Pooling and Servicing Agreement ......................................... 26
Pre-Funded Amount ....................................................... 54
Pre-Funding Account ..................................................... 54
Pre-Funding Limit ....................................................... 97
Primary Mortgage Insurance Policy ....................................... 16
Prime Rate .............................................................. 37
Principal Prepayments ................................................... 30
Properties .............................................................. 16
PTCE .................................................................... 97
Purchase Price .......................................................... 26
Rating Agency ........................................................... 101
RCRA .................................................................... 68
Record Date ............................................................. 27
Refinance Loan .......................................................... 18
Relevant Depositary ..................................................... 37
Relief Act .............................................................. 70
Retained Interest ....................................................... 27
Rules ................................................................... 38
S&P ..................................................................... 96
SAIF .................................................................... 53
Sale and Servicing Agreement ............................................ 14
secured creditor exclusion .............................................. 67
Securities Act .......................................................... 18
Security Account ........................................................ 53
Security Owners ......................................................... 37
Security Register ....................................................... 27
Sellers ................................................................. 14
Senior Securities ....................................................... 42
Senior Securityholders .................................................. 42
Servicing Fee ........................................................... 58
significant ............................................................. 95
Single Family Properties ................................................ 17
SMMEA ................................................................... 99
Subordinated Securityholders ............................................ 42
Subsequent Assets ....................................................... 97
Subsequent Loans ........................................................ 54
Terms and Conditions .................................................... 40
Title V ................................................................. 70
Trust Agreement ......................................................... 26
Trust Fund Assets ....................................................... 14
UCC ..................................................................... 66
underwriter ............................................................. 95
107
$286,339,321
(Approximate)
AEGIS ASSET BACKED SECURITIES CORPORATION
Mortgage Loan Asset Backed Certificates,
Series 2003-1
Aegis Mortgage Corporation
Seller
Aegis Asset Backed Securities Corporation
Depositor
[AEGIS MORTGAGE CORP. LOGO]
Chase Manhattan Mortgage Corporation
Servicer
PROSPECTUS SUPPLEMENT
April 17, 2003
LEHMAN BROTHERS COUNTRYWIDE SECURITIES CORPORATION