PROSPECTUS SUPPLEMENT
(To Prospectus dated September 25, 2003)
$142,245,000
(Approximate)
Bear Stearns Asset Backed Securities Trust 2003-SD2
Issuer
Asset-Backed Certificates, Series 2003-SD2
EMC Mortgage Corporation
Seller and Servicer
Wells Fargo Bank Minnesota, National Association
Master Servicer and Securities Administrator
Bear Stearns Asset Backed Securities, Inc.
Depositor
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Consider carefully the risk factors beginning on page S-14 in this prospectus
supplement and on page 4 in the prospectus.
The certificates represent obligations of the trust only and do not represent an
interest in or obligation of Bear Stearns Asset Backed Securities, Inc., EMC
Mortgage Corporation, Wells Fargo Bank Minnesota, National Association, JPMorgan
Chase Bank or any of their affiliates.
This prospectus supplement may be used to offer and sell the offered
certificates only if accompanied by the prospectus.
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The issuer is offering the following classes of certificates pursuant to this
prospectus supplement and the accompanying prospectus:
------------ -------------- --------------------- ---------- -------------- --------------------
Original Original
Certificate Certificate
Principal Pass-Through Principal Pass-Through
Class Balance Rate Class Balance Rate
------------ -------------- --------------------- ---------- -------------- --------------------
Class I-A $ 29,515,300 variable rate (1) Class B-3 $ 3,010,400 variable rate (1)(2)
------------ -------------- --------------------- ---------- -------------- --------------------
Class II-A $ 71,442,500 variable rate (1) Class R-I $ 50 N/A
------------ -------------- --------------------- ---------- -------------- --------------------
Class III-A $ 29,245,300 variable rate (1) Class R-II $ 50 N/A
------------ -------------- --------------------- ---------- -------------- --------------------
Class B-1 $ 5,268,300 variable rate (1)(2)
------------ -------------- --------------------- ---------- -------------- --------------------
Class B-2 $ 3,763,100 variable rate (1)(2)
------------ -------------- --------------------- ---------- -------------- --------------------
(1) As described on page S-9 of this prospectus supplement.
(2) Class of subordinated certificates.
Neither the SEC nor any state securities commission has approved these
securities or determined that this prospectus supplement or the prospectus is
accurate or complete. Any representation to the contrary is a criminal offense.
Bear, Stearns & Co. Inc., as the underwriter, will offer the
certificates listed above at varying prices to be determined at the time
of sale.
The underwriter will deliver the Class R-I and Class R-II Certificates
in physical form and the remaining offered certificates in book-entry form only
through the facilities of The Depository Trust Company, Clearstream and
Euroclear, in each case, on or about September 30, 2003.
Bear, Stearns & Co. Inc.
The date of the prospectus supplement is September 26, 2003
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Summary.............................................4
Risk Factors.......................................14
The Mortgage Pool..................................28
Servicing of the Mortgage Loans....................39
Description of the Certificates....................53
Yield, Prepayment and Maturity Considerations......80
Use of Proceeds....................................92
Federal Income Tax Consequences....................92
State Taxes........................................95
ERISA Considerations...............................95
Restrictions on Purchase and Transfer of the
residual certificates.........................96
Method of Distribution.............................96
Legal Matters......................................97
Ratings............................................98
Index of Defined Terms.............................99
Schedule A - Mortgage Loan Statistical Data.........1
Annex I - Global Clearance, Settlement and Tax
Documentation Procedures.......................1
PROSPECTUS
Risk Factors........................................4
Description of the Securities......................14
The Trust Funds....................................19
Credit Enhancement.................................40
Servicing of Loans.................................45
The Agreements.....................................53
Material Legal Aspects of the Loans................66
The Depositor......................................80
Use of Proceeds....................................80
Material Federal Income Tax Considerations.........81
Reportable Transactions...........................111
State Tax Considerations..........................111
FASIT Securities..................................111
ERISA Considerations..............................117
Legal Matters.....................................124
Financial Information.............................124
Available Information.............................124
Incorporation of Certain Information
by Reference.................................125
Ratings...........................................125
Legal Investment Considerations...................126
Plan of Distribution..............................126
Glossary of Terms.................................127
S-2
Important Notice About Information Presented In This
Prospectus Supplement And The Accompanying Prospectus
We describe the certificates in two separate documents that provide
varying levels of detail: (a) the accompanying prospectus, which provides
general information, some of which may not apply to your certificates and (b)
this prospectus supplement, which describes the specific terms of your
certificates. If there is conflicting information between this prospectus
supplement and the accompanying prospectus, you should rely on the information
in this prospectus supplement.
Cross-references are included in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further discussions about related topics. The table of contents on page S-2
above provides the pages on which these captions are located.
You can find a listing of the pages where certain capitalized and other
terms used in this prospectus supplement and the accompanying prospectus are
defined under the caption "Index of Defined Terms" beginning on page S-99 of
this prospectus supplement or "Glossary of Terms" beginning on page 127 of the
prospectus.
S-3
SUMMARY
o This summary highlights selected information from this document and does not
contain all of the information that you need to consider when making your
investment decision. To understand all of the terms of an offering of the
certificates, you should read this entire document and the accompanying
prospectus carefully.
o Certain statements contained in or incorporated by reference in this
prospectus supplement and the accompanying prospectus consist of
forward-looking statements relating to future economic performance or
projections and other financial items. These statements can be identified by
the use of forward-looking words such as "may," "will," "should," "expects,"
"believes," "anticipates," "estimates," or other comparable words.
Forward-looking statements are subject to a variety of risks and
uncertainties that could cause actual results to differ from the projected
results. Those risks and uncertainties include, among others, general
economic and business conditions, regulatory initiatives and compliance with
governmental regulations, customer preferences and various other matters,
many of which are beyond our control. Because we cannot predict the future,
what actually happens may be very different from what is contained in our
forward-looking statements.
Issuer
Bear Stearns Asset Backed Securities Trust 2003-SD2, also referred to as the
trust.
The Certificates
Asset-Backed Certificates, Series 2003-SD2, represent beneficial ownership
interests in a trust fund that consists primarily of a pool of hybrid and
adjustable rate, conventional mortgage loans that are secured by first liens on
one- to four-family residential properties and certain other property and assets
described in this prospectus supplement.
Originators
The principal originators of the mortgage loans are Wells Fargo Home Mortgage,
Inc., with respect to approximately 19.86% of the mortgage loans, and Washington
Mutual Bank, FA and Washington Mutual Bank with respect to approximately 55.20%
of the mortgage loans, in each case, by stated principal balance as of the
cut-off date (the "cut-off date principal balance"). No other entity originated
over 10% of the cut-off date principal balance of the mortgage loans.
Depositor
Bear Stearns Asset Backed Securities, Inc., a Delaware corporation and a limited
purpose finance subsidiary of The Bear Stearns Companies Inc. and an affiliate
of Bear, Stearns & Co. Inc.
Seller
EMC Mortgage Corporation, a Delaware corporation and an affiliate of the
depositor and Bear, Stearns & Co. Inc., which will sell the mortgage loans to
the depositor.
Master Servicer
Wells Fargo Bank Minnesota, National Association.
S-4
Servicers
The primary servicers of the mortgage loans are EMC Mortgage Corporation, Wells
Fargo Home Mortgage, Inc. and Washington Mutual Bank, FA, which service 49.24%,
18.25% and 32.51% of the cut-off date principal balance of the mortgage loans,
respectively.
We refer you to "Servicing of the Mortgage Loans" in this prospectus supplement
for a description of the servicing of the mortgage loans.
Trustee
JPMorgan Chase Bank, a New York banking corporation.
Securities Administrator
Wells Fargo Bank Minnesota, National Association, a national banking
association.
Pooling and Servicing Agreement
The pooling and servicing agreement dated as of September 1, 2003, among the
seller, the master servicer, the depositor, the securities administrator and the
trustee, under which the trust will be formed and will issue the certificates.
Cut-Off Date
The close of business on September 1, 2003.
Closing Date
On or about September 30, 2003.
The Mortgage Loans
The aggregate principal balance of the mortgage loans as of the cut-off date is
$150,523,952.65. The mortgage loans are adjustable rate and hybrid mortgage
loans that are secured by first liens on primarily one- to four-family
residential properties. "Hybrid mortgage loans" are fixed rate mortgage loans
that will convert to adjustable rate mortgage loans after an initial stated
period of time ranging from two to ten years. We will divide the mortgage loans
into three separate groups, which we refer to as the "group I mortgage loans,"
the "group II mortgage loans" and the "group III mortgage loans," and sometimes
as "mortgage loan group I," "mortgage loan group II" or "mortgage loan group
III" or as a "mortgage loan group."
Set forth below is certain information regarding the mortgage loans and the
related mortgaged properties as of the cut-off date. This information has been
separately provided for each of the group I mortgage loans, the group II
mortgage loans, the group III mortgage loans and the total mortgage pool. The
information provided is approximate. All weighted average information provided
below reflects weighting of the mortgage loans by their stated principal
balances as of the cut-off date.
The group I mortgage loans all have (or, in the case of hybrid mortgage loans in
their fixed rate period, will, upon conversion, have) interest rates based on
various indices. The next interest adjustment date (or, in the case of hybrid
mortgage loans in their fixed rate period, initial interest adjustment date)
with respect to all of the group I mortgage loans will occur less than 24 months
following the closing date.
The group II mortgage loans all have (or, in the case of hybrid mortgage loans
in their fixed rate period, upon conversion, will have) interest rates based on
various indices. The next interest adjustment date (or, in the case of hybrid
mortgage loans in their fixed rate period, initial interest adjustment date)
will occur 24 months or more following the closing date.
S-5
The interest rates on the group III mortgage loans are all based (or, in the
case of hybrid mortgage loans in their fixed rate period will, upon conversion,
be based) on the 11th District Cost of Funds Index, which we refer to as "COFI."
None of the mortgage loans in mortgage loan group I or mortgage loan group II
are or will be based on COFI.
The stated principal balance of each mortgage loan has been calculated on the
assumption that the principal portion of all monthly payments due with respect
to each mortgage loan on or before the cut-off date has been received. None of
the mortgage loans are "simple interest loans," which accrue interest on their
outstanding principal balances on a daily basis and have principal balances
which reflect actual payments as opposed to principal owed as of a particular
date.
Approximately 13.84%, 4.05%, 59.77% and 18.79% of the group I mortgage loans,
the group II mortgage loans, the group III mortgage loans and the total mortgage
pool, respectively, in each case by cut-off date principal balance, have
negative amortization provisions which we describe under "The Mortgage
Pool--General."
Approximately $53,960,508 of the mortgage loans, by cut-off date principal
balance, are hybrid mortgage loans. For many of these mortgage loans, a period
of time has elapsed since the date of their origination. As a result, they may
no longer be in their fixed rate period, or may convert to an adjustable rate
within a shorter period of time than their initial stated fixed rate period. The
weighted average number of months until the next (or in the case of hybrid loans
in their fixed rate period, initial) interest rate adjustment date for each of
mortgage loan group I, mortgage loan group II, mortgage loan group III and the
entire mortgage pool is indicated in the table below.
Schedule A, which is attached and is a part of this prospectus supplement,
presents more detailed statistical information relating to the mortgage loans.
You should also refer to "The Mortgage Pool" in this prospectus supplement.
The following table summarizes the characteristics of the mortgage loans as of
the cut-off date:
S-6
Mortgage Loan Mortgage Loan Mortgage Loan Total
Group I Group II Group III Mortgage Pool
Number of mortgage loans........... 203 341 264 808
Total aggregate principal
balance.......................... $34,121,776 $82,592,556 $33,809,620 $150,523,953
Average principal balance.......... $168,088 $242,207 $128,067 $186,292
Range of principal balances........ $10,045 to $1,436,607 $21,679 to $1,173,047 $7,430 to $1,146,936 $7,430 to $1,436,607
Range of mortgage rates............ 3.000% to 10.950% 3.250% to 10.950% 3.646% to 7.750% 3.00% to 10.950%
Weighted average mortgage
rate............................. 5.7539% 5.4122% 5.4206% 5.4915%
Weighted average
loan-to-value ratio.............. 76.93% 71.93% 76.85% 74.17%
Range of scheduled remaining
terms to maturity................ 35 month to 131 month to 41 month to 35 month to
470 months 476 months 392 months 476 months
Weighted average scheduled
remaining term to maturity....... 317 months 354 months 259 months 324 months
Original term:
5-15 years...................... 0.26% 0.26% 0.00% 0.20%
16-30 years..................... 97.63% 89.68% 67.26% 86.45%
31-40 years..................... 2.11% 10.06% 32.74% 13.35%
Indices:
COFI............................ 0% 0% 99.44% 22.34%
1-year CMT...................... 67.22% 87.73% 0% 63.38%
6-month LIBOR................... 24.46% 5.92% 0% 8.79%
Adjustable/other................ 8.32% 6.35% 0.56% 5.50%
Type of mortgaged properties:
Single-family dwellings......... 76.45% 73.91% 81.84% 76.27%
2-4 family dwellings............ 3.52% 2.65% 8.74% 4.21%
Condominium..................... 10.26% 10.41% 5.34% 9.24%
Planned Unit Development........ 9.05% 11.71% 4.08% 9.39%
Mobile/Manufactured Housing
(treated as real estate)...... 0.53% 0.00% 0.00% 0.12%
Other........................... 0.19% 1.32% 0.00% 0.77%
Owner Occupied..................... 87.53% 92.59% 83.97% 89.50%
First liens........................ 100.00% 100.00% 100.00% 100.00%
State concentrations:
California...................... 24.07% 23.93% 65.47% 33.29%
Florida......................... 12.59% 5.90% 4.82% 7.18%
Illinois........................ 9.29% 6.31% 2.04% 6.02%
New Jersey...................... 4.88% 7.64% 2.98% 5.97%
New York........................ 5.15% 4.18% 5.77% 4.76%
Delinquencies:
31-60 days...................... 6.87% 1.61% 5.89% 3.77%
Weighted average:
gross margin.................... 3.475% 2.772% 2.535% 2.878%
periodic cap.................... 1.573% 1.979% 1.208% 1.771%
maximum mortgage rate........... 12.270% 10.612% 13.187% 11.565%
months to next adjustment....... 9.04 months 53.18 months 2.62 months 31.82 months
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S-7
Description of the Certificates
General
The trust will issue nine classes of senior and subordinated certificates and
two classes of residual certificates. Eight of those classes are being offered
pursuant to this prospectus supplement and are listed on the cover page. We
sometimes refer to these classes of certificates as the "offered certificates."
In addition to the offered certificates, the trust is issuing Class B-4, Class
B-5 and Class B-6 Certificates, which are subordinated to and provide credit
enhancement for the offered certificates. The approximate original certificate
principal balances of these classes are $2,107,400, $2,032,100 and $4,139,553,
respectively. They are not being offered pursuant to this prospectus supplement,
and we sometimes refer to them as the "other subordinated certificates."
Information provided in this prospectus supplement with respect to the other
subordinated certificates is provided only to permit you to better understand
the offered certificates.
The Class I-A, Class II-A and Class III-A Certificates represent senior
interests in the mortgage pool, and we sometimes refer to these certificates as
the "senior certificates." The Class B-1, Class B-2 and Class B-3 Certificates
each represent subordinated interests in the mortgage pool, and we sometimes
refer to these certificates as the "offered subordinated certificates." We refer
to the offered subordinated certificates and the other subordinated certificates
as the "subordinated certificates."
The Class I-A Certificates will represent interests principally in mortgage loan
group I, and we sometimes refer to them as the "group I senior certificates" or
"senior certificate group I." The Class II-A Certificates will represent
interests principally in mortgage loan group II, and we sometimes refer to them
as the "group II senior certificates" or as "senior certificate group II." The
Class III-A certificates represent interests principally in mortgage loan group
III, and we sometimes refer to them as the "group III senior certificates," or
"senior certificate group III." We sometimes refer to senior certificate group
I, senior certificate group II or senior certificate group III as a "senior
certificate group." The Class B-1, Class B-2 and Class B-3 Certificates will
represent subordinated interests in all three mortgage loan groups.
The Class R-I and Class R-II Certificates represent the residual interests in
the real estate mortgage investment conduits established by the trust. We
sometimes refer to them as "Class R Certificates" or as "residual certificates."
The last scheduled distribution date for the offered certificates is the
distribution date in June 2043.
Record Date
For the first distribution date, the closing date and for any distribution date
thereafter, the last business day of the month preceding the month in which such
distribution date occurs.
Denominations
$25,000 and multiples of $1,000 in excess thereof, except $50 for each class of
residual certificates.
Registration of Certificates
The trust will issue the offered certificates, other than the Class R
Certificates, initially in book-entry form. Persons acquiring beneficial
ownership interests in book-entry certificates may elect to hold their
beneficial interests through The Depository Trust Company, in the United States,
or Clearstream Luxembourg or Euroclear, in Europe.
S-8
We refer you to "Description of Certificates - Book-Entry Certificates" in this
prospectus supplement.
Pass-Through Rates
The pass-through rate for each class of offered certificates (other than the
residual certificates) may change from distribution date to distribution date.
On any distribution date, the pass-through rate per annum for each such class
will be equal to:
o for the Class I-A Certificates, the weighted average of the net mortgage
rates of the group I mortgage loans,
o for the Class II-A Certificates, the weighted average of the net mortgage
rates of the group II mortgage loans,
o for the Class III-A Certificates, the weighted average of the net mortgage
rates of the group III mortgage loans and
o for the Class B-1, Class B-2 and Class B-3 Certificates, the weighted average
of the net mortgage rates of the mortgage loans in each mortgage loan group,
weighted in proportion to the excess, if any, of the aggregate principal
balance of each mortgage loan group over the certificate principal balance of
the related class of senior certificates.
The other subordinated certificates will bear interest at the same pass-through
rate as that of the offered subordinated certificates.
The "net mortgage rate" of a mortgage loan is equal to the applicable interest
rate borne by the mortgage loan less the sum of the related servicing fee and
the related master servicing fee.
The initial pass-through rates for the Class I-A, Class II-A, Class III-A, Class
B-1, Class B-2 and Class B-3 Certificates are expected to be approximately
5.307%, 5.095%, 4.940%, 5.108%, 5.108% and 5.108%, respectively.
Distribution Dates
The trustee will make distributions on the certificates on the 25th day of each
calendar month beginning in October 2003 to the appropriate holders of record.
If the 25th day of a month is not a business day, then the trustee will make
distributions on the next business day after the 25th day of the month.
Interest Payments
On each distribution date holders of the offered certificates (other than the
residual certificates) will be entitled to receive:
o the interest that has accrued on the certificate principal balance of the
applicable class of certificates at the related pass-through rate during the
related accrual period,
plus
o any interest due on a prior distribution date that was not paid,
S-9
minus
o certain shortfalls in interest collections allocated to that class of
certificates.
In the case of the senior certificates, each senior certificate group will have
priority over the other senior certificate group with respect to interest
distributions in respect of its related mortgage loan group. You should review
the priority of payments described under "Description of the
Certificates--Distributions" in this prospectus supplement.
The "accrual period" for the offered certificates (except the residual
certificates) will be the calendar month, commencing September 2003, preceding
the month in which a distribution date occurs, and interest will be calculated
based on a 360-day year that consists of twelve 30-day months.
Principal Payments
On each distribution date, distributions of principal to those classes of
certificates entitled to principal distributions will be made in the priorities
and amounts described in this prospectus supplement, if there is cash available
on that date for the payment of principal to the applicable class.
For a description of the amount and priority of principal payments to each class
of offered certificates, we refer you to "Description of the
Certificates--Distributions" in this prospectus supplement. Not all classes of
offered certificates will receive principal on each distribution date.
You should be aware that, as a result of negative amortization provisions
applicable to certain of the mortgage loans, amounts of interest which are added
to the stated principal balances of those mortgage loans are also applied to
increase the certificate principal balances of the applicable certificates, as
described under "Description of the Certificates--Principal" in this prospectus
supplement.
Payment Priorities
On each distribution date, your certificates will be entitled to receive
payments of interest and principal, primarily from collections and other
recoveries on the mortgage loans (in the case of the senior certificates,
generally in the applicable mortgage loan group), in the following general order
of priority:
first, interest to the senior certificates;
second, principal to the senior certificates;
third, to the subordinated certificates, interest and then principal on each
class, in the order of their numerical class designations; and
fourth, in the unlikely event of any remaining amounts, to the residual
certificates.
On the first distribution date, each class of residual certificates will receive
$50 from a separate deposit made by the seller on the closing date.
Credit Enhancement
Credit enhancement provides limited protection to holders of specified
certificates against shortfalls in payments received on the mortgage loans. This
transaction employs the following forms of credit enhancement.
Subordination. By issuing senior certificates and subordinated certificates, the
trust has increased the likelihood that senior certificateholders will receive
regular payments of interest and principal.
S-10
The senior certificates will have payment priority over the subordinated
certificates.
Among the classes of offered subordinated certificates:
o the Class B-1 Certificates will have payment priority over the Class B-2
Certificates, the Class B-3 Certificates and the other subordinated
certificates,
o the Class B-2 Certificates will have payment priority over the Class B-3
Certificates and the other subordinated certificates and
o the Class B-3 Certificates will have priority over the other subordinated
certificates.
Allocation of Losses. We provide the holders of certificates having a higher
payment priority with protection against losses realized when the unpaid
principal balance on a mortgage loan exceeds the proceeds recovered on
liquidation of that mortgage loan. In general, we accomplish this loss
protection by allocating any realized losses first, among the subordinated
certificates in inverse order of payment priority, beginning with the Class B-6
Certificates, in each case until the certificate principal balance of that
subordinated class has been reduced to zero. After the certificate principal
balances of all classes of subordinated certificates have been reduced to zero,
we allocate realized losses in respect of mortgage loan group I, mortgage loan
group II and mortgage loan group III to the Class I-A, Class II-A and Class
III-A Certificates, respectively. In each case, we allocate a realized loss to a
class of certificates by reducing its certificate principal balance.
Initial Credit Enhancement. As of the closing date:
o the aggregate certificate principal balance of the Class B-1, Class B-2,
Class B-3, Class B-4, Class B-5 and Class B-6 Certificates, which provide
credit enhancement for the senior certificates, will equal approximately
13.50% of the aggregate certificate principal balance of all classes of
certificates and
o the aggregate certificate principal balance of the other subordinated
certificates, which also provide credit enhancement for the offered
subordinated certificates, will equal approximately 5.50% of the aggregate
certificate principal balance of all classes of certificates.
Related Provisions
This transaction structure contains certain features designed to increase the
credit enhancement provided to the senior certificates by subordination of the
subordinated certificates.
Principal Prepayment Lock-out Period. To extend the period during which the
subordinated certificates remain available as credit enhancement to the senior
certificates, the issuer will allocate the entire amount of any prepayments and
certain other unscheduled recoveries of principal with respect to the mortgage
loans in the related mortgage loan group to the related senior certificate group
to the extent described in this prospectus supplement on each distribution date
through and including the distribution date in September 2008 (with that
allocation to be subject to further reduction over an additional four year
period thereafter subject to satisfaction of certain loss and delinquency tests
as described in this prospectus supplement), unless the amount of subordination
provided to the related group of senior certificates is twice the amount as of
the cut-off date, and certain loss and delinquency tests are satisfied.
S-11
This will accelerate the amortization of each class of senior certificates as a
whole and, in the absence of losses in respect of the mortgage loans in the
related mortgage loan group, increase the percentage interest in the principal
balance of the mortgage loans in each mortgage loan group evidenced by the
subordinated certificates.
Additional information about these matters appears under the captions
"Description of the Certificates--Distributions," "--Allocation of Realized
Losses" and "--Subordination" in this prospectus supplement.
Crosscollateralization. In certain limited circumstances, a class of senior
certificates may receive cashflow from unrelated mortgage loan groups that would
otherwise have been paid to the subordinated certificates, as described under
"Description of the Certificates--Distributions--Cross-collateralization" in
this prospectus supplement.
Advances
Each servicer will make cash advances with respect to delinquent payments of
scheduled interest and principal (other than principal on any simple interest
loans) on the mortgage loans for which it acts as servicer, in general to the
extent that such servicer reasonably believes that such cash advances can be
repaid from future payments on the related mortgage loans. If the servicer fails
to make any required advances, the master servicer in general may be obligated
to do so, as described in this prospectus supplement. These cash advances are
only intended to maintain a regular flow of scheduled interest and principal
payments on the certificates and are not intended to guarantee or insure against
losses.
We refer you to "Servicing of the Mortgage Loans" in this prospectus supplement.
Optional Termination
EMC Mortgage Corporation may purchase all of the remaining assets in the trust
fund on any distribution date that the principal balance of the mortgage loans
and any foreclosed real estate owned by the trust fund has declined to or below
10% of the principal balance of the mortgage loans as of the cut-off date. We
refer to this distribution date as the "optional termination date." Such a
purchase will result in the early retirement of all the certificates.
Federal Income Tax Consequences
For federal income tax purposes, the trust will comprise multiple real estate
mortgage investment conduits, organized in a tiered REMIC structure. The offered
certificates (other than the Class R Certificates) will represent beneficial
ownership of "regular interests" in the related REMIC identified in the pooling
and servicing agreement.
Each class of residual certificates will represent the beneficial ownership of
the sole class of "residual interest" in a REMIC. Certain classes of offered
certificates may be issued with original issue discount for federal income tax
purposes.
We refer you to "Federal Income Tax Consequences" in this prospectus supplement
and "Material Federal Income Tax Considerations" in the prospectus for
additional information concerning the application of federal income tax laws.
S-12
Legal Investment
The senior certificates and the Class B-1 Certificates will be "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984, so long as they are rated in one of the two highest rating categories by
at least one nationally recognized statistical rating organization. The Class
B-2 and Class B-3 Certificates will not be "mortgage related securities."
We refer you to "Legal Investment Considerations" in the prospectus.
ERISA Considerations
The certificates may only be purchased by an employee benefit plan or other
retirement arrangement subject to the Employee Retirement Income Security Act of
1974 or Section 4975 of the Internal Revenue Code of 1986 ("Plan") if one of a
number of prohibited transaction class exemptions, based on the identity of the
fiduciary of such plan or arrangement or the source of funds used to acquire the
certificates, are applicable to the acquisition and holding of such
certificates.
We refer you to "ERISA Considerations" in this prospectus supplement and in the
prospectus.
Ratings
The classes of certificates listed below will not be offered unless they receive
the respective ratings set forth below from Moody's Investors Service, Inc.,
which we refer to as "Moody's," Standard & Poor's, a division of The McGraw-Hill
Companies, Inc., which we refer to as "Standard & Poor's" and Fitch, Inc., which
we refer to as "Fitch Ratings."
Rating
-------------------------------------
Standard & Fitch
Class Moody's Poor's Ratings
- --------- ------------ ------------ -----------
I-A Aaa AAA AAA
II-A Aaa AAA AAA
III-A Aaa AAA AAA
B-1 Aa2 AA AA
B-2 A2 A A
B-3 Baa2 BBB BBB
R-I -- AAA AAA
R-II -- AAA AAA
A rating is not a recommendation to buy, sell or hold securities and either
rating agency can revise or withdraw such ratings at any time. In general,
ratings address credit risk and do not address the likelihood of prepayments.
S-13
RISK FACTORS
In addition to the matters described elsewhere in this prospectus supplement and
the prospectus, you should carefully consider the following risk factors before
deciding to purchase a certificate.
Available credit enhancement may not
be sufficient to ensure payment in
full of your certificates The subordination, loss allocation and
limited cross-collateralization features
described in this prospectus supplement
are intended to enhance the likelihood
that holders of more senior classes of
certificates will receive regular
payments of interest and principal, but
are limited in nature and may be
insufficient to cover all losses on the
mortgage loans.
The amount of any realized loss
experienced on a mortgage loan in any
mortgage loan group will be applied to
reduce the certificate principal balances
of the certificates in inverse order of
seniority, beginning with the Class B-6
Certificates, until the certificate
principal balance of each such class has
been reduced to zero. If subordination is
insufficient to absorb realized losses,
then certificateholders of more senior
classes will incur losses and may never
receive all of their principal payments.
You should consider the following:
o if you buy a Class B-3 Certificate and
realized losses on the mortgage loans
exceed the total certificate principal
balance of the Class B-4, Class B-5
and Class B-6 Certificates, the
certificate principal balance of your
certificates will be reduced
proportionately with the certificate
principal balance of the other Class
B-3 Certificates by the amount of that
excess;
o if you buy a Class B-2 Certificate and
realized losses on the mortgage loans
exceed the total certificate principal
balance of the Class B-3, Class B-4,
Class B-5 and Class B-6 Certificates,
the certificate principal balance of
your certificates will be reduced
proportionately with the certificate
principal balance of the other Class
B-2 Certificates by the amount of that
excess;
o if you buy a Class B-1 Certificate and
realized losses on mortgage loans
exceed the total certificate principal
balance of the Class B-2, Class B-3,
Class B-4, Class B-5 and Class B-6
Certificates, the certificate
principal balance of your certificates
will be reduced proportionately with
the certificate principal balance of
the other Class B-1 Certificates by
the amount of that excess; and
S-14
o after the total certificate principal
balance of the subordinated
certificates has been reduced to zero,
realized losses on the group I, group
II or group III mortgage loans will
reduce the certificate principal
balance of the Class I-A, Class II-A
or Class III-A Certificates,
respectively.
In addition, higher than expected losses
on one group of mortgage loans will
decrease the amount of credit support
provided by the subordinated certificates
to the senior certificates with respect
to all other groups of mortgage loans.
We refer you to "Description of the
Certificates--Distributions" and
"--Allocation of Realized Losses" in this
prospectus supplement for additional
information.
Additional risks associated with the
subordinated certificates The weighted average lives of, and the
yields to maturity on, the Class B-1
Certificates, the Class B-2 Certificates
and the Class B-3 Certificates will be
progressively more sensitive, in that
order, to the rate and timing of
mortgagor defaults and the severity of
ensuing losses on the mortgage loans. If
the actual rate and severity of losses on
the mortgage loans is higher than those
assumed by an investor in its
certificates, the actual yield to
maturity of such certificates may be
lower than the yield anticipated by such
investor based on such assumption.
The timing of losses on the mortgage
loans will also affect an investor's
actual yield to maturity, even if the
rate of defaults and severity of losses
over the life of the mortgage loans are
consistent with an investor's
expectations. In general, the earlier a
loss occurs, the greater the effect on an
investor's yield to maturity.
Realized losses on the mortgage loans, to
the extent they exceed the aggregate
certificate principal balance of the
other subordinated certificates, will
reduce the certificate principal balances
of the Class B-3 Certificates, the Class
B-2 Certificates and the Class B-1
Certificates, in that order. As a result
of such reductions, less interest will
accrue on that class of certificates than
would otherwise be the case. Once a
realized loss is allocated to a
subordinated certificate, no interest
will be distributable with respect to
such written down amount.
S-15
Unless the certificate principal balances
of the senior certificates have been
reduced to zero, the subordinated
certificates will not be entitled to any
unscheduled principal distributions on
the mortgage loans until at least October
2008, unless the amount of subordination
provided to the related group of senior
certificates has doubled since the
cut-off date and certain loss and
delinquency tests are satisfied. As a
result, the weighted average lives of the
subordinated certificates will be longer
than would otherwise be the case if
unscheduled distributions of principal on
the mortgage loans were allocated among
all of the certificates at the same time.
As a result of the longer weighted
average lives of the subordinated
certificates, the holders of such
certificates have a greater risk of
suffering a loss on their investments.
Because distributions of principal will
be made to the holders of the
subordinated certificates according to
the priorities described in this
prospectus supplement, the yield to
maturity on such classes of certificates
will be sensitive to the rates of
prepayment on the mortgage loans
experienced both before and after the
commencement of unscheduled principal
distributions on such classes. The yield
to maturity on the subordinated
certificates will be extremely sensitive
to losses due to defaults on the mortgage
loans once the other subordinated
certificates are no longer outstanding.
Furthermore, the timing of receipt of
principal and interest by the
subordinated certificates may be
adversely affected by losses even if such
classes of certificates do not ultimately
bear such loss.
Changes in the applicable indices
for the mortgage loans may reduce
the yields on your certificates As described in this prospectus
supplement, the certificates will accrue
interest at rates based on the weighted
average of the interest rates on the
mortgage loans in the related mortgage
loan group or groups less certain fees
payable by the trust. Except with respect
to hybrid loans during their respective
fixed rate periods, the interest rates on
the mortgage loans will be calculated on
the basis of the related index plus the
applicable margin, as described in this
prospectus supplement. As a result,
declines in the indices on which the
interest rates on the mortgage loans in
any mortgage loan group are based will
result, over time, in lower yields on the
related classes of certificates. In
addition, increases in the indices on
which the interest rates on the mortgage
loans in any mortgage loan group are
based may result in prepayments on the
related mortgage loans and payments of
principal on the related classes of
certificates then entitled to receive
principal prepayments. Furthermore,
prepayments on mortgage loans in any
mortgage loan group with higher interest
rates will reduce the weighted average of
the interest rates of the mortgage loans
in that mortgage loan group and,
consequently, reduce the interest rate of
the related classes of certificates.
S-16
Negative amortization provisions 13.84%, 4.05%, 59.77% and 18.79% of the
group I mortgage loans, the group II
mortgage loans, the group III mortgage
loans and the total mortgage pool,
respectively, in each case by cut-off
date principal balance, have negative
amortization features. Because the rate
at which interest accrues changes more
frequently than payment adjustments, and
because that adjustment of monthly
payments may be subject to certain
limitations, the amount of interest
accruing on the remaining principal
balance of such a mortgage loan at the
applicable mortgage rate may exceed the
amount of the monthly payment. Negative
amortization occurs if the resulting
excess is added to the unpaid principal
balance of the mortgage loan. For certain
mortgage loans with a negative
amortization feature, the monthly payment
is increased in order to amortize the
mortgage loan fully by the end of its
original term. Other such mortgage loans
limit the amount by which the monthly
payment can be increased, which results
in a larger monthly payment at maturity.
The ability of the mortgagor to make that
payment may depend on its ability to
obtain refinancing of the balance due on
the mortgage loan or to sell the related
mortgaged property. Certain of these
mortgagors may have negative payment
histories that would affect their ability
to refinance. As a result, mortgage loans
with negative amortization provisions
could experience higher default rates
relative to other mortgage loans.
S-17
Certain mortgage loans were
underwritten to non-conforming
underwriting standards, which may
result in losses or shortfalls to be
incurred on the offered certificates Certain mortgage loans were underwritten
generally in accordance with underwriting
standards which are primarily intended to
provide for single family
"non-conforming" mortgage loans. A
"non-conforming" mortgage loan means a
mortgage loan which is ineligible for
purchase by Fannie Mae or Freddie Mac due
to either credit characteristics of the
related mortgagor or documentation
standards in connection with the
underwriting of the related mortgage loan
that do not meet the Fannie Mae or
Freddie Mac underwriting guidelines for
"A" credit mortgagors. These credit
characteristics include mortgagors whose
creditworthiness and repayment ability do
not satisfy such Fannie Mae or Freddie
Mac underwriting guidelines and
mortgagors who may have a record of
credit write-offs, outstanding judgments,
prior bankruptcies and other credit items
that do not satisfy such Fannie Mae or
Freddie Mac underwriting guidelines.
These documentation standards may include
mortgagors who provide limited or no
documentation in connection with the
underwriting of the related mortgage
loan. Accordingly, mortgage loans
underwritten under such non-conforming
credit underwriting standards are likely
to experience rates of delinquency,
foreclosure and loss that are higher, and
may be substantially higher, than
mortgage loans originated in accordance
with Fannie Mae or Freddie Mac
underwriting guidelines. Any resulting
losses, to the extent not covered by
credit enhancement, may affect the yield
to maturity of the offered certificates.
Defaults could cause payment
delays and losses There could be substantial delays in the
liquidation of defaulted mortgage loans
and corresponding delays in your
receiving your portion of the proceeds of
liquidation. These delays could last up
to several years. Furthermore, an action
to obtain a deficiency judgment is
regulated by statutes and rules, and the
amount of a deficiency judgment may be
limited by law. In the event of a default
by a mortgagor, these restrictions may
impede the ability of the related
servicer to foreclose on or to sell the
mortgaged property or to obtain a
deficiency judgment. In addition,
liquidation expenses such as legal and
appraisal fees, real estate taxes and
maintenance and preservation expenses,
will reduce the amount of security for
the mortgage loans and, in turn, reduce
the proceeds payable to
certificateholders.
In the event that:
o the mortgaged properties fail to
provide adequate security for the
related mortgage loans, and
S-18
o the protection provided by
the subordination of certain
classes are insufficient to
cover any shortfall, you
could lose all or a portion
of the money you paid for
your certificates.
Your yield could be adversely
affected by the unpredictability of
prepayments on the mortgage loans No one can accurately predict the level
of prepayments that the trust will
experience. The trust's prepayment
experience may be affected by many
factors, including:
o general economic conditions,
o the level of prevailing interest
rates,
o the availability of alternative
financing and
o homeowner mobility.
A majority of the mortgage loans contain
due-on-sale provisions, and the related
servicers intend to enforce those
provisions unless doing so is not
permitted by applicable law or the
related servicer, in a manner consistent
with reasonable commercial practice,
permits the purchaser of the mortgaged
property in question to assume the
related mortgage loan. In addition,
certain of the mortgage loans impose a
prepayment charge in connection with
voluntary prepayments made within up to
five years after origination, which
charges may, if not waived by a servicer,
discourage prepayments during the
applicable period. However, mortgage
loans still subject to such a prepayment
charge constitute approximately 8.93%,
10.73%, 2.08% and 8.38% of the group I
mortgage loans, the group II mortgage
loans, the group III mortgage loans and
all the mortgage loans, respectively, in
each case by aggregate principal balance
as of the cut-off date.
The weighted average lives of the
certificates will be sensitive to the
rate and timing of principal payments,
including prepayments, on the mortgage
loans in one or all mortgage loan groups,
which may fluctuate significantly from
time to time.
S-19
You should note that:
o if you purchase your
certificates at a discount and
principal is repaid on the
related mortgage loans slower
than you anticipate, then your
yield may be lower than you
anticipate;
o if you purchase your
certificates at a premium and
principal is repaid on the
related mortgage loans faster
than you anticipate, then your
yield may be lower than you
anticipate;
o if you purchase a senior
certificate, the weighted
average life and yield to
maturity of your certificate
will depend primarily on the
performance of the mortgage
loans in the related mortgage
loan group;
o since repurchases of mortgage
loans as a result of breaches of
representations and warranties
and liquidations of mortgage
loans following default have the
same effect as prepayments, your
yield may be lower than you
expect if the rate of such
repurchases and liquidations is
higher than you expect; and
o you bear the reinvestment risks
resulting from a faster or
slower rate of principal
payments than you expect.
We refer you to "The Mortgage Pool,"
"Yield, Prepayment and Maturity
Considerations," and "Description of the
Certificates--Optional Termination" in
this prospectus supplement and "Material
Legal Aspects of the Loans -- Due-on-Sale
Clauses in Mortgage Loans" in the
prospectus for a description of certain
provisions of the mortgage loans that may
affect the prepayment experience on the
mortgage loans.
S-20
Mortgage loan modifications may
extend the weighted average life and
affect the yield to maturity of your
certificates Modifications of mortgage loans agreed to
by the related servicer in order to
maximize ultimate proceeds of such
mortgage loans may extend the period over
which principal is received on your
certificates, resulting in a longer
weighted average life. If such
modifications downwardly adjust interest
rates, such modifications may lower the
pass-through rate on your certificates,
resulting in a lower yield to maturity.
Violations of consumer protection
laws may result in losses Certain of the mortgage loans may be
subject to special rules, disclosure
requirements and other provisions that
were added to the federal
Truth-in-Lending Act by the Home
Ownership and Equity Protection Act of
1994, or Home Ownership Act, if such
mortgage loans
o were originated on or after
October 1, 1995
o are not mortgage loans made to finance
the purchase of the mortgaged
property and
o have interest rates or origination
costs in excess of certain
prescribed levels.
We refer to these mortgage loans as high
cost loans.
The Home Ownership Act provides that any
purchaser or assignee of a high cost
loan, which could include the trust, is
subject to all of the claims and defenses
which the mortgagor could assert against
the original lender. The maximum damages
that may be recovered under the Home
Ownership Act from an assignee is the
remaining amount of indebtedness plus the
total amount paid by the mortgagor in
connection with the high cost loan.
Remedies available to the mortgagor
include monetary penalties, as well as
rescission rights if the appropriate
disclosures were not given as required.
S-21
In addition to the Home Ownership Act, a
number of legislative proposals have been
introduced at federal, state and local
levels that are designed to discourage
predatory lending practices. Some states
and local governments, including Georgia,
North Carolina, New York and The City of
New York, have enacted, and other states
or local governments may enact, laws that
impose requirements and restrictions that
may be greater than those in the Home
Ownership Act. These laws prohibit
inclusion of some provisions in mortgage
loans that have interest rates or
origination costs in excess of prescribed
levels, and require that mortgagors be
given certain disclosures before
borrowing. Purchasers or assignees of a
mortgage loan, which, as under the Home
Ownership Act, could include the trust,
could be exposed to all claims and
defenses that the mortgagor could assert
against the originator of the mortgage
loan for a violation of state law. Claims
and defenses available to the mortgagor
could include monetary penalties,
rescission and defenses to a foreclosure
action or an action to collect.
The seller believes that none of the
mortgage loans in any mortgage loan group
are high cost loans. If, however, any
mortgage loan is determined to be a high
cost loan, the seller's representations
and warranties would be breached and, if
that mortgage loan violates the Home
Ownership Act or applicable state or
local law, the seller would be obligated
to cure or repurchase (or in certain
instances substitute for) the mortgage
loan in question. The applicable
repurchase price would include any costs
or damages incurred by the trust as a
result of a breach by the seller of its
representation and warranty. This could
accelerate the timing of principal
distributions with respect to the
mortgage loans and may thereby affect the
yields and weighted average lives of the
certificates. If the seller fails to
cure, repurchase or substitute for the
applicable mortgage loan, the related
certificateholders may suffer a loss.
Lawsuits have been brought in various
states making claims against assignees of
high cost loans for violations of federal
and state law allegedly committed by the
originator. Named defendants in these
cases include numerous participants in
the secondary mortgage market, including
some securitization trusts. The suits,
which allege violations of federal and
state consumer protection laws and state
usury and licensing laws, seek damages,
rescission and other relief. Although no
trust sponsored by EMC Mortgage
Corporation or the depositor has been
named in such a class action lawsuit,
there can be no assurance that this will
continue to be the case. If the trust or
the trustee on behalf of the trust were
to be named as a defendant in a class
action lawsuit, the costs of defending or
settling that lawsuit or a judgment could
reduce the amount available for
distribution to certificateholders.
S-22
The mortgage loans are also subject to
other federal and state laws. We refer
you to "Material Legal Aspects of Loans"
in the prospectus for a discussion of
certain of those laws.
A reduction in certificate rating
could have an adverse effect on the
value of your certificates The ratings of each class of offered
certificates will depend primarily on an
assessment by the rating agencies of the
related mortgage loans and the
subordination afforded by certain classes
of certificates. The ratings by each of
the rating agencies of the offered
certificates are not recommendations to
purchase, hold or sell the offered
certificates because such ratings do not
address the market prices of the
certificates or suitability for a
particular investor.
The rating agencies may suspend, reduce
or withdraw the ratings on the offered
certificates at any time. Any reduction
in, or suspension or withdrawal of, the
rating assigned to a class of offered
certificates would probably reduce the
market value of such class of offered
certificates and may affect your ability
to sell them.
Your distributions could be
adversely affected by the bankruptcy
or insolvency of certain parties The seller will treat its transfer of the
mortgage loans to the depositor as a sale
of the mortgage loans. However, if the
seller becomes bankrupt, the trustee in
bankruptcy may argue that the mortgage
loans were not sold but were only pledged
to secure a loan to the seller. If that
argument is made, you could experience
delays or reductions in payments on the
certificates. If that argument is
successful, the bankruptcy trustee could
elect to sell the mortgage loans and pay
down the certificates early. Thus, you
could lose the right to future payments
of interest, and might suffer
reinvestment loss in a lower interest
rate environment.
In addition, if a servicer or the master
servicer becomes bankrupt, a bankruptcy
trustee or receiver may have the power to
prevent the appointment of a successor
servicer or successor master servicer.
Any related delays in servicing could
result in increased delinquencies or
losses on the mortgage loans.
S-23
Developments in specified states
could have a disproportionate effect
on the mortgage loans due to
geographic concentration of
mortgaged properties Approximately 24.07%, 12.59%, 9.29% and
5.15% of the group I mortgage loans by
cut-off date principal balance are
secured by mortgaged properties located
in the states of California, Florida,
Illinois and New York, respectively.
Approximately 23.93%, 7.64%, 6.76%, 6.31%
and 5.90% of the group II mortgage loans
by cut-off date principal balance are
secured by mortgaged properties located
in the states of California, New Jersey,
Colorado, Illinois and Florida,
respectively. Approximately 65.47% and
5.77% of the group III mortgage loans by
cut-off date principal balance are
secured by mortgaged properties located
in the states of California and New York,
respectively. Approximately 33.29%,
7.18%, 6.02% and 5.97% of the mortgage
pool by cut-off date principal balance
are secured by mortgaged properties
located in the states of California,
Florida, Illinois and New Jersey,
respectively. Property in certain of
those states, including California and
Florida, or in other states may be more
susceptible than homes located in other
parts of the country to certain types of
uninsurable hazards, such as earthquakes,
floods, mudslides, hurricanes and other
natural disasters. We are unable at this
time to describe the effect, if any, of
the recent hurricane Isabel on properties
securing mortgage loans located along the
eastern seaboard of the United States and
particularly in Virginia and North
Carolina. No other state constituted more
than 5% of the mortgage loans by stated
principal balances as of the cut-off
date. In addition:
o economic conditions in the
specified states, which may
or may not affect real
property values, may affect
the ability of mortgagors to
repay their loans on time;
o declines in the residential real
estate market in the specified
states may reduce the values of
properties located in those
states, which would result in an
increase in the loan-to-value
ratios; and
o any increase in the market value
of properties located in the
specified states would reduce
the loan-to-value ratios and
could, therefore, make
alternative sources of financing
available to the mortgagors at
lower interest rates, which could
result in an increased rate of
prepayment of the mortgage loans.
S-24
The return on your certificates may
be affected by revised servicing
procedures adopted in response to
terrorist attacks In response to the terrorist attacks on
September 11, 2001 in New York City and
Arlington, Virginia, EMC Mortgage
Corporation and certain other servicers
announced that they will implement
revised servicing procedures for
mortgagors who have been personally or
financially affected by such attacks.
Certain government agencies, government
sponsored entities and private financial
institutions have implemented similar
procedures.
Such revised servicing procedures
generally include:
o increased use of repayment plans
that will seek to cure
delinquencies without imposing
undue hardship on the affected
mortgagor;
o extending due dates for payments;
o waiving or reducing late payment
fees or similar fees;
o waiving deficiency balances for
victims of the terrorist attacks; and
o suspending the submission of
reports to credit bureaus for
affected mortgagors that have
delinquent mortgage loans.
We can make no prediction whether
mortgagors under the mortgage loans will
be affected by any future terrorist
attacks. However, as a result of the
terrorist attacks and such revised
servicing procedures, the rate of
delinquencies and losses on mortgage
loans made to affected mortgagors may be
larger than would otherwise be the case.
S-25
The return on your certificates
could be reduced by shortfalls due
to the Soldiers' and Sailors' Civil
Relief Act or similar state laws The Soldiers' and Sailors' Civil Relief
Act of 1940, or Relief Act, provides
relief to mortgagors who enter active
military service and to mortgagors in
reserve status who are called to active
duty after the origination of their
mortgage loans. The response of the
United States to the terrorist attacks on
September 11, 2001 has included rescue
efforts and military action that have
increased the number of citizens who are
in active military service, including
persons in reserve status called to
active duty. The Relief Act provides,
generally, that a mortgagor who is
covered by the Relief Act may not be
charged interest on the related mortgage
loan in excess of 6% per annum during the
period of the mortgagor's active duty.
These shortfalls are not required to be
paid by the mortgagor at any future time.
Neither the master servicer nor the
servicers are required to advance these
shortfalls as delinquent payments, and
such shortfalls are not covered by any
form of credit enhancement on the
certificates. Interest shortfalls on the
mortgage loans due to the application of
the Relief Act or similar legislation or
regulations will be applied to reduce
accrued interest owed on each class of
the certificates on a pro rata basis.
The Relief Act also limits the ability of
the servicers to foreclose on the
property securing a mortgage loan during
the related mortgagor's period of active
duty and, in some cases, may require the
servicer to extend the maturity of the
mortgage loan, lower the monthly payments
and readjust the payment schedule for a
period of time after the completion of
the mortgagor's military service. As a
result, there may be delays in payment
and increased losses on the mortgage
loans. Those delays and increased losses
will be borne first by the subordinated
certificates in inverse order of
seniority, and then by the senior
certificates in respect of its related
mortgage loan group.
Certain states have enacted or may enact
their own versions of the Relief Act,
which provide or may provide for similar
or more enhanced protection provisions
than those set forth in the Relief Act.
The Relief Act may not preempt those
state laws.
Neither the master servicer nor the
servicers are required to advance
shortfalls resulting from application of
the Relief Act or similar state laws as
delinquent payments, and these shortfalls
are not covered by any form of credit
enhancement on the certificates.
S-26
Interest shortfalls on the mortgage loans
due to the application of the Relief Act
or similar state laws, in the case of the
senior certificates, with respect to the
related mortgage loan group, will be
applied to reduce accrued interest owed
on each class of the certificates on a
pro rata basis.
We do not know how many mortgage loans
have been or may be affected by the
application of the Relief Act or similar
state laws.
You may have difficulty selling your
certificates The underwriter intends to make a
secondary market in the offered
certificates, but the underwriter has no
obligation to do so. We cannot assure you
that a secondary market will develop or,
if it develops, that it will continue.
Consequently, you may not be able to sell
your certificates readily or at prices
that will enable you to realize your
desired yield. The market values of the
certificates are likely to fluctuate, and
such fluctuations may be significant and
could result in significant losses to
you.
The secondary markets for asset backed
securities have experienced periods of
illiquidity and can be expected to do so
in the future. Illiquidity can have a
severely adverse effect on the prices of
certificates that are especially
sensitive to prepayment, credit or
interest rate risk, or that have been
structured to meet the investment
requirements of limited categories of
investors.
S-27
THE MORTGAGE POOL
General
We have provided below and in Schedule A to this prospectus supplement
information with respect to the mortgage loans that we expect to include in the
pool of mortgage loans in the trust fund. Prior to the closing date of September
30, 2003, we may remove mortgage loans from the mortgage pool and we may
substitute other mortgage loans for the mortgage loans we remove. The depositor
believes that the information set forth herein with respect to the mortgage pool
as presently constituted is representative of the characteristics of the
mortgage pool as it will be constituted at the closing date, although certain
characteristics of the mortgage loans in the mortgage pool may vary. Unless we
have otherwise indicated, the information we present below and in Schedule A is
expressed as of the cut-off date of September 1, 2003.
The mortgage loans in the trust fund (the "mortgage pool") are
adjustable rate and hybrid mortgage loans secured by first liens on the related
mortgaged properties. The cut-off date pool principal balance is $150,523,953,
and consists of 808 mortgage loans. All of the mortgage loans included in the
trust fund provide for the amortization of the amount financed over a series of
monthly payments and provide for payments due as of a specified due date in each
month. These due dates occur throughout the month.
The issuer has divided the mortgage loans into three mortgage loan
groups. The mortgage loans have been allocated among the mortgage loan groups
based on the following characteristics:
o group I mortgage loans: adjustable or hybrid mortgage loans based on
various indices (other than COFI), whose next interest rate
adjustment date or, in the case of the hybrid mortgage loans in
their fixed rate period, initial interest adjustment date, will
occur within 24 months following the closing date;
o group II mortgage loans: adjustable or hybrid mortgage loans based
on various indices (other than COFI) whose next interest rate
adjustment date or, in the case of the hybrid mortgage loans in
their fixed rate period, initial interest adjustment date, will
occur 24 or more months following the closing date;
o group III mortgage loans: adjustable or hybrid mortgage loans
bearing interest (in the case of the hybrid mortgage loans in their
fixed rate period, upon conversion to an adjustable rate) based on
COFI.
Scheduled monthly payments made by the mortgagors on the mortgage loans
either earlier or later than the scheduled due dates thereof will not affect the
amortization schedule or the relative application of such payments to principal
and interest. The mortgage notes generally provide for a grace period for
monthly payments. Any mortgage loan may be prepaid in full or in part at any
time, in some cases upon the payment of a prepayment charge during an initial
period. Such prepayment charges, if not waived by a servicer, would typically
discourage prepayments during the applicable period although not more than
8.93%, 10.73%, 2.08% and 8.38% of the group I mortgage loans, the group II
mortgage loans, the group III mortgage loans and all of the mortgage loans,
respectively, in each case by cut-off date principal balance, still provide for
the payment by the mortgagor of a prepayment charge on voluntary prepayments
typically made up to the first five years from the date of execution of the
related mortgage note.
S-28
13.84%, 4.05%, 59.77% and 18.79% of the group I mortgage loans, the
group II mortgage loans, the group III mortgage loans and all of the mortgage
loans, respectively, in each case by cut-off date principal balance, have
negative amortization provisions. We refer to these mortgage loans as "negative
amortization loans." For negative amortization loans, the interest accruing at
the related mortgage rate currently exceeds the amount of interest actually paid
by the related mortgagors under the corresponding mortgage notes. The resulting
deficiency is referred to as "negative amortization." This situation occurs
because the rate at which interest on such mortgage loan accrues changes more
frequently than payment adjustments or because adjustments of monthly payments
may be subject to certain limitations on the amount such monthly payments may be
increased or decreased. Any such deficiency is added to the stated principal
balance of the related mortgage loan in the month during which any negative
amortization occurs.
Loan-to-Value Ratio. The loan-to-value ratio of a mortgage loan is
equal to
o the principal balance of such mortgage loan at the date of
origination, divided by
o the collateral value of the related mortgaged property.
The "collateral value" of a mortgaged property is the appraised value
based on an appraisal made by an independent fee appraiser at the time of the
origination of the related mortgage loan.
With respect to a mortgage loan the proceeds of which were used to
refinance an existing mortgage loan, the collateral value is the appraised value
of the mortgaged property based upon the appraisal obtained at the time of
refinancing. No assurance can be given that the values of the mortgaged
properties have remained or will remain at their levels as of the dates of
origination of the related mortgage loans.
Credit Life Insurance. Under certain circumstances, part of the
proceeds of a mortgage loan are used to finance certain life insurance policies
which we refer to as credit life insurance. The credit life insurance policies
provide that, upon the death of the related mortgagor, an amount generally
sufficient to fully repay the related mortgage loan shall be payable by the
insurer. Credit life insurance premiums are financed by adding the total premium
payments payable under the policy to the principal balance of the related
mortgage loan. In the event of a claim under the credit life insurance policy,
the insurer would pay applicable proceeds to the related servicer. Credit life
insurance policies have been challenged by mortgagors as being unlawfully
predatory. However, none of the mortgage loans in the mortgage pool have been
used to finance credit.
S-29
Credit scores. Many lenders obtain credit scores in connection with
mortgage loan applications to help them assess a mortgagor's creditworthiness.
They obtain credit scores from credit reports provided by various credit
reporting organizations, each of which may employ differing computer models and
methodologies. The credit score is designed to assess a mortgagor's credit
history at a single point, using objective information currently on file for the
mortgagor at a particular credit reporting organization. Information utilized to
create a credit score may include, among other things, payment history,
delinquencies on accounts, level of outstanding indebtedness, length of credit
history, types of credit, and bankruptcy experience. Credit scores range from
approximately 429 to approximately 821, 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 mortgagor represents to a lender, that is, a mortgagor
with a higher score is statistically expected to be less likely to default in
payment than a mortgagor with a lower score. In addition, it should be noted
that credit scores were developed to indicate a level of default probability
over a two-year period, which does not correspond to the life of a mortgage
loan. Furthermore, credit scores were not developed specifically for use in
connection with mortgage loans, but for consumer loans in general, and assess
only the mortgagor's past credit history. Therefore, a credit score does not
take into consideration the differences between mortgage loans and consumer
loans generally or the specific characteristics of the related mortgage loan
including, for example, the loan-to-value ratio, the collateral for the mortgage
loan, or the debt to income ratio. We cannot assure you that the credit scores
of the mortgagors will be an accurate predictor of the likelihood of repayment
of the related mortgage loans.
The mortgage loans are evidenced by a note bearing interest at a
mortgage rate which is (or, if a hybrid mortgage loan in its fixed rate period,
following conversion will be) adjusted generally monthly, semiannually, annually
or less frequently to equal an index plus (or minus) a fixed percentage set
forth in or computed in accordance with the related mortgage note, the sum of
which is generally as specified in the related mortgage note, subject, however,
to certain limitations described below. The value of the index on which each
adjustment is based (as specified in the related mortgage note) generally
corresponds to that available on the date on which such adjustment is made,
which we refer to as an "interest adjustment date", or on a prior date. If the
applicable index described therein becomes unavailable, generally an alternative
index based on comparable information will become the index.
Adjustments of the applicable mortgage rate are subject to rounding, to
a maximum mortgage rate, to a minimum mortgage rate and to maximum limitations
applicable to increases or decreases of the mortgage rate on an interest
adjustment date, all as set forth in the related mortgage note. Some of the
mortgage loans are assumable upon sale or transfer of the related mortgaged
property.
Indices
Approximately 24.46%, 5.92% and 8.79% of the group I mortgage loans,
the group II mortgage loans, and all of the mortgage loans, respectively, in
each case by cut-off date principal balance, and none of the group III mortgage
loans, bear interest (or, if a hybrid mortgage loan in its fixed rate period,
will upon conversion bear interest) at 6-month LIBOR. Approximately 67.22%,
87.73% and 63.38% of the group I mortgage loans, the group II mortgage loans and
all of the mortgage loans, respectively, in each case by cut-off date principal
balance, and none of the group III mortgage loans, bear interest (or, if a
hybrid mortgage loan in its fixed rate period, following conversion will bear
interest) based on 1-year CMT. All of the group III mortgage loans by cut-off
date principal balance, representing 22.46% of the cut-off date principal
balance of the total mortgage pool, bear interest (or, if a hybrid mortgage loan
in its fixed rate period, upon conversion will bear interest) based on COFI.
S-30
6-Month LIBOR. This index is the London interbank offered rate
("LIBOR") for U.S. dollar deposits having a maturity of six months ("6-month
LIBOR"). The following tables show approximate historical values for 6-Month
LIBOR as reported by Bloomberg on the first business day of each month since
January 1998:
6-Month LIBOR
-------------
Month 1998 1999 2000 2001 2002 2003
- ---------- ---- ---- ---- ---- ---- ----
January 5.63% 4.97% 6.29% 5.26% 2.03% 1.38%
February 5.70 5.13 6.33 4.91 2.08 1.35
March 5.75 5.06 6.53 4.71 2.04 1.34
April 5.81 5.04 6.73 4.30 2.36 1.23
May 5.75 5.25 7.11 3.98 2.12 1.29
June 5.78 5.65 7.00 3.91 2.08 1.21
July 5.75 5.71 6.89 3.69 1.95 1.12
August 5.59 5.92 6.83 3.45 1.87 1.15
September 5.25 5.96 6.76 2.52 1.80 1.20
October 4.98 6.12 6.72 2.15 1.71 --
November 5.15 6.06 6.64 2.03 1.60 --
December 5.07 6.13 6.20 1.48 1.47 --
1-Year CMT. This index is the weekly average yield on U.S. Treasury
securities, adjusted to a constant maturity of one year ("1-Year CMT"). Yields
on U.S. Treasury securities are estimated from the U.S. Treasury's daily yield
curve. This curve, which relates the yield on a security to its time to
maturity, is based on the closing market bid yields on actively-traded U.S.
Treasury securities in the over-the-counter market. These market yields are
calculated from composites of quotations reported by five leading U.S. Treasury
securities dealers to the Federal Reserve Bank of New York. The constant yield
values are read from the yield curve at fixed maturities. This method permits,
for example, estimations of the yield for one-year maturity even if no
outstanding security has exactly one year remaining to maturity. Such yields of
different U.S. Treasury securities are generally published in Federal Reserve
Statistical Release No. H.15 (519).
S-31
Listed below are some of the approximate historical values of 1-Year
CMT since January 1998:
1-Year CMT*
-----------
Month 1998 1999 2000 2001 2002 2003
- ---------- ---- ---- ---- ---- ---- ----
January 5.44% 4.52% 5.50% 6.14% 2.24% 1.46%
February 5.53 4.49 5.69 5.78 2.17 1.38
March 5.25 4.55 6.12 4.79 2.13 1.30
April 5.28 4.67 6.20 4.72 2.24 1.25
May 5.37 4.77 6.18 4.47 2.58 1.23
June 5.39 4.67 6.14 4.07 2.53 0.97
July 5.46 4.79 6.38 3.76 2.40 1.08
August 5.42 5.12 6.23 3.53 2.24 1.29
September 5.36 5.01 6.09 3.62 2.00 --
October 5.23 5.23 6.17 3.50 1.76 --
November 4.76 5.28 6.20 3.02 1.78 --
December 4.18 5.34 5.98 2.39 1.59 --
- ---------------------
* Figures are averages of daily rates and do not necessarily correspond to
1-Year CMT values determined as provided in any related notes.
COFI. This index is the weighted average cost of savings, borrowings
and advances for member institutions of the Eleventh District of the Federal
Home Loan Bank System , as published in the place specified in the related
mortgage note and as made available as of the date specified in the related
mortgage note. In the event that the index specified in a mortgage note is no
longer available, an index reasonably acceptable to the trustee that is based on
comparable information will be selected by the master servicer, to the extent
permissible under the terms of the related mortgage and mortgage note. The
Federal Home Loan Bank of San Francisco ("FHLB") publishes COFI for the prior
month in its monthly Information Bulletin and such bulletins may be obtained by
writing or calling FHLB of San Francisco, P.O. Box 7948, San Francisco,
California 94120, telephone (415) 616-2600.
S-32
Listed below are some of the approximate historical values for monthly
COFI for the months indicated as reported on Bloomberg since January 1998:
COFI
----
Month 1998 1999 2000 2001 2002 2003
- ---------- ----- ----- ----- ----- ----- -----
January 4.987% 4.608% 4.901% 5.514% 2.823% 2.308%
February 4.968 4.562 4.967 5.426 2.744 2.257
March 4.917 4.519 5.002 5.198 2.653 2.210
April 4.903 4.490 5.078 4.946 2.723 2.208
May 4.881 4.480 5.196 4.745 2.772 2.130
June 4.881 4.504 5.357 4.498 2.847 2.113
July 4.911 4.500 5.456 4.274 2.821 2.018
August 4.899 4.562 5.509 4.106 2.763 --
September 4.882 4.608 5.548 3.974 2.759 --
October 4.762 4.666 5.589 3.628 2.708 --
November 4.691 4.773 5.607 3.368 2.537 --
December 4.655 4.852 5.617 3.074 2.375 --
These rates of 6-Month LIBOR, 1-Year CMT and COFI may in the future
fluctuate significantly from month to month as well as over longer periods and
may not increase or decrease in a constant pattern from period to period. The
tables presented above do not purport to be representative of future levels of
these indices.
Mortgage Loan Statistical Data
Schedule A to this prospectus supplement sets forth in tabular format
certain information, as of the cut-off date, about the mortgage loans in each
mortgage loan group and in the mortgage pool as a whole. Other than with respect
to rates of interest, percentages are approximate and are stated by cut-off date
principal balance of the mortgage loans. The sum of the respective columns may
not equal the total indicated due to rounding.
Assignment of the Mortgage Loans; Repurchase
At the time of issuance of the certificates, the depositor will cause
the mortgage loans, together with all principal and interest due with respect to
such mortgage loans after the cut-off date to be sold to the trust. The mortgage
loans in each of the mortgage loan groups will be identified in a schedule
appearing as an exhibit to the pooling and servicing agreement with each
mortgage loan group separately identified. Such schedule will include
information as to the principal balance of each mortgage loan as of the cut-off
date, as well as information including, among other things, the mortgage rate,
the mortgagor's monthly payment and the maturity date of each mortgage note.
S-33
In addition, the depositor will deposit with Wells Fargo Bank
Minnesota, National Association, as custodian and agent for the trustee, the
following documents with respect to each mortgage loan:
(a) except with respect to a MOM loan, the original mortgage
note, endorsed without recourse in the following form: "Pay to the
order of JPMorgan Chase Bank, as trustee for certificateholders of Bear
Stearns Asset Backed Securities, Inc., Asset-Backed Certificates,
Series 2003-SD2 without recourse," with all intervening endorsements,
to the extent available, showing a complete chain of endorsement from
the originator to the seller or, if the original mortgage note is
unavailable to the depositor, a photocopy thereof, if available,
together with a lost note affidavit;
(b) the original recorded mortgage or a photocopy thereof, and
if the related mortgage loan is a MOM loan, noting the applicable
mortgage identification number for that mortgage loan;
(c) except with respect to a mortgage loan that is registered
on the MERS(R) System, a duly executed assignment of the mortgage to
"JPMorgan Chase Bank, as trustee for certificateholders of Bear Stearns
Asset Backed Securities, Inc., Asset-Backed Certificates, Series
2003-SD2, without recourse;" in recordable form, as described in the
pooling and servicing agreement;
(d) originals or duplicates of all interim recorded
assignments of such mortgage, if any and if available to the depositor;
(e) the original or duplicate original lender's title policy
or, in the event such original title policy has not been received from
the insurer, such original or duplicate original lender's title policy
shall be delivered within one year of the closing date or, in the event
such original lender's title policy is unavailable, a photocopy of such
title policy or, in lieu thereof, a current lien search on the related
property; and
(f) the original or a copy of all available assumption,
modification or substitution agreements, if any.
In general, assignments of the mortgage loans provided to the custodian
on behalf of the trustee will not be recorded in the appropriate public office
for real property records, based upon an opinion of counsel to the effect that
such recording is not required to protect the trustee's interests in the
mortgage loan against the claim of any subsequent transferee or any successor to
or creditor of the depositor or the seller, or as to which the rating agencies
advise that the omission to record therein will not affect their ratings of the
offered certificates.
In connection with the assignment of any mortgage loan that is
registered on the MERS(R) System, the depositor will cause the MERS(R) System to
indicate that those mortgage loans have been assigned by EMC to the depositor
and by the depositor to the trustee by including (or deleting, in the case of
repurchased mortgage loans) in the computer files (a) the code in the field
which identifies the trustee and (b) the code in the field "Pool Field" which
identifies the series of certificates issued. Neither the depositor nor the
master servicer will alter these codes (except in the case of a repurchased
mortgage loan).
S-34
A "MOM loan" is any mortgage loan as to which, at origination, Mortgage
Electronic Registration Systems, Inc. acts as mortgagee, solely as nominee for
the originator of that mortgage loan and its successors and assigns.
The custodian on behalf of the trustee will perform a limited review of
the mortgage loan documents on or prior to the closing date or in the case of
any document permitted to be delivered after the closing date, promptly after
the custodian's receipt of such documents and will hold such documents in trust
for the benefit of the holders of the certificates.
In addition, the seller will make representations and warranties in the
pooling and servicing agreement as of the cut-off date in respect of the
mortgage loans. The depositor will file the pooling and servicing agreement
containing such representations and warranties with the Securities and Exchange
Commission in a report on Form 8-K following the closing date.
After the closing date, if any document is found to be missing or
defective in any material respect, or if a representation or warranty with
respect to any mortgage loan is breached and such breach materially and
adversely affects the interests of the holders of the certificates in such
mortgage loan, the custodian, on behalf of the trustee, is required to notify
the seller in writing. If the seller cannot or does not cure such omission,
defect or breach within 90 days of its receipt of notice from the custodian, the
seller is required to repurchase the related mortgage loan from the trust fund
at a price equal to 100% of the stated principal balance thereof as of the date
of repurchase plus accrued and unpaid interest thereon at the mortgage rate to
the first day of the month following the month of repurchase. In addition, if
the obligation to repurchase the related mortgage loan results from a breach of
the seller's representations regarding predatory lending, the seller will be
obligated to pay any resulting costs and damages incurred by the trust. Rather
than repurchase the mortgage loan as provided above, the seller may remove such
mortgage loan from the trust fund and substitute in its place another mortgage
loan of like characteristics; however, such substitution is only permitted
within two years after the closing date.
With respect to any repurchase or substitution of a mortgage loan that
is not in default or as to which a default is not imminent, the trustee must
have received a satisfactory opinion of counsel that such repurchase or
substitution will not cause the trust fund to lose the status of its REMIC
elections or otherwise subject the trust to a prohibited transaction tax. The
obligation to cure, repurchase or substitute as described above constitutes the
sole remedy available to the certificateholders, the trustee or the depositor
for omission of, or a material defect in, a mortgage loan document or for a
breach of representation or warranty by the seller with respect to a mortgage
loan.
Underwriting Guidelines
The mortgage loans were originated pursuant to underwriting standards
of various originators. Underwriting guidelines are primarily intended to
evaluate the value and adequacy of the mortgaged property as collateral and are
also intended to consider the mortgagor's credit standing and repayment ability.
On a case-by-case basis, the related originator may determine that, based upon
compensating factors, a prospective mortgagor not strictly qualifying under the
underwriting guidelines warrants an underwriting exception. Compensating factors
may include, but are not limited to, low loan-to-value ratio, low debt-to-income
ratio, good credit history, stable employment, pride of ownership and time in
residence at the applicant's current address. It is expected that a substantial
number of the mortgage loans will represent such underwriting exceptions.
Approximately 19.00% of the mortgage loans, and 28.35% and 19.86% of the
mortgage loans in mortgage loan group I and mortgage loan group II,
respectively, in each case by cut-off date principal balance, were originated or
acquired by Wells Fargo Home Mortgage, Inc., which we refer to as "WFHM." WFHM
did not originate or acquire any of the group III mortgage loans. Approximately
58.61% of the mortgage loans, and 52.14%, 59.27% and 55.20% of the mortgage
loans in mortgage loan group I, mortgage loan group II and mortgage loan group
III, respectively, in each case by cut-off date principal balance, were
originated or acquired by Washington Mutual Bank, FA, which we refer to as
"WAMU," and Washington Mutual Bank. We refer to WAMU and Washington Mutual Bank
as the "Washington Mutual Sellers." The remaining mortgage loans were acquired
from several different sellers at varying times, which mortgage loans were
originated by many different originators, a number of which may no longer be in
existence.
S-35
The information set forth in the following paragraphs with respect to
each of WFHM and the Washington Mutual Sellers has been provided by the
respective parties. None of the depositor, the seller, the underwriter, the
trustee, the master servicer or any of their respective affiliates have made or
will make any representation as to the accuracy or completeness of such
information.
WFHM
All WFHM mortgage loans were either acquired or originated under, or
were intended to have been acquired or originated under, one of WFHM's standard
first-lien lending programs. All WFHM mortgage loans were approved for purchase
by WFHM pursuant to underwriting guidelines approved by WFHM. However,
subsequent to funding, WFHM discovered or was notified that substantially all of
the WFHM mortgage loans either:
o violated the underwriting guidelines or program guidelines for which
they were intended to have been originated
o had document deficiencies or
o became delinquent and thereby ineligible for sale.
The specific defects may have included:
o the failure to comply with maximum debt service coverage
requirements,
o the failure to comply with maximum loan-to-value ratio requirements,
o the failure to comply with minimum credit score requirements,
o the failure to comply with maximum loan amount requirements,
S-36
o missing or deficient appraisals (for example, the comparable
properties did not support the appraised value),
o the absence of required primary mortgage insurance,
o the mortgagor's credit history did not meet program requirements,
o the mortgage file had a deficient, missing or unexecuted note or
modification agreement or power of attorney or
o the mortgagor became delinquent.
In some cases, the defect may not have been discovered, or the
delinquency may not have occurred, until the loan had been sold to a third-party
and WFHM was required to repurchase the loan.
Washington Mutual Sellers
In this section of the prospectus supplement, "mortgage loan" refers
only to a mortgage loan for which the applicable Washington Mutual Seller is the
seller.
The mortgage loans have been originated generally in accordance with
the following underwriting guidelines established by the applicable Washington
Mutual Seller, subject to certain exceptions giving consideration to
compensating underwriting factors. The following is a general summary of the
underwriting guidelines generally applied by the applicable Washington Mutual
Seller. This summary does not purport to be a complete description of the
underwriting standards of the applicable Washington Mutual Seller.
All one- to four-family residential mortgage loans must meet acceptable
credit, appraisal and underwriting criteria as established by the applicable
Washington Mutual Seller. The underwriting guidelines are applied in accordance
with applicable state and federal laws and regulations. The underwriting
guidelines are established to set acceptable criteria regarding credit history,
repayment ability, adequacy of necessary liquidity, and adequacy of the
collateral. These guidelines generally conform to secondary market standards.
Additional loan-to-value ratio guidelines are established with respect
to individual programs and loan amount ranges.
Three general sets of underwriting guidelines are applicable: Standard,
which includes all the basic guidelines and is applied to both fixed rate and
adjustable rate mortgage products; Portfolio Feature, which includes some
specific enhanced guidelines such as slightly higher loan-to-value ratios and 40
year terms, and is available only on adjustable rate mortgage products; and
Subprime, which allows for deviations from basic guidelines for credit,
collateral and income stability in return for risk-based pricing premiums.
Documentation guidelines are established and are generally classified as "Full
Documentation," "Low Documentation" and "Streamline Refinance Documentation."
Full Documentation loans may include two years of tax returns for self-employed
applicants, the most recent paystub and two years of W-2 forms for salaried
applicants, and the most recent bank statements for verification of liquidity.
Low Documentation loans require certain loan-to-value ratios, loan amounts and
credit scores to be met and utilize income and assets as stated by the mortgagor
in the loan application. Verification of assets is required in Low Documentation
transactions when compensating factors are used to support the mortgagor's
claimed income. Streamline Refinance Documentation loans utilize the most recent
tax return for self-employed applicants and the most recent mortgagor paystub
for salaried applicants, and also require the mortgagor to have a one year
history of timely mortgage payments.
S-37
All applicants must complete a standard residential loan application
that includes information on income, employment, assets, debts, payments and
specific questions regarding credit history. Credit history is reviewed and
independently confirmed using merged in-file credit reports. Calculations are
made to establish the relationship between fixed expenses and gross monthly
income, which should not exceed established guidelines but are reviewed with
respect to the applicant's overall ability to repay the mortgage loan, including
other income sources, commitment to the property as evidenced by loan-to-value
ratio, credit history, other liquid resources, ability to accumulate assets and
other compensating factors.
The adequacy of the collateral is generally determined by an appraisal
made in accordance with pre-established appraisal procedural guidelines. At
origination, all appraisals are required to conform to the Uniform Standards of
Professional Appraisal Practice adopted by the Appraisal Standards Board of the
Appraisal Foundation and are made on forms acceptable to Fannie Mae and/or
Freddie Mac. Appraisers may be staff appraisers employed by the applicable
Washington Mutual Seller or independent appraisers selected in accordance with
the pre-established appraisal procedural guidelines. Such guidelines generally
require that the appraiser, or an agent on its behalf, personally inspect the
property and verify whether the property is in good condition and, if the
property is new construction, whether it is substantially completed. The
appraisal is usually based upon a market data analysis of recent sales of
comparable properties and, when deemed applicable, a replacement cost analysis
based on the current cost of constructing or purchasing a similar property. The
Streamline Refinance Documentation program uses the original appraisal and
requires, at a minimum, a current drive-by inspection.
All mortgage loans are subject to a sampling by the applicable
Washington Mutual Seller's internal quality assurance department, which reviews
and verifies a statistical sampling of loans on a regular basis. Adequate title
insurance and hazard insurance is required for all loans. From time to time,
loan-to-value ratio exceptions may be made for creditworthy applicants who
exhibit strong compensating factors and well supported collateral valuations.
Notwithstanding the foregoing, although all of the mortgage loans were
originated or intended to be originated in accordance with the underwriting
guidelines described above, substantially all of the mortgage loans that have
been originated by a Washington Mutual Seller and included in the trust either
possess document deficiencies or have experienced one or more payment
delinquencies or have failed to meet the underwriting guidelines described
above.
S-38
SERVICING OF THE MORTGAGE LOANS
General
Wells Fargo Bank Minnesota, National Association, which we refer to in
the section in its capacity as master servicer as "Wells Fargo," will act as
master servicer of the mortgage loans pursuant to the pooling and servicing
agreement.
Primary servicing of the mortgage loans, other than those serviced
pursuant to the pooling and servicing agreement by EMC Mortgage Corporation,
which we refer to as "EMC," will be provided for by Wells Fargo Home Mortgage,
Inc., which we refer to as "WFHM," and Washington Mutual Bank, FA, which we
refer to as "WAMU" in accordance with various seller's warranties and servicing
agreements, or, in the case of WAMU, in accordance with a servicing agreement,
each of which EMC will assign to the trust, pursuant to a series of related
assignment and assumption agreements, or, in the case of WAMU, pursuant to an
assignment, assumption and recognition agreement, among WFHM or WAMU, as the
related servicer, EMC and the trustee on behalf of the certificateholders,
except for the rights to enforce the representations and warranties with respect
to the related mortgage loans, which will be retained by EMC in its capacity as
seller of such mortgage loans to the trust. WFHM and WAMU will each be
responsible for the servicing of the mortgage loans covered by the related
servicing agreement and EMC will be responsible for the servicing of the
remaining mortgage loans under the terms contained in the pooling and servicing
agreement. For purposes of this prospectus supplement, with respect to EMC's
obligations as a primary servicer of mortgage loans, we refer to the pooling and
servicing agreement as a "servicing agreement." Wells Fargo also will be
required to monitor EMC's, WFHM's and WAMU's performance. In the event of a
default by EMC, WFHM or WAMU under the related servicing agreement, Wells Fargo
will be required to enforce any remedies against EMC, WFHM or WAMU, as
applicable, and shall either find a successor servicer or shall assume the
primary servicing obligations for the related mortgage loans itself.
Limitations on EMC's ability to resign from its obligations as servicer
and rights of the master servicer to remove EMC on the occurrence of certain
events of default are described under "Servicing of the Mortgage Loans--Certain
Matters Regarding the Parties to the Pooling and Servicing Agreement,"
"Description of the Certificates--Events of Default" and "--Rights Upon Event of
Default" in this prospectus supplement. WFHM's and WAMU's servicing agreements
also contain provisions governing their rights to resign and rights, exercisable
by the master servicer, to have them removed as servicers on the occurrence of
certain events, as set forth in those servicing agreements.
The information set forth in the following paragraphs with respect to
each of Wells Fargo, Wells Fargo Home Mortgage, Inc., EMC and WAMU has been
provided by the respective party. None of the depositor, the seller (except for
the information about itself), the underwriter, the trustee, the master servicer
or any of their respective affiliates have made or will make any representation
as to the accuracy or completeness of such information.
S-39
The Master Servicer and the Servicers
Wells Fargo, a national banking association, with its master servicing
offices located at 9062 Old Annapolis Road, Columbia, Maryland 21045, will act
as master servicer for all of the mortgage loans. Wells Fargo is engaged in the
business of master servicing single family residential mortgage loans secured by
properties located in all 50 states and the District of Columbia. EMC will have
certain rights under the pooling and servicing agreement in respect of Wells
Fargo, as master servicer, including the right to replace it as master servicer
in the event of a default by Wells Fargo and the right of termination of Wells
Fargo, without cause, upon payment of a termination fee.
The following table shows, for each mortgage loan group and for the
entire mortgage pool, the percentage of mortgage loans serviced by each servicer
of over 10% of the mortgage pool:
Mortgage Mortgage Mortgage
Loan Loan Loan Mortgage
Name of Servicer Group I Group II Group III Pool
- ---------------- -------- --------- --------- ---------
EMC Mortgage Corporation 74.95% 22.69% 88.14% 49.24%
Wells Fargo Home
Mortgage, Inc. 13.99% 27.48% 0.00% 18.25%
Washington Mutual Bank, FA 11.06% 49.83% 11.86% 32.51%
The following sections provide information regarding the servicing
practices of EMC, WFHM and WAMU. The sections entitled "EMC Mortgage
Corporation," "Wells Fargo Home Mortgage, Inc." and "Washington Mutual Bank, FA"
were provided by EMC, WFHM and WAMU, respectively, and none of the underwriter,
seller (except for its section), the depositor, the issuer or the master
servicer and securities administrator take any responsibility for the accuracy
or completeness of those sections.
EMC Mortgage Corporation
General. EMC, a wholly-owned subsidiary of The Bear Stearns Companies
Inc., was established as a full-line mortgage banking company to facilitate the
purchase and servicing of whole loan portfolios containing various levels of
quality from "investment grade" to varying degrees of "non-investment grade" up
to and including mortgaged properties acquired through foreclosure or
deed-in-lieu of foreclosure (each such mortgaged property). EMC was incorporated
in the State of Delaware on September 26, 1990 and commenced operation in Texas
on October 9, 1990. EMC has its principal executive office at 909 Hidden Ridge
Drive, Irving, Texas 75038.
The principal business of EMC has been the resolution of non-performing
residential mortgage loan portfolios acquired from Resolution Trust Corporation,
from private investors and from the Department of Housing and Urban Development
through its auctions of defaulted Federal Housing Authority mortgage loans.
EMC's servicing portfolio consists primarily of two categories:
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o performing investment-quality loans serviced for EMC's own account
or the account of Fannie Mae, Freddie Mac, private mortgage conduits
and various institutional investors; and
o non-investment grade, sub-performing loans, non-performing loans and
REO properties serviced for EMC's own account and for the account of
investors in securitized performing and non-performing collateral
transactions.
EMC's operations resemble those of most mortgage banking companies,
except that significant emphasis is placed on the collection and due diligence
areas, due to the nature of the mortgage portfolios purchased. As of May 31,
2003, EMC was servicing approximately $11.4 billion of mortgage loans and REO
property.
Delinquency and Foreclosure Experience. The following tables set forth
the delinquency and foreclosure experience of mortgage loans serviced by EMC as
of the dates indicated. EMC's portfolio of mortgage loans may differ
significantly from the mortgage loans backing the certificates in terms of
interest rates, principal balances, geographic distribution, types of properties
and other possibly relevant characteristics. There can be no assurance, and no
representation is made, that the delinquency and foreclosure experience with
respect to the mortgage loans backing the certificates will be similar to that
reflected in the table below, nor is any representation made as to the rate at
which losses may be experienced on liquidation of defaulted mortgage loans. The
actual delinquency experience on the mortgage loans will depend, among other
things, upon the value of the real estate securing such mortgage loans and the
ability of mortgagors to make required payments.
As of November 30, 2001 As of November 30, 2002
-------------------------------------------------------------------------------------------
Number Unpaid Percentage Unpaid Percentage
of Loans Principal of Number Principal of
Balance (2) Portfolio of Loans Balance (2) Portfolio
-------------------------------------------------------------------------------------------
Current Loans 76,892 $4,291,550,897 58.30% 107,444 $6,863,380,896 62.44%
Period of
Delinquency(3)
30 - 59 Days 14,425 $795,817,499 10.81% 17,455 $1,044,663,778 9.50%
60 - 89 Days 4,935 $279,727,400 3.80% 6,524 $401,534,696 3.65%
90+ Days 10,257 $530,744,768 7.21% 13,797 $686,521,557 6.25%
Foreclosures/
Bankruptcies (4) 19,054 $1,213,468,377 16.48% 24,299 $1,663,845,463 15.14%
REO Properties 4,234 $249,853,497 3.39% 5,014 $331,882,863 3.02%
-------------------------------------------------------------------------------------------
Total 129,795 $7,361,162,438 100.00% 174,533 $10,991,829,253 100.00%
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As of May 31, 2003
-------------------------------------------------
Percentage
Number Unpaid Principal of
of Loans Balance (2) Portfolio
-------------------------------------------------
Current Loans 107,477 $7,307,522,523 64.07%
Period of Delinquency(3)
30 - 59 Days 16,550 $1,004,132,528 8.80%
60 - 89 Days 6,042 $396,332,208 3.48%
90+ Days 14,643 $726,437,281 6.37%
Foreclosures/
Bankruptcies (4) 22,911 $1,623,741,813 14.24%
REO Properties 4,739 $346,829,448 3.04%
-------------------------------------------------
Total 172,362 $11,404,995,801 100.00%
- ---------------------------
(1) The table shows mortgage loans which were delinquent or for which
foreclosure proceedings had been instituted as of the date indicated.
(2) For the REO properties, the principal balance is at the time of
foreclosure. (3) No mortgage loan is included in this table as
delinquent until it is 30 days past due. (4) Exclusive of the number of
loans and principal balance shown in the period of delinquency.
Since the mortgage loans were originated by various originators at
different times, it is unlikely that the delinquency and foreclosure experience
set forth above will be representative of the actual delinquency and foreclosure
experience on the mortgage loans in the trust fund or even representative of the
mortgage loans in the trust fund being serviced by EMC. In addition, a variety
of factors, including the appreciation of real estate values, historically have
limited the loss and delinquency experience on subprime mortgage loans. There
can be no assurance that factors beyond EMC's control, such as national or local
economic conditions or downturn in the real estate markets in which the
mortgaged properties are located, will not result in increased rates of
delinquencies and foreclosure losses in the future.
Wells Fargo Home Mortgage, Inc.
General. WFHM is a direct, wholly owned subsidiary of Wells Fargo Bank,
National Association and an indirect, wholly owned subsidiary of Wells Fargo &
Company. WFHM is engaged principally in the business of (i) originating,
purchasing and selling residential mortgage loans in its own name and through
its affiliates and (ii) servicing residential mortgage loans for its own account
and for the account of others. WFHM is an approved servicer of Fannie Mae and
Freddie Mac. WFHM's principal office is located at 1 Home Campus, Des Moines,
Iowa 50328-0001.
Delinquency and Foreclosure Experience. The following table sets forth
certain information, as reported by WFHM concerning recent delinquency and
foreclosure experience on mortgage loans included in various mortgage pools
underlying all series of WFHM's mortgage pass-through certificates with respect
to which one or more classes of certificates were publicly offered. The
delinquency and foreclosure experience set forth in the following table includes
mortgage loans with various terms to stated maturity, and includes loans having
a variety of payment characteristics. In addition, the adjustable rate mortgage
loans include mortgage loans with various periods until the first interest rate
adjustment date and different indices upon which the adjusted interest rate is
based. Certain of the adjustable rate mortgage loans also provide for the
payment of only interest until the first adjustment date. There can be no
assurance that the delinquency and foreclosure experience set forth in the
following table will be representative of the results that may be experienced
with respect to the mortgage loans included in the trust.
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Fixed Rate Mortgage Loans
By Dollar By Dollar By Dollar
By No. Amount By No. Amount By No. Amount
of Loans of Loans of Loans of Loans of Loans of Loans
(Dollar Amounts in -------- -------- -------- -------- -------- --------
Thousands) As of December 31, 2001 As of December 31, 2002 As of June 30, 2003
----------------------- ----------------------- -------------------
Fixed Rate Loans 91,468 $31,526,756 57,527 $21,021,499 32,108 $12,395,078
======= =========== ====== =========== ====== ============
Period of Delinquency(1)
30-59 Days 536 $168,811 398 $129,563 266 $91,305
60-89 Days 106 $ 35,482 103 $ 31,662 84 $27,340
90 days or more 135 $ 41,344 100 $ 32,817 78 $25,946
--------- ------------ ------ ----------- ------- ------------
Total Delinquent Loans 777 $245,637 601 $194,042 428 $144,591
========= ============ ====== =========== ======= =============
Percent of Fixed Rate 0.85% 0.78% 1.04% 0.92% 1.33% 1.17%
Loans
Foreclosures(2) $39,220 $48,928 $46,187
Foreclosure Ratio (3) 0.12% 0.23% 0.37%
Adjustable Rate Mortgage Loans
By Dollar By Dollar
By No. Amount By No. Amount
of Loans of Loans of Loans of Loans
-------- -------- -------- --------
(Dollar Amounts in Thousands) As of December 31, 2002 As of June 30, 2003
----------------------- -------------------
Adjustable Rate Loans (4) 4,352 $1,933,392 5,960 $2,826,967
============ =========== ======== ===========
Period of Delinquency(1)
30-59 Days 18 $7,633 20 $9,987
60-89 Days 0 0 2 $1,367
90 days or more 1 325 2 $ 760
------------ ----------- -------- -----------
Total Delinquent Loans 19 $7,958 24 $12,114
============ =========== ======== ===========
Percent of Adjustable Rate 0.44% 0.40% 0.40% 0.43%
Loans
Foreclosures(2) $0 $830
Foreclosure Ratio (3) 0.00% 0.03%
(1) The indicated periods of delinquency are based on the number of days past
due, based on a 30-day month. No mortgage loan is considered delinquent for
these purposes until one month has passed since its contractual due date. A
mortgage loan is no longer considered delinquent once foreclosure
proceedings have commenced.
(2) Includes loans in the applicable portfolio for which foreclosure
proceedings had been instituted or with respect to which the related
property had been acquired as of the dates indicated.
(3) Foreclosure as a percentage of total loans in the applicable portfolio at
the end of each period.
(4) Because the series which include adjustable rate mortgage loans in the
related mortgage pools have been issued only since the third quarter
of 2001, WFHM does not believe that including the delinquency and
foreclosure experience for 2001 provides meaningful disclosure.
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Washington Mutual Bank, FA
General. WAMU is a federally chartered savings association. WAMU's
principal executive offices are located at 1201 Third Avenue, Seattle,
Washington, telephone (206) 461-2000. The primary mortgage loan servicing office
of WAMU is located at 19850 Plummer Street, Chatsworth, California 91311. Its
telephone number is (818) 775-2278. WAMU is subject to regulation and
examination by the Office of Thrift Supervision, which is its primary regulator.
Its deposit accounts are insured by the FDIC, primarily through the Savings
Association Insurance Fund. As a result, the FDIC also has some authority to
regulate WAMU.
Nonaccrual and Foreclosure Statistics. The following table sets forth
information concerning single-family residential ("SFR") loans, which WAMU holds
in its own portfolio and services, as well as SFR nonaccrual loans and
foreclosed assets. Assets considered to be nonperforming include nonaccrual
loans and foreclosed assets. Loans are generally placed on nonaccrual status
when they are 90 days or more past due or when the timely collection of the
principal of the loan, in whole or in part, is not expected. Management's
classification of a loan as nonaccrual does not necessarily indicate that the
principal of the loan is uncollectible in whole or in part.
As of June 30, As of December 31,
-------------------------- --------------------------
2003 2002 2001 2000
----------- ----------- ----------- -----------
(dollars in thousands)
Nonaccrual SFR loans (excluding loans
serviced by others) (1)(2) $ 623,674 $ 834,938 $ 761,554 $ 369,908
Total SFR loans held in portfolio
(excluding loans serviced by others) $67,639,129 $71,709,181 $65,568,982 $63,765,143
Nonaccrual SFR loans as a percentage
of total SFR loans held in
portfolio (excluding loans serviced
by others) 0.92% 1.16% 1.16% 0.58%
Foreclosed SFR assets $ 111,923 $ 120,850 $ 67,958 $ 58,793
(1) Nonaccrual SFR loans exclude nonaccrual SFR loans held for sale.
(2) Nonaccrual SFR loans exclude foreclosed SFR assets. Foreclosed SFR assets
are listed separately in the table above.
The above information represents the nonaccrual and foreclosure
statistics of WAMU as a servicer of SFR loans held in its portfolio (the
"Portfolio"). The nonaccrual and foreclosure statistics of the mortgage loans in
the Portfolio is unlikely to be a meaningful predictor of the performance of the
mortgage loans in the trust. The statistics shown above represent the nonaccrual
and foreclosure statistics of WAMU's Portfolio only for the periods presented
whereas the aggregate delinquency and loss experience of the mortgage loans in
the trust will depend on the results obtained over the life of the trust. In
addition, the foregoing statistics include mortgage loans with a variety of
payment and other characteristics that may not correspond to those of the
mortgage loans in the trust. In particular, substantially all of the mortgage
loans that have been originated by a Washington Mutual Seller and included in
the trust either have document deficiencies or have experienced one or more
payment delinquencies or have failed to meet the underwriting guidelines in
place at the time of origination.
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The statistics shown above should not be considered as a basis of
assessing the likelihood, amount or severity of losses of the mortgage loans in
the trust. If the residential real estate market should experience an overall
decline in property values, the actual rate of delinquencies, foreclosures and
losses could be higher than those previously experienced by WAMU in its
Portfolio. In addition, adverse economic conditions (which may or may not affect
property values) may affect the timely payment by mortgagors of scheduled
payments of principal and interest on the mortgage loans in the trust, and
accordingly, the actual rates of delinquencies, foreclosures and losses with
respect to the mortgage loans in the trust. The likelihood that mortgagors will
become delinquent in the payment of their mortgage loans may be affected by a
number of factors related to a mortgagor's personal circumstances, including,
for example, unemployment, fluctuations in income and a mortgagor's equity in
the related mortgaged property. The actual delinquency and foreclosure
experience of the mortgage loans in the trust may also be sensitive to the level
of interest rates and influenced by servicing decisions on the applicable
mortgage loans. Regional economic conditions (including declining real estate
values) may particularly affect delinquency and foreclosure experience on such
mortgage loans in the trust to the extent that mortgaged properties are
concentrated in certain geographic areas. Accordingly, the information regarding
the nonaccrual and foreclosure statistics of the Portfolio is not likely to
provide an accurate assessment of the delinquency, default and loss experience
of the mortgage loans in the trust over time.
Collection and Other Servicing Procedures
The applicable servicers will use their reasonable efforts to ensure
that all payments required under the terms and provisions of the mortgage loans
are collected, and shall follow collection procedures comparable to the
collection procedures of prudent mortgage lenders servicing mortgage loans for
their own account, to the extent such procedures shall be consistent with the
servicing agreements. Consistent with the foregoing, the servicers may in their
discretion waive, modify or vary or permit to be waived, modified or varied, any
term of any mortgage loan including, in certain instances, changing the mortgage
interest rate, forgiving the payment of principal or extending the final
maturity.
If a mortgaged property has been or is about to be conveyed by the
mortgagor and the applicable servicer has knowledge thereof, the servicer will
accelerate the maturity of the mortgage loan, to the extent permitted by the
terms of the related mortgage note and applicable law. If it reasonably believes
that the due-on-sale clause cannot be enforced under applicable law, or would
otherwise potentially impair any recovery under a primary mortgage insurance
policy, if applicable, the applicable servicer, in some cases with the prior
consent of the trustee (not to be unreasonably withheld) may enter into an
assumption agreement with the person to whom such property has been or is about
to be conveyed, pursuant to which such person becomes liable under the mortgage
note and the mortgagor, to the extent permitted by applicable law, remains
liable thereon. The servicers will retain any fee collected for entering into
assumption agreements, as additional servicing compensation. In regard to
circumstances in which the servicers may be unable to enforce due-on-sale
clauses, we refer you to "Material Legal Aspects of the Loans -- Due-on-Sale
Clauses in Mortgage Loans" in the prospectus. In connection with any such
assumption, the interest rate borne by the related mortgage note may not be
changed.
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The servicers will establish and maintain, in addition to the protected
accounts described below under "--Protected Accounts and Master Servicer
Collection Account," one or more servicing accounts in a depository institution
the deposits of which are insured by the FDIC to the maximum extent permitted by
law. The servicers will deposit and retain therein all collections from the
mortgagors for the payment of taxes, assessments, insurance premiums, or
comparable items as agent of the mortgagors as provided in the servicing
agreements. Each servicing account and the investment of deposits therein shall
comply with the requirements of the servicing agreements and shall meet the
requirements of the rating agencies. Withdrawals of amounts from the servicing
accounts may be made only to effect timely payment of taxes, assessments,
insurance premiums, or comparable items, to reimburse the servicer or the master
servicer for any advances made with respect to such items, to refund to any
mortgagors any sums as may be determined to be overages, to pay interest, if
required, to mortgagors on balances in the servicing accounts, to pay earnings
not required to be paid to mortgagors to the servicers, or to clear and
terminate the servicing accounts at or at any time after the termination of the
servicing agreements.
The servicers will maintain errors and omissions insurance and fidelity
bonds in certain specified amounts to the extent required under the related
servicing agreements.
Hazard Insurance
The servicers will maintain and keep, or cause to be maintained and
kept, with respect to each mortgage loan, in full force and effect for each
mortgaged property a hazard insurance policy with extended coverage customary in
the area where the mortgaged property is located in an amount equal to the
amounts required in the servicing agreement, or in general equal to at least the
lesser of the outstanding principal balance of the mortgage loan or the maximum
insurable value of the improvements securing such mortgage loan and containing a
standard mortgagee clause; but no less than the amount necessary to prevent loss
due to the application of any co-insurance provision of the related policy. Any
amounts collected by the servicers under any such hazard insurance policy, other
than amounts to be applied to the restoration or repair of the mortgaged
property or amounts released to the mortgagor in accordance with normal
servicing procedures, shall be deposited in a protected account. Any cost
incurred in maintaining any such hazard insurance policy shall not be added to
the amount owing under the mortgage loan for the purpose of calculating monthly
distributions to certificateholders, notwithstanding that the terms of the
mortgage loan so permit. Such costs shall be recoverable by the related servicer
out of related late payments by the mortgagor or out of insurance proceeds or
liquidation proceeds or any other amounts in the related protected account. The
right of the servicer to reimbursement for such costs incurred will be prior to
the right of the master servicer or the trustee to receive any related insurance
proceeds or liquidation proceeds or any other amounts in the related protected
account.
S-46
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property by
fire, lightning, explosion, smoke, windstorm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the mortgage loans will be
underwritten by different insurers and therefore will not contain identical
terms and conditions, the basic terms thereof are dictated by state law. Such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mud flows),
nuclear reactions, wet or dry rot, vermin, rodents, insects or domestic animals,
theft and, in certain cases, vandalism and malicious mischief. The foregoing
list is merely indicative of certain kinds of uninsured risks and is not
intended to be all-inclusive.
Hazard insurance policies covering properties similar to the mortgaged
properties typically contain a clause which in effect requires the insured at
all times to carry insurance of a specified percentage generally at least 80% of
the full replacement value of the improvements on the property in order to
recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, such clause provides that the insurer's
liability in the event of partial loss does not exceed the greater of (i) the
replacement cost of the improvements less physical depreciation, or (ii) such
proportion of the loss as the amount of insurance carried bears to the specified
percentage of the full replacement cost of such improvements.
Since the amount of hazard insurance to be maintained on the
improvements securing the mortgage loans may decline as the principal balances
owing thereon decrease, and since residential properties have historically
appreciated in value over time, in the event of partial loss, hazard insurance
proceeds may be insufficient to restore fully the damaged property.
Where the property securing a mortgage loan is located at the time of
origination in a federally designated flood area, the servicers will cause with
respect to such mortgage loan flood insurance to the extent available and in
accordance with industry practices to be maintained. Such flood insurance will
generally be in an amount equal to the lesser of (i) the outstanding principal
balance of the related mortgage loan, (ii) either (a) the minimum amount
required under the terms of coverage to compensate for any damage or loss on a
replacement cost basis, or (b) the maximum insurable value of the improvements
securing such mortgage loan, and (iii) the maximum amount of such insurance
available for the related mortgaged property under either the regular or
emergency programs of the National Flood Insurance Program, assuming that the
area in which such mortgaged property is located is participating in such
program.
The servicers, on behalf of the trustee and certificateholders, will
present claims to the insurer under any applicable hazard insurance policy. As
set forth above, all collections under such policies that are not applied to the
restoration or repair of the related mortgaged property or released to the
mortgagor in accordance with normal servicing procedures are to be deposited in
a protected account. The servicers are required to deposit in a protected
account the amount of any deductible under a blanket hazard insurance policy, if
applicable.
S-47
Realization Upon Defaulted Mortgage Loans
The servicers will take such action either as such servicer deems to be
in the best interest of the trust, or as is consistent with accepted servicing
practices or in accordance with established practices for other mortgage loans
serviced by such servicer, as applicable with respect to defaulted mortgage
loans and foreclose upon or otherwise comparably convert the ownership of
properties securing defaulted mortgage loans as to which no satisfactory
collection arrangements can be made. To the extent set forth in the servicing
agreements, the servicers will service the property acquired by the trust
through foreclosure or deed-in-lieu of foreclosure in accordance with procedures
that the servicer employs and exercises in servicing and administering mortgage
loans for its own account and which are in accordance with accepted mortgage
servicing practices of prudent lending institutions or Fannie Mae guidelines.
The related servicer generally will not be required to expend its own moneys
with respect to the restoration or to make servicing advances with respect to
such mortgaged properties unless the servicer has determined that (i) such
amounts would be recovered, and (ii) it believes such restoration will increase
proceeds to the trust following the mortgaged property's eventual liquidation.
Since insurance proceeds received in connection with a mortgage loan
cannot exceed deficiency claims and certain expenses incurred by the servicers,
no insurance payments will result in a recovery to certificateholders which
exceeds the principal balance of the defaulted mortgage loan together with
accrued interest thereon at its applicable net mortgage rate.
Servicing Compensation and Payment of Expenses
Wells Fargo will receive a monthly master servicing fee on each
distribution date equal to 0.01% per annum of the aggregate principal balance of
the mortgage loans as of the beginning of the month immediately preceding such
distribution date, and will also be entitled to investment earnings on amounts
in the Master Servicer Collection Account and the Distribution Account as
additional master servicing compensation. Each of the servicers will be entitled
to receive a fee as compensation for its activities under the related servicing
agreement equal to the applicable servicing fee rate multiplied by the stated
principal balance of each mortgage loan serviced by such servicer as of the due
date in the month preceding the month in which such distribution date occurs.
The servicing fee rate for each mortgage loan will be set forth on the schedule
to the pooling and servicing agreement and will range from 0.25% to 0.50% per
annum and the weighted average servicing fee, by cut-off date principal balance
is approximately 0.383%. Interest shortfalls on the mortgage loans resulting
from prepayments in any calendar month will be offset by the related servicer,
or the master servicer in the event of a servicer default, on the distribution
date in the following calendar month to the extent of compensating interest
payments as described herein.
In addition to the primary compensation described above, the applicable
servicer will retain all prepayment charges and penalties, if any, and any other
ancillary servicing fees, including assumption fees, tax service fees, fees for
statements of account payoff and late payment charges, all to the extent
collected from mortgagors.
The applicable servicer will pay all related expenses incurred in
connection with its servicing responsibilities, subject to limited reimbursement
as described herein.
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Protected Accounts and Master Servicer Collection Account
The servicers will establish and maintain one or more custodial
accounts (referred to herein as protected accounts) into which they will deposit
daily or at such other time specified in the applicable servicing agreement all
collections of principal and interest on any mortgage loans, including principal
prepayments, insurance proceeds, liquidation proceeds, the repurchase price for
any mortgage loans repurchased, and advances made from the servicer's own funds,
less the applicable servicing fee. Each servicer will distribute these amounts
to the master servicer on the applicable remittance date specified in its
servicing agreement. All protected accounts and amounts at any time credited
thereto shall comply with the requirements of the servicing agreements and shall
meet the requirements of the rating agencies
Wells Fargo, as a master servicer, will establish and maintain an
account (the "Master Servicer Collection Account") into which it will deposit
the following amounts received from EMC, WFHM and WAMU, as well as any advances
made from the master servicer's own funds, less its expenses, as provided in the
pooling and servicing agreement:
(i) any amounts withdrawn from a protected account or other
permitted account;
(ii) any monthly advance and compensating interest payments from a
servicer or, to the extent provided in the pooling and
servicing agreement, from Wells Fargo;
(iii) any insurance proceeds or liquidation proceeds received by
Wells Fargo which were not deposited in a protected account or
other permitted account;
(iv) the repurchase price with respect to any mortgage loans
repurchased;
(v) any amounts required to be deposited with respect to losses on
permitted investments; and
(vi) any other amounts received by Wells Fargo and required to be
deposited in the Master Servicer Collection Account pursuant
to the pooling and servicing agreement.
The Master Servicer Collection Account and amounts at any time credited
thereto will comply with the requirements of the pooling and servicing agreement
and will meet the requirements of the rating agencies.
On the business day prior to each distribution date, Wells Fargo will
withdraw or cause to be withdrawn all amounts from the Master Servicer
Collection Account, net of its master servicing fee and will remit them to the
trustee for deposit in the Distribution Account.
Wells Fargo is entitled to receive all investment earnings on amounts
in the Master Servicer Collection Account.
S-49
Distribution Account
The trustee will establish and maintain in the name of the trustee, for
the benefit of the certificateholders, an account (the "Distribution Account"),
into which on the business day prior to each distribution date it will deposit
all amounts transferred to it by Wells Fargo from the Master Servicer Collection
Account and all proceeds of any mortgage loans and REO properties transferred in
connection with the optional termination of the trust. All amounts deposited to
the Distribution Account shall be held in the name of the trustee in trust for
the benefit of the certificateholders in accordance with the terms and
provisions of the pooling and servicing agreement. The amount at any time
credited to the Distribution Account will generally be fully insured by the FDIC
to the maximum coverage provided thereby or in permitted investments specified
in the pooling and servicing agreement, on written instructions from Wells
Fargo.
On each Distribution Date, the trustee will withdraw funds from the
Distribution Account and make payments to the certificateholders in accordance
with the provisions set forth under "Description of the
Certificates--Distributions" in this prospectus supplement. Wells Fargo will be
entitled to any amounts earned on permitted investments in the Distribution
Account.
Interest Shortfalls and Compensating Interest
When a mortgagor prepays all or a portion of a mortgage loan between
due dates, the mortgagor pays interest on the amount prepaid only to the date of
prepayment. In addition, the Relief Act and similar state laws limit the amount
of interest otherwise payable on certain mortgage loans. Accordingly, an
interest shortfall will result equal to the difference between the amount of
interest collected and the amount of interest that would have been due absent
such prepayment or limitation. We refer to this interest shortfall as an
"interest shortfall." In order to mitigate the effect of any such shortfall in
interest distributions to holders of the offered certificates on any
distribution date, generally, the amount of the servicing fee otherwise payable
to the related servicer for such month shall, to the extent of such a shortfall
resulting from prepayment by the mortgagor (for mortgage loans serviced by WAMU,
only if resulting from a prepayment in full of a mortgage loan), be deposited by
such servicer in its related protected account for distribution to the master
servicer. We refer to such deposited amounts as "compensating interest." None of
the servicers or the master servicer are obligated to fund interest shortfalls
resulting from the application of the Relief Act or similar state laws. Failure
by EMC, WFHM or WAMU, as servicer, to remit any required compensating interest
by the date specified in the pooling and servicing agreement will obligate Wells
Fargo, as master servicer, to remit such amounts to the extent provided in the
pooling and servicing agreement. Any such deposit by a servicer or the master
servicer will be reflected in the distributions to holders of the offered
certificates entitled thereto made on the distribution date on which the
principal prepayment received would be distributed. We refer to interest
shortfalls net of compensating interest as "net interest shortfalls."
S-50
Advances
If the scheduled payment on a mortgage loan which was due on a related
due date is delinquent other than for certain reasons as set forth in the
applicable servicing agreement, for example, as a result of application of the
Relief Act or similar state laws, the applicable servicer will remit to the
master servicer, within the number of days prior to the related distribution
date set forth in the related servicing agreement, an amount equal to such
delinquency, net of the related servicing fee except to the extent the servicer
determines any such advance to be nonrecoverable from liquidation proceeds,
insurance proceeds or from future payments on the mortgage loan for which such
advance was made. Subject to the foregoing, such advances will be made by the
servicers until the liquidation of the related mortgage loan property. Failure
by EMC, WFHM or WAMU, as servicer, to remit any required advance by the date
specified in the pooling and servicing agreement will obligate Wells Fargo, as
master servicer, to advance such amounts to the extent provided in the pooling
and servicing agreement. Any failure of the master servicer or EMC to make such
advances would constitute an event of default as discussed under "Description of
the Certificates--Events of Default" in this prospectus supplement. If Wells
Fargo fails to make an advance as required by the pooling and servicing
agreement, then EMC, as successor master servicer, will be obligated to make
such advance. In the event that the master servicer is removed following the
occurrence of an event of default, and, EMC does not become successor master
servicer, the trustee, as successor master servicer, will be obligated to make
such advance. Neither any servicer, the master servicer or the trustee, as
successor master servicer, will make any advances in respect of principal on any
simple interest loans.
Evidence as to Compliance
The pooling and servicing agreement will provide that on or before a
specified date in each year, EMC and, to the extent that the master servicer
directly services any of the mortgage loans, the master servicer, will cause a
firm of independent public accountants to furnish a statement to the trustee,
and in the case of EMC, as servicer, to the master servicer, to the effect that,
on the basis of the examination by such firm conducted substantially in
compliance with the Uniform Single Attestation Program for Mortgage Bankers or
the Audit Program for Mortgages serviced for Freddie Mac, the servicing by or on
behalf of the servicers of mortgage loans pursuant to the servicing agreements
or the pooling and servicing agreement, as applicable, or under servicing
agreements or pooling and servicing agreements substantially similar to such
agreements, was conducted in compliance with such agreements, the Audit Program
for Mortgages serviced for Freddie Mac, or the Uniform Single Attestation
Program for Mortgage Bankers, except for any significant exceptions or errors in
records that, in the opinion of the firm it is required to report. In rendering
its statement such firm may rely, as to matters relating to the direct servicing
of the mortgage loans by subservicers, upon comparable statements for
examinations conducted substantially in compliance with the Uniform Single
Attestation Program for Mortgage Bankers or the Audit Program for Mortgages
serviced for Freddie Mac (rendered within one year of such statement) of firms
of independent public accountants with respect to the related subservicer.
The pooling and servicing agreement will also provide for delivery by
the master servicer to the trustee, and, in the case of EMC, by it to the master
servicer, on or before a specified date in each year, of an annual statement
signed by officers of the master servicer or EMC , as servicer, as applicable,
to the effect that the master servicer or EMC, as applicable, has fulfilled its
obligations under the pooling and servicing agreement or the related servicing
agreement throughout the preceding year.
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Copies of the annual accountants' statement and the statement of
officers of the master servicer may be obtained by certificateholders without
charge upon written request to the master servicer at the address of the master
servicer set forth above.
WFHM and WAMU are also required to deliver to the master servicer
annual independent accountants' servicing reports and annual officer's
certificates of compliance as specified in their respective servicing agreements
by a specified date in each year.
Certain Matters Regarding the Parties to the Pooling and Servicing Agreement
The pooling and servicing agreement will provide that neither the
master servicer nor EMC, as servicer, may resign from its obligations and duties
under the pooling and servicing agreement except (a) upon a determination that
its duties thereunder are no longer permissible under applicable law or (b) in
the case of the master servicer, upon compliance with the following
requirements:
o the master servicer has proposed a successor to the trustee and the
trustee has consented thereto, such consent not to be withheld
unreasonably
o the proposed successor is qualified to service mortgage loans on
behalf of Fannie Mae or Freddie Mac and
o the trustee has received written confirmation from each rating
agency that the appointment of such successor will not cause that
rating agency to reduce, qualify or withdraw its then-current
ratings assigned to any class of offered certificates.
No resignation by the master servicer will become effective until the
trustee or a successor master servicer has assumed the master servicer's
obligations and duties under the pooling and servicing agreement.
In addition, EMC or the master servicer may be removed from its
obligations and duties as set forth in the pooling and servicing agreement.
The pooling and servicing agreement will further provide that none of
the seller, the master servicer, the depositor, or any director, officer,
employee, or agent of the master servicer, or the depositor will be under any
liability to the trust fund or certificateholders for any action taken or for
refraining from the taking of any action in good faith pursuant to the pooling
and servicing agreement, or for errors in judgment; provided, however, that none
of the seller, the master servicer or the depositor, or any such person will be
protected against any breach of its representations and warranties in the
pooling and servicing agreement or any liability which would otherwise be
imposed by reason of willful misfeasance, bad faith or gross negligence in the
performance of duties pursuant to the pooling and servicing agreement or by
reason of reckless disregard of obligations and duties pursuant to the pooling
and servicing agreement.
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In addition, the pooling and servicing agreement will provide that the
seller, the master servicer and the depositor and any director, officer,
employee or agent of the seller, the master servicer and the depositor will be
entitled to indemnification by the trust fund and will be held harmless against
any loss, liability or expense incurred in connection with any legal action
relating to the pooling and servicing agreement or the certificates, other than
any loss, liability or expense related to any specific mortgage loan or mortgage
loans and any loss, liability or expense incurred by reason of willful
misfeasance, bad faith or gross negligence in the performance of duties
thereunder or by reason of reckless disregard of obligations and duties
thereunder. In addition, the pooling and servicing agreement will provide that
none of the seller, the master servicer nor the depositor will be under any
obligation to appear in, prosecute or defend any legal action which is not
incidental to its respective responsibilities under the pooling and servicing
agreement and which in its opinion may involve it in any expense or liability.
The seller, the master servicer or the depositor may, however, in its discretion
undertake any such action which it may deem necessary or desirable with respect
to the pooling and servicing agreement and the rights and duties of the parties
thereto and the interests of the certificateholders thereunder. In such event,
the legal expenses and costs of such action and any liability resulting
therefrom will be expenses, costs and liabilities of the trust fund, and such
master servicer or the depositor, as the case may be, will be entitled to be
reimbursed therefor out of funds otherwise distributable to certificateholders.
Any person into which the master servicer may be merged or
consolidated, or any person resulting from any merger or consolidation to which
the master servicer is a party, or any person succeeding to the business of the
master servicer, will be the successor of the master servicer under the pooling
and servicing agreement, provided that such person is qualified to service
mortgage loans on behalf of Fannie Mae or Freddie Mac and further provided that
such merger, consolidation or succession does not adversely affect the
then-current ratings of any class of offered certificates.
DESCRIPTION OF THE CERTIFICATES
General
The trust will issue the certificates pursuant to the pooling and
servicing agreement. The certificates consist of the classes of certificates
reflected on the cover of this prospectus supplement, which we refer to as the
offered certificates, and the Class B-4, Class B-5 and Class B-6 Certificates,
which we are not offering by this prospectus supplement, and which we sometimes
refer to as the other subordinated certificates. We sometimes refer to the Class
B-1, Class B-2 and Class B-3 Certificates, collectively, as the offered
subordinated certificates and together with the other subordinated certificates,
as the subordinated certificates.
We sometimes refer to the classes of certificates with a letter "A" in
their name as senior certificates. In addition, we sometimes refer to the Class
I-A Certificates as the group I senior certificates or senior certificate group
I, to the Class II-A Certificates as the group II senior certificates or senior
certificate group II and to the Class III-A Certificates as the group III senior
certificates or senior certificate group III. We sometimes refer to senior
certificate group I, senior certificate group II or senior certificate group III
as a senior certificate group.
The trust will issue the offered certificates, other than the residual
certificates, in book-entry form as described below, in minimum dollar
denominations of $25,000 and integral multiples of $1,000 in excess thereof,
except that one certificate of each class may be issued in the remainder of the
class. The trust will issue each residual certificate in a single physical
certificate each having a denomination of $50.
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Book-Entry Registration
The offered certificates, other than the residual certificates, will be
issued in book-entry form. Persons acquiring beneficial ownership interests in
the book-entry securities will hold their securities through The Depository
Trust Company in the United States and through Clearstream, Luxembourg or the
Euroclear System in Europe, if they are participants of any of such systems, or
indirectly through organizations which are participants. The Depository Trust
Company is referred to as "DTC." Clearstream, Luxembourg is referred to as
"Clearstream." The Euroclear System is referred to as "Euroclear." The
book-entry securities will be issued in one or more certificates that equal the
aggregate principal balance of the applicable class or classes of securities and
will initially be registered in the name of Cede & Co., the nominee of DTC.
Clearstream and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in Clearstream's and
Euroclear's names on the books of their respective depositaries that in turn
will hold such positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank N.A. will act as the relevant depositary for
Clearstream and JPMorgan Chase Bank will act as the relevant depositary for
Euroclear. Except as described below, no person acquiring a book-entry security
will be entitled to receive a physical certificate representing such security.
Unless and until physical securities are issued, it is anticipated that the only
"securityholder" with respect to a book-entry security will be Cede & Co., as
nominee of DTC. Beneficial owners are only permitted to exercise their rights
indirectly through participants and DTC.
An Owner's ownership of a book-entry security will be recorded on the
records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a "Financial Intermediary") that maintains the beneficial
owner's account for such purpose. In turn, the Financial Intermediary's
ownership of such book-entry security will be recorded on the records of DTC (or
of a DTC participant that acts as agent for the Financial Intermediary, whose
interest will in turn be recorded on the records of DTC, if the beneficial
owner's Financial Intermediary is not a DTC participant and on the records of
Clearstream or Euroclear, as appropriate).
Beneficial owners will receive all distributions allocable to principal
and interest with respect to the book-entry securities from the trustee through
DTC and DTC participants. While the book-entry securities are outstanding
(except under the circumstances described below), under the rules, regulations
and procedures creating, governing and affecting DTC and its operations (the
"Rules"), DTC is required to make book-entry transfers among Participants on
whose behalf it acts with respect to the securities. DTC is required to receive
and transmit distributions allocable to principal and interest with respect to
the securities. Participants and Financial Intermediaries with whom beneficial
owners have accounts with respect to securities are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective beneficial owners. Accordingly, although beneficial owners will
not possess physical certificates, the Rules provide a mechanism by which
beneficial owners will receive distributions and will be able to transfer their
beneficial ownership interests in the securities.
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Beneficial owners will not receive or be entitled to receive Definitive
Securities, except under the limited circumstances described below. Unless and
until Definitive Securities are issued, beneficial owners who are not
participants may transfer ownership of securities only through participants and
Financial Intermediaries by instructing such participants and Financial
Intermediaries to transfer beneficial ownership interests in the securities by
book-entry transfer through DTC for the account of the purchasers of such
securities, which account is maintained with their respective participants or
Financial Intermediaries. Under the Rules and in accordance with DTC's normal
procedures, transfers of ownership of securities will be executed through DTC
and the accounts of the respective participants at DTC will be debited and
credited. Similarly, the participants and Financial Intermediaries will make
debits or credits, as the case may be, on their records on behalf of the selling
and purchasing beneficial owners.
Because of time zone differences, credits of securities received in
Clearstream or Euroclear as a result of a transaction with a participant will be
made during subsequent securities settlement processing and dated the business
day following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or Clearstream participants on such business day. Cash received in
Clearstream or Euroclear as a result of sales of securities by or through a
Clearstream participant or Euroclear participant to a DTC participant will be
received with value on the DTC settlement date but will be available in the
relevant Clearstream or Euroclear cash account only as of the business day
following settlement in DTC.
Transfers between DTC participants will occur in accordance with DTC
rules. Transfers between Clearstream participants and Euroclear participants
will occur in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream
participants or Euroclear participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the relevant depositary; however, such cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
relevant depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Clearstream participants and Euroclear participants may not deliver
instructions directly to the relevant depositaries.
DTC is a New York-chartered limited purpose trust company that performs
services for its participants, some of which (and/or their representatives) own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC participant in the book-entry securities, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of book-entry securities will be subject to the Rules as in
effect from time to time.
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Clearstream, has advised that it is incorporated under the laws of the
Grand Duchy of Luxembourg as a professional depository. Clearstream holds
securities for its participating organizations or participants. Clearstream
facilitates the clearance and settlement of securities transactions between
Clearstream participants through electronic book-entry changes in account of
Clearstream participants, eliminating the need for physical movement of
securities. Clearstream provides to Clearstream participants, among other
things, services for safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing.
Clearstream interfaces with domestic markets in several countries. As a
professional depository, Clearstream is subject to regulation by the Luxembourg
Commission for the Supervision of the Financial Sector (the "CSSF"). Clearstream
participants are recognized financial institutions around the world, including
underwriter, securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. Indirect access to Clearstream is
also available to others, such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Clearstream
participant, either directly or indirectly.
Distributions, to the extent received by the Relevant Depository for
Clearstream, with respect to the securities held beneficially through
Clearstream will be credited to cash accounts of Clearstream participants in
accordance with its rules and procedures.
Euroclear was created in 1968 to hold securities for its participants
and to clear and settle transactions between Euroclear participants through
simultaneous electronic book-entry delivery against payment, thereby eliminating
the need for movement of physical securities and any risk from lack of
simultaneous transfers of securities and cash. Transactions may be settled in
any of 32 currencies, including United States dollars. Euroclear provides
various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. Euroclear is
operated by Euroclear Bank S.A./NV under contract with Euroclear Clearance
Systems S.C., a Belgian cooperative corporation. Euroclear Bank S.A./NV conducts
all operations. All Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with Euroclear Bank S.A./NV, not Euroclear Clearance
Systems S.C. Euroclear Clearance Systems S.C. establishes policy for Euroclear
on behalf of Euroclear participants. Euroclear participants include banks
(including central banks), securities brokers and dealers and other professional
financial intermediaries. Indirect access to Euroclear is also available to
other firms that clear through or maintain a custodial relationship with a
Euroclear participant, either directly or indirectly.
Euroclear Bank S.A./NV has advised us that it is licensed by the
Belgian Banking and Finance Commission to carry out banking activities on a
global basis. As a Belgian bank, it is regulated and examined by the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with Euroclear Bank
S.A./NV are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law. These terms and conditions, operating procedures and laws govern transfers
of securities and cash within Euroclear, withdrawals of securities and cash from
Euroclear, and receipts of payments with respect to securities in Euroclear. All
securities in Euroclear are held on a fungible basis without attribution of
specific certificates to specific securities clearance accounts. Euroclear Bank
S.A./NV acts under the Terms and Conditions only on behalf of Euroclear
participants, and has no record of or relationship with persons holding through
Euroclear participants.
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The trustee will make distributions on the book-entry securities on
each distribution date to DTC. DTC will be responsible for crediting the amount
of such payments to the accounts of the applicable DTC participants in
accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payments to the beneficial owners that it
represents and to each Financial Intermediary for which it acts as agent. Each
such Financial Intermediary will be responsible for disbursing funds to the
beneficial owners that it represents.
Under a book-entry format, beneficial owners may experience some delay
in their receipt of payments, since the trustee will forward such payments to
Cede & Co. Distributions with respect to securities held through Clearstream or
Euroclear will be credited to the cash accounts of Clearstream participants or
Euroclear participants in accordance with the relevant system's rules and
procedures, to the extent received by the relevant depositary. Such
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. Because DTC can only act on behalf of
DTC participants that in turn can only act on behalf of Financial
Intermediaries, the ability of an Owner to pledge book-entry securities to
persons or entities that do not participate in the DTC system, or otherwise take
actions in respect of such book-entry securities, may be limited due to the lack
of physical certificates for such book-entry securities. In addition, issuance
of the book-entry securities in book-entry form may reduce the liquidity of such
securities in the secondary market since certain potential investors may be
unwilling to purchase securities for which they cannot obtain physical
certificates.
Monthly and annual reports on the applicable trust fund will be
provided to Cede & Co., as nominee of DTC, and Cede & Co may make such reports
available to beneficial owners upon request, in accordance with the Rules, and
to the DTC participants to whose DTC accounts the book-entry securities of such
beneficial owners are credited directly or are credited indirectly through
Financial Intermediaries.
DTC has advised the trustee that, unless and until Definitive
Securities are issued, DTC will take any action permitted to be taken by the
holders of the book-entry securities under the pooling and servicing agreement
only at the direction of one or more DTC participants to whose DTC accounts the
book-entry securities are credited, to the extent that such actions are taken on
behalf of such participants whose holdings include such book-entry securities.
Clearstream or Euroclear Bank S.A./NV, as the case may be, will take any other
action permitted to be taken by a holder under the pooling and servicing
agreement on behalf of a Clearstream participant or Euroclear participant only
in accordance with its relevant rules and procedures and subject to the ability
of the relevant depositary to effect such actions on its behalf through DTC. DTC
may take actions, at the direction of the related participants, with respect to
some securities which conflict with actions taken with respect to other
securities.
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Except with respect to the residual certificates, physical certificates
representing a security will be issued to beneficial owners only upon the events
specified in the pooling and servicing agreement. Such events may include the
following:
o we advise the trustee in writing that DTC is no longer willing or
able to properly discharge its responsibilities as depository with
respect to the securities, and that we or the trustee is unable to
locate a qualified successor,
o at our option, we elect to terminate the book-entry system through
DTC, or
o after the occurrence of an event of default, securityholders
representing not less than 51% of the aggregate certificate
principal balance of the applicable securities advise the trustee
and DTC through participants in writing that the continuation of a
book-entry system through DTC (or a successor thereto) is no longer
in the best interest of the securityholders.
Upon the occurrence of any of the events specified in the pooling and
servicing agreement, DTC will be required to notify all participants of the
availability through DTC of physical certificates. Upon surrender by DTC of the
certificates representing the securities and instruction for re-registration,
the trustee will issue the securities in the form of physical certificates, and
thereafter the trustee will recognize the holders of such physical certificates
as securityholders. Thereafter, payments of principal of and interest on the
securities will be made by the trustee directly to securityholders in accordance
with the procedures listed in this prospectus and in the pooling and servicing
agreement. The final distribution of any security (whether physical certificates
or securities registered in the name of Cede & Co.), however, will be made only
upon presentation and surrender of such securities on the final distribution
date at such office or agency as is specified in the notice of final payment to
securityholders.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures to facilitate transfers of securities among participants of DTC,
Clearstream and Euroclear, they are under no obligation to perform or continue
to perform such procedures and such procedures may be discontinued at any time.
None of the trust, the securities administrator 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 for DTC, or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests or
transfers thereof.
Distributions
General. On each distribution date, the trustee will make distributions
on the certificates to the persons in whose names such certificates are
registered at the related record date in accordance with timely disbursement
information from the securities administrator, by wire transfer in immediately
available funds to the account of a certificateholder at a bank or other
depository institution having appropriate wire transfer facilities as instructed
by a certificateholder in writing in accordance with the pooling and servicing
agreement. If no such instructions are given to the trustee, then the trustee
will make such distributions by check mailed to the address of the person
entitled thereto as it appears on the certificate register; provided, however,
that the final distribution in retirement of the certificates will be made only
upon presentation and surrender of such certificates at the offices of the
trustee designated for such purposes. As of the closing date, the trustee
designates its offices located at 2001 Bryan Street, Floor 8, Dallas, Texas
75201, Attention: Institutional Trust Services Transfer Department--BSABS
2003-SD2 for purposes of surrender, transfer and exchange. On each distribution
date, a holder of a certificate will receive such holder's percentage interest
of the amounts required to be distributed with respect to the applicable class
of certificates. The percentage interest evidenced by a certificate will equal
the percentage derived by dividing the denomination of such certificate by the
aggregate denominations of all certificates of the applicable class.
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Available Funds. Available funds for any distribution date will be
determined separately with respect to mortgage loan group I, mortgage loan group
II and mortgage loan group III. We refer to the available funds with respect to
each mortgage loan group in this prospectus supplement as "Group Available
Funds."
"Group Available Funds" with respect to any distribution date are equal
to, for each mortgage loan group:
(i) the sum, without duplication, of
o the scheduled principal due and collected or, with respect to any
simple interest loans, principal actually received during the
related due period or, other than with respect to any simple
interest loans, advanced on or before the related servicer advance
date,
o all interest due and received during the related due period, less
the related servicing fee and master servicing fee, if applicable,
o all advances relating to interest made on or before the related
servicer advance date,
o all compensating interest received for that distribution date,
o all prepayments, exclusive of any prepayment charges, collected in
the related prepayment period,
o the proceeds of the repurchase of any mortgage loan by the seller, a
servicer or EMC during the related prepayment period,
o the amount, if any, by which the aggregate unpaid principal balance
of any replacement mortgage loans is less than the aggregate unpaid
principal balance of any deleted mortgage loans delivered by a
servicer in connection with a substitution of a mortgage loan,
o all liquidation proceeds and insurance proceeds collected during the
related prepayment period, less all non-recoverable advances
reimbursed during the related due period, and
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o the purchase price of the assets of the trust upon the exercise by
EMC of its optional termination rights, less
(ii) amounts used to reimburse the trustee, the securities
administrator, the master servicer or any servicer for amounts due under the
pooling and servicing agreement or the applicable servicing agreement that have
not been retained by or paid to such party, any such amount, if not specifically
allocable to a mortgage loan group, to be allocated to each mortgage loan group
in proportion to Group Available Funds for such distribution date for such
mortgage loan group.
We refer to the sum of Group Available Funds for all three mortgage
loan groups for a distribution date as "Available Funds."
Priority of Distributions. On the first distribution date, the trustee
will distribute $100 deposited by the seller in the Distribution Account on the
closing date, to the Class R-I and Class R-II Certificates, pro rata, in
reduction of their respective certificate principal balances to zero.
On each distribution date, the trustee will withdraw Available Funds
for such distribution date from the Distribution Account and apply them as
follows:
(A) to each senior certificate group, from the related Group
Available Funds, in the following priority:
first, the Accrued Certificate Interest for that senior
certificate group for that distribution date;
second, any Accrued Certificate Interest for that senior
certificate group remaining undistributed from previous distribution
dates;
third, in reduction of the certificate principal balance of
that senior certificate group, the related Group Senior Optimal
Principal Amount for that distribution date, until the certificate
principal balance of that senior certificate group has been reduced to
zero;
The senior certificates may receive additional distributions as
described under "--Crosscollateralization" below.
(B) Except as provided under "--Crosscollateralization" below,
on each distribution date on or prior to the cross-over date, an amount equal to
the sum of the remaining Available Funds after the distributions in paragraph
(A) above will be distributed sequentially, in the following order, to the Class
B-1, Class B-2, Class B-3, Class B-4, Class B-5 and Class B-6 Certificates, in
each case up to an amount equal to and in the following order:
first, the Accrued Certificate Interest on the applicable
class for that distribution date,
second, any Accrued Certificate Interest on that class
remaining undistributed from previous distribution dates and
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third, that class' Allocable Share for that distribution date.
The "cross-over date" is the distribution date on which the certificate
principal balances of the subordinated certificates are reduced to zero.
Crosscollateralization. Application of Available Funds to pay the
subordinated certificates as provided in clause (B) under "--Priority of
Distributions" above will be subject to prior application to make additional
distributions to the senior certificates as described below.
Rapid prepayments in one or more mortgage loan groups. On each
distribution date prior to the cross-over date, but after the reduction of the
certificate principal balance of one or more classes of senior certificates to
zero, the remaining class or classes of senior certificates will be entitled to
receive in reduction of their certificate principal balances, pro rata based
upon their certificate principal balances immediately prior to that distribution
date, in addition to any principal prepayments related to each such remaining
senior certificates' respective mortgage loan group allocated to those senior
certificates, 100% of the principal prepayments on any mortgage loan in the
mortgage loan group relating to the fully repaid class or classes of senior
certificates. However, this additional allocation of principal prepayments to
the senior certificates will not be made if:
o the Subordination Doubling Test and the Delinquency Test have been
satisfied for the applicable distribution date and
o cumulative realized losses since the cut-off date, as a percentage
of the aggregate certificate principal balance of the certificates
on the closing date, do not exceed for any distribution date
occurring in a month (i) in or prior to September 2006, 20% and (ii)
after September 2006, 30%.
The "Subordination Doubling Test" has been satisfied for any
distribution date if the weighted average Subordinate Percentage equals or
exceeds 27.00% on such distribution date.
The "Delinquency Test" will have been satisfied for any distribution
date if, as of the last day of the related due period, (i) the aggregate stated
principal balance of the mortgage loans delinquent 60 days or more (including
for this purpose any such mortgage loans in foreclosure and mortgage loans with
respect to which the related mortgaged property has been acquired by the trust),
averaged over the last six months, as a percentage of the aggregate certificate
principal balance of the subordinated certificates does not exceed 50%.
Crosscollateralization due to disproportionate losses in a mortgage
loan group. If on any distribution date the aggregate certificate principal
balance of any class or classes of senior certificates would be in excess of the
aggregate stated principal balance of the mortgage loans in its related mortgage
loan group and any subordinated certificates are still outstanding, in each case
after giving effect to distributions to be made on that distribution date, then:
o 100% of amounts otherwise allocable to the subordinated certificates
in respect of principal will be distributed to that class or those
classes of senior certificates (pro rata if more than one class of
senior certificates is so affected, based on the relative amounts of
that excess) in reduction of the aggregate certificate principal
balance of that class or those classes, until the aggregate
certificate principal balance of that class or those classes of
senior certificates is equal to the aggregate stated principal
balance of the mortgage loans in its related mortgage loan group and
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o the Accrued Certificate Interest otherwise allocable to the
subordinated certificates on that distribution date will be reduced,
if necessary, and distributed to that class or those classes of
senior certificates in an amount equal to the Accrued Certificate
Interest for that distribution date on the excess of (x) the
aggregate certificate principal balance of that class or those
classes of senior certificates over (y) the aggregate stated
principal balance of the mortgage loans in the related mortgage loan
group (pro rata if more than one class of senior certificates is so
affected, based on the relative amounts of Accrued Certificate
Interest for each such class). Any such reduction in the Accrued
Certificate Interest or principal of the subordinated certificates
will be allocated to the subordinated certificates in reverse order
of their numerical designations, commencing with the Class B-6
Certificates.
If, after distributions have been made pursuant to priorities first and
second of clause (A) under "--Priority of Distributions" above on any
distribution date, the remaining Group Available Funds for any senior
certificate group are less than the related Group Senior Optimal Principal
Amount, that amount will be reduced, and the remaining funds will be distributed
on the related senior certificates on the basis of that reduced amount.
Distributions to Residual Certificates. On each distribution date, any
Available Funds remaining after payment of interest and principal to the classes
of certificates entitled to those distributions as described above will be
distributed to the residual certificates. However, if on any distribution date
any Group Available Funds remain after payment of interest and principal to the
related class or classes of senior certificates, those amounts will be
distributed to the other classes of senior certificates, pro rata, based upon
their certificate principal balances, until all amounts due to all classes of
senior certificates have been paid in full, before any amounts are distributed
to the residual certificates. We do not anticipate that there will be any
significant amounts remaining for any such distribution to the residual
certificates.
Interest
The "accrual period" for the certificates will be the calendar month,
commencing with September 2003, preceding the month in which a distribution date
occurs. Interest will accrue during the preceding accrual period for each class
of certificates (other than the residual certificates) at its then applicable
pass-through rate on the certificate principal balance of that class immediately
preceding the related distribution date. Accrued interest is calculated on the
basis of a 360-day year consisting of twelve 30-day months.
The "pass-through rates" on the offered certificates (other than the
residual certificates, which do not bear interest) are set forth under "Summary
of Terms--Pass-Through Rates."
The effective yield to the holders of certificates will be lower than
the yield otherwise produced by the applicable pass-through rate and purchase
price, because interest will not be distributed to the certificateholders until
the 25th day (or if that day is not a business day, then the next succeeding
business day) of the month following the month in which interest accrues on the
mortgage loans. See "Yield, Prepayment and Maturity Considerations" in this
prospectus supplement.
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In addition, the amount of interest payable to a certificateholder will
be reduced by that certificateholder's share of net interest shortfalls, the
interest portion of realized losses and deferred interest.
Net interest shortfalls and deferred interest (in the case of the
senior certificates, for the related mortgage loan group) will be allocated
among the certificates in proportion to the amount of Accrued Certificate
Interest that would have been allocated to the applicable certificate in the
absence of these shortfalls.
The interest portion of realized losses for the mortgage loans will be
allocated sequentially, in the following order, to the Class B-6, Class B-5,
Class B-4, Class B-3, Class B-2 and Class B-1 Certificates, and following the
cross-over date, to the class of senior certificates related to the mortgage
loans on which those realized losses occurred.
No Accrued Certificate Interest will be payable with respect to any
class of certificates after the distribution date on which the outstanding
certificate principal balance of that class of certificates has been reduced to
zero.
"Accrued Certificate Interest" for any certificate, for any
distribution date, will equal the amount of interest accrued during the related
accrual period at the applicable pass-through rate on the certificate principal
balance of that certificate immediately prior to that distribution date:
minus
o (i) in the case of a senior certificate, that certificate's share of
any net interest shortfalls and any deferred interest in respect of
the related mortgage loan group, and, after the cross-over date, the
interest portion of any realized losses in respect of the related
mortgage loan group
or
(ii) in the case of a subordinated certificate, that certificate's
share of any net interest shortfall and deferred interest and the
interest portion of any realized losses on the mortgage loans.
"Deferred interest" is, with respect to any distribution date and a
mortgage loan having a negative amortization feature, excess interest which is
not paid as interest for the related due period but is added to the unpaid
principal balance of the mortgage loan.
If on any distribution date the Group Available Funds for any senior
certificate group are less than the Accrued Certificate Interest on those senior
certificates for that distribution date prior to reduction for net interest
shortfall, deferred interest and, after the cross-over date, the interest
portion of realized losses on the related mortgage loans, the shortfall will be
allocated among the holders of the related class of senior certificates in
proportion to the respective amounts of Accrued Certificate Interest that would
have been allocated to those holders in the absence of that net interest
shortfall, deferred interest and/or realized losses for that distribution date.
In addition, the amount of any net interest shortfalls with respect to the
mortgage loans in the related mortgage loan group will constitute unpaid Accrued
Certificate Interest and will be distributable to holders of the related
certificates entitled to those amounts on subsequent distribution dates, to the
extent of the related Group Available Funds, after current interest
distributions as required in this prospectus supplement. Any such amounts so
carried forward will not bear interest. Shortfalls in interest payments will not
be offset by a reduction in the servicing compensation of the servicers or
otherwise, except to the extent of applicable compensating interest payments.
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Principal
General. The "certificate principal balance" of any certificate as of
any distribution date will equal that certificate's certificate principal
balance on the closing date, as increased by any deferred interest previously
allocated to that certificate, and as reduced by:
o all amounts distributed on previous distribution dates on that
certificate on account of principal,
o the principal portion of all realized losses previously allocated to
that certificate and
o in the case of a subordinated certificate, that certificate's pro
rata share, if any, of the Subordinated Certificate Writedown
Amount, as applicable, for previous distribution dates.
Deferred interest for any due period, with respect to each negative
amortization mortgage loan will be allocated to the related senior certificates
based upon the Senior Percentage for that loan group with the remainder being
allocated to the subordinate certificates pro rata based upon their respective
certificate principal balances and will be applied to increase the certificate
principal balances of those certificates.
With respect to any class of certificates, the certificate principal
balance of that class will equal the sum of the certificate principal balances
of all certificates in that class.
As of any distribution date, the "Subordinated Certificate Writedown
Amount" will equal the amount by which:
o the sum of the certificate principal balances of all of the
certificates (after giving effect to the distribution of principal
and the allocation of realized losses in reduction of, and deferred
interest as an increase to, the certificate principal balances of
those certificates on that distribution date) exceeds
o the stated principal balances of the mortgage loans on the due date
related to that distribution date.
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The Subordinated Certificate Writedown Amount will be allocated to the
subordinated certificates in inverse order of their numerical class
designations, until the certificate principal balance of each such class has
been reduced to zero.
Distributions in reduction of the certificate principal balance of each
senior certificate group will be made on each distribution date pursuant to
priority third above of clause (A) under "--Distributions--Priority of
Payments." In accordance with that priority third, Group Available Funds
remaining after distributions of interest on the related senior certificate
group will be allocated to those certificates in an aggregate amount not to
exceed the related Group Senior Optimal Principal Amount for that distribution
date.
Distributions in reduction of the certificate principal balances of the
subordinated certificates will be made pursuant to priority third of clause (B)
above under "--Distributions--Priority of Payments." In accordance with that
priority third, Available Funds, if any, remaining after distributions of
principal and interest on the senior certificates on that distribution date will
be allocated to the subordinated certificates in an amount equal to each such
class's Allocable Share for that distribution date, provided that no
distribution of principal will be made on any such class until any class ranking
prior to that class has received distributions of interest and principal, and
that class has received distributions of interest, on that distribution date.
Group Senior Optimal Principal Amount. The "Group Senior Optimal
Principal Amount" will be for each of the group I, group II and group III senior
certificates, respectively, with respect to each distribution date, an amount
equal to the sum of the following (but in no event greater than the aggregate
certificate principal balance of the related senior certificate group
immediately prior to that distribution date):
(i) the applicable Senior Percentage of the principal portion of
all monthly payments due on the mortgage loans in the related
mortgage loan group on the related due date, as specified in
the amortization schedule at the time applicable thereto
(after adjustment for previous principal prepayments but
before any adjustment to such amortization schedule by reason
of any bankruptcy or similar proceeding or any moratorium or
similar waiver or grace period);
(ii) the applicable Group Senior Prepayment Percentage of the
stated principal balance of each mortgage loan in the related
mortgage loan group which was the subject of a prepayment in
full received by the master servicer during the applicable
prepayment period, together with the applicable Group Senior
Prepayment Percentage of all partial prepayments allocated to
principal received during the applicable prepayment period;
(iii) the lesser of:
o the applicable Group Senior Prepayment Percentage of the
sum of:
(a) the stated principal balance of each mortgage
loan in the related mortgage loan group purchased by
an insurer from the trust during the related
prepayment period pursuant to the related primary
mortgage insurance policy, if any, or otherwise plus
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(b) all liquidation proceeds allocable to principal
received in respect of each other mortgage loan in
the related mortgage loan group which became a
liquidated mortgage loan during the related
prepayment period, and
o the applicable Senior Percentage of the sum of:
(a) the stated principal balance of each mortgage
loan in the related mortgage loan group that was
purchased by an insurer from the trust during the
related prepayment period pursuant to the related
primary mortgage insurance policy, if any or
otherwise plus
(b) the stated principal balance of each other
mortgage loan in the related mortgage loan group
which became a liquidated mortgage loan during the
related prepayment period; and
(iv) the applicable Group Senior Prepayment Percentage of the sum
of:
o the stated principal balance of each mortgage loan in the
related mortgage loan group which was repurchased by or on
behalf of the mortgage loan seller in connection with such
distribution date, and
o the excess, if any, of the stated principal balance of a
mortgage loan in the related mortgage loan group that has
been replaced by the mortgage loan seller with a substitute
mortgage loan pursuant to the mortgage loan purchase
agreement in connection with that distribution date over
the stated principal balance of that substitute mortgage
loan.
The applicable "Senior Percentage" for any senior certificate group on
any distribution date will equal the lesser of (i) 100% and (ii) the percentage
(carried to six places rounded up) obtained by dividing the aggregate
certificate principal balance of those senior certificates immediately preceding
that distribution date by the aggregate stated principal balance of the mortgage
loans in the related mortgage loan group as of the beginning of the related due
period.
The initial Senior Percentages for each senior certificate group will
be equal to, in each case, approximately 86.50%.
The "Group Senior Prepayment Percentage" will, for each of the group I,
group II and group III senior certificates, on any distribution date occurring
during the periods set forth below, be as follows:
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Period (dates inclusive) Group Senior Prepayment Percentage
- ------------------------ -----------------------------------
October 2003 - September 2008 100%
October 2008 - September 2009 Senior Percentage for the related senior
certificates plus 70% of the related
Subordinate Percentage.
October 2009 - September 2010 Senior Percentage for the related senior
certificates plus 60% of the related
Subordinate Percentage.
October 2010 - September 2011 Senior Percentage for the related senior
certificates plus 40% of the related
Subordinate Percentage.
October 2011 - September 2012 Senior Percentage for the related senior
certificates plus 20% of the related
Subordinate Percentage.
October 2012 and thereafter Senior Percentage for the related
senior certificates.
No reduction of a Group Senior Prepayment Percentage will occur on any
distribution date unless, as of the last day of the month preceding that
distribution date:
o the Delinquency Test has been satisfied,
and
o cumulative realized losses on the mortgage loans do not exceed, on
any distribution date for the periods set forth below, the following
percentage of the aggregate certificate principal balance of the
subordinated certificates as of the cut-off date:
Percentage of
Original Subordinate
Period (dates inclusive) Principal Balance
------------------------ ----------------------
October 2008 - September 2009 30%
October 2009 - September 2010 35%
October 2010 - September 2011 40%
October 2011 - September 2012 45%
October 2012 and thereafter 50%
However, if on any distribution date:
o the Subordination Doubling Test has been satisfied;
o the Delinquency Test has been satisfied; and
o cumulative realized losses on the mortgage loans as a percentage of
the aggregate certificate balance of the subordinated certificates
as of the cut-off date do not exceed for any distribution date
occurring in a month (i) in or prior to September 2006, 20% and (ii)
after September 2006, 30%,
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then
instead of the percentages set forth above, the applicable Group Senior
Prepayment Percentage will be, for any distribution date:
o prior to the distribution date in October 2006, the Senior
Percentage for the related senior certificates plus 50% of the
related Subordinate Percentage, and
o on or after the distribution date in October 2006, the Senior
Percentage for the related Senior Certificates.
On the distribution date on which the certificate principal balances of
a senior certificate group is reduced to zero, the related Group Senior
Prepayment Percentage will be the minimum percentage sufficient to effect that
reduction and thereafter will be zero.
The "Subordinate Percentage" for the subordinated certificates with
respect to a mortgage loan group on any distribution date will equal 100% minus
the Senior Percentage for the related senior certificates.
The "Subordinate Prepayment Percentage" for the subordinated
certificates with respect to a mortgage loan group on any distribution date will
equal 100% minus the related Group Senior Prepayment Percentage. On any
distribution date after the certificate principal balances of a senior
certificate group has been reduced to zero, the Subordinate Prepayment
Percentage for the subordinated certificates with respect to the related
mortgage loan group will equal 100%.
The initial Subordinate Percentages for each mortgage loan group will
be equal to approximately 13.50%.
Subordinate Optimal Principal Amount and Allocable Share. The
"Subordinate Optimal Principal Amount" for the subordinated certificates with
respect to each distribution date will be an amount equal to the sum of the
following for each of the mortgage loan groups (but in no event greater than the
aggregate certificate principal balance of the subordinated certificates
immediately prior to such distribution date):
(i) the applicable Subordinate Percentage of the principal portion
of all monthly payments due on each mortgage loan in the
related mortgage loan group on the related due date, as
specified in the then-applicable amortization schedule at the
time applicable thereto (after adjustment for previous
principal prepayments but before any adjustment to such
amortization schedule by reason of any bankruptcy or similar
proceeding or any moratorium or similar waiver or grace
period);
(ii) the applicable Subordinate Prepayment Percentage of the stated
principal balance of each mortgage loan in the related
mortgage loan group which was the subject of a prepayment in
full received by the master servicer during the applicable
prepayment period, together with the applicable Subordinate
Prepayment Percentage of all partial prepayments of principal
received during the applicable prepayment period for each
mortgage loan in the related mortgage loan group;
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(iii) the excess, if any, of:
o the liquidation proceeds allocable to principal received
during the related prepayment period in respect of each
liquidated mortgage loan in the related mortgage loan group
over
o the sum of the amounts distributable to the holders of the
related senior certificates pursuant to clause (iii) of the
related definition of Group Senior Optimal Principal Amount
on that distribution date;
(iv) the applicable Subordinate Prepayment Percentage of the sum
of:
o the stated principal balance of each mortgage loan in the
related mortgage loan group which was repurchased by the
mortgage loan seller in connection with that distribution
date and
o the difference, if any, between the stated principal
balance of a mortgage loan in the related mortgage loan
group which was replaced by the mortgage loan seller with a
substitute mortgage loan pursuant to the mortgage loan
purchase agreement in connection with that distribution
date and the stated principal balance of that substitute
mortgage loan; and
(v) on the distribution date on which the certificate principal
balance of the related senior certificate group has been
reduced to zero, 100% of any applicable Group Senior Optimal
Principal Amount.
The "Allocable Share" with respect to any class of subordinated
certificates on any distribution date will generally equal that class's pro rata
share (based on the certificate principal balance of that class as a percentage
of the aggregate certificate principal balance of the subordinated certificates)
of the sum of each of the components of the definition of Subordinate Optimal
Principal Amount; provided, that, except as described in the second succeeding
paragraph, no class of subordinated certificates (other than the class of
subordinated certificates outstanding with the lowest numerical designation)
shall be entitled on any distribution date to receive distributions pursuant to
clauses (ii) and (iv) of the definition of the Subordinate Optimal Principal
Amount unless the Class Prepayment Distribution Trigger for the related class is
satisfied for that distribution date.
The "Class Prepayment Distribution Trigger" for a class of subordinated
certificates for any distribution date is satisfied if the fraction (expressed
as a percentage), the numerator of which is the aggregate certificate principal
balance of such class and each class subordinated thereto, if any, and the
denominator of which is the stated principal balances of all of the mortgage
loans as of the related due date, equals or exceeds such percentage calculated
as of the closing date.
If on any distribution date the certificate principal balance of any
class of subordinated certificates for which the related Class Prepayment
Distribution Trigger was satisfied on that distribution date is reduced to zero,
any amounts distributable to that class pursuant to clauses (ii) and (iv) of the
definition of Subordinate Optimal Principal Amount to the extent of that class's
remaining Allocable Share, will be distributed to the remaining classes of
subordinated certificates that satisfy the related Class Prepayment Distribution
Trigger and to the class of subordinated certificates having the lowest
numerical designation, in reduction of their respective certificate principal
balances, sequentially, in the order of their numerical class designations.
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If the Class Prepayment Distribution Trigger is not satisfied for any
class of subordinated certificates on any distribution date, this may have the
effect of accelerating the amortization of more senior classes of subordinated
certificates.
Certain Definitions Relating to the Mortgage Loans
The "due period" with respect to any distribution date is:
o for any mortgage loan other than a simple interest loan, the period
commencing on the second day of the month preceding the month in
which the distribution date occurs and ending at the close of
business on the first day of the month in which the distribution
date occurs and
o for any simple interest loan, the related prepayment period.
"Insurance proceeds" are all proceeds of any insurance policies, to the
extent such proceeds are not applied to the restoration of the property or
released to the mortgagor in accordance with the related servicer's normal
servicing procedures, other than proceeds that represent reimbursement of the
related servicer's costs and expenses incurred in connection with presenting
claims under the related insurance policies.
"Liquidation proceeds" are all net proceeds, other than insurance
proceeds, received in connection with the partial or complete liquidation of
mortgage loans, whether through trustee's sale, foreclosure sale or otherwise,
or in connection with any condemnation or partial release of a mortgaged
property, together with the net proceeds received with respect to any mortgaged
properties acquired by the related servicer by foreclosure or deed in lieu of
foreclosure in connection with defaulted mortgage loans, other than the amount
of such net proceeds representing any profit realized by the servicer in
connection with the disposition of any such properties.
The "prepayment period" with respect to a distribution date is the
immediately preceding calendar month in the case of the mortgage loans for which
EMC is the servicer and such period as is provided in the related servicing
agreement with respect to the remaining mortgage loans.
A "realized loss" is (i) the outstanding principal balance of a
defaulted mortgage loan and (ii) accrued and unpaid interest at the applicable
mortgage rate through the last day of the month of liquidation, in each case as
reduced by liquidation proceeds and insurance proceeds for that mortgage loan.
In determining whether a realized loss on a liquidated mortgage loan is a
realized loss in respect of interest or principal, liquidation proceeds are
allocated first, to accrued unpaid interest and second to reduce the principal
balance of such mortgage loan. If we do not specifically state whether we are
referring to the interest portion or principal portion of a realized loss in
this prospectus supplement, we are referring to the principal portion of that
realized loss.
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The "stated principal balance" of any mortgage loan means, with respect
to any distribution date, the cut-off date principal balance thereof
o minus the sum of
(i) the principal portion of the scheduled monthly payments due
(or, with respect to any simple interest loans, the
principal portion of payments actually received) from
mortgagors with respect to such mortgage loan during each
due period ending prior to such distribution date (and,
other than with respect to any simple interest loans,
irrespective of any delinquency in their payment);
(ii) all prepayments of principal with respect to such mortgage
loan received prior to or during the related prepayment
period, and all liquidation proceeds to the extent applied
by the related servicer as recoveries of principal in
accordance with the pooling and servicing agreement that
were received by the related servicer as of the close of
business on the last day of the prepayment period related
to such distribution date, and
(iii) the principal portion of any realized loss thereon incurred
during the related prepayment period;
o plus, with respect to each negatively amortizing loan, any deferred
interest added to principal through the last day of the related due
period.
The stated principal balance of any liquidated mortgage loan is zero.
Allocation of Realized Losses
The principal portion of realized losses on the mortgage loans will not
be allocated to any senior certificates until the cross-over date. Prior to the
cross-over date (or on that date under certain circumstances) any such realized
losses will be allocated as follows:
first, to the Class B-6 Certificates,
second, to the Class B-5 Certificates,
third, to the Class B-4 Certificates,
fourth, to the Class B-3 Certificates,
fifth, to the Class B-2 Certificates, and
sixth, to the Class B-1 Certificates.
Commencing on the cross-over date, the principal portion of realized
losses on the group I, group II and group III mortgage loans will be allocated
to the related senior certificate group.
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The interest portion of realized losses will be allocated among the
outstanding classes of certificates to the extent described under "--Interest"
above.
All allocations of realized losses will be accomplished on a
distribution date by reducing the aggregate certificate principal balance of the
applicable classes of certificates by their appropriate shares of any such
losses occurring during the month preceding the month of that distribution date
and, accordingly, will be taken into account in determining the distributions of
principal and interest on the certificates commencing on the following
distribution date.
No reduction of the certificate principal balance of any class of
senior certificates will be made on any distribution date on account of realized
losses to the extent that the reduction would have the effect of reducing the
aggregate certificate principal balance of that class of senior certificates to
an amount less than the aggregate stated principal balance of the mortgage loans
in the related mortgage loan group as of the related due date.
Subordination
Priority of senior certificates. As of the closing date, (i) the
aggregate certificate principal balances of the Class B-1, Class B-2, Class B-3,
Class B-4, Class B-5 and Class B-6 Certificates will equal approximately 13.50%
of the aggregate certificate principal balances of all the classes of
certificates and (ii) the aggregate certificate principal balances of the Class
B-4, Class B-5 and Class B-6 Certificates will equal approximately 5.50% of the
aggregate certificate principal balances of all the classes of certificates. The
rights of the holders of the subordinated certificates to receive distributions
with respect to the mortgage loans will be subordinated to such rights of the
holders of the senior certificates and to each class of subordinated
certificates having a lower numerical designation than that class. The
subordination of a class of subordinated certificates to the senior certificates
and the further subordination among the subordinated certificates, are each
intended to increase the likelihood of timely receipt by the holders of the
certificates with higher relative payment priority of the maximum amount to
which they are entitled on any distribution date and to provide those holders
with protection against losses resulting from defaults on mortgage loans to the
extent described above.
However, in certain circumstances, the amount of available
subordination may be exhausted and shortfalls in distributions on the offered
certificates could result. Holders of senior certificates will bear their
proportionate share of realized losses in excess of the total subordination
amount, as described under the heading "--Allocation of Losses," above.
In addition, in order to extend the period during which the
subordinated certificates remain available as credit enhancement for the senior
certificates, the entire amount of any prepayment or other unscheduled recovery
of principal with respect to a mortgage loan will be allocated to the applicable
senior certificates to the extent described under the heading "--Principal"
above during the first five years after the closing date (with such allocation
to be subject to reduction over a four year period thereafter as described under
that heading), unless the amount of subordination provided to the related group
of senior certificates is twice the amount as of the cut-off date, and certain
loss and delinquency tests are satisfied. This allocation has the effect of
accelerating the amortization of the applicable senior certificates while, in
the absence of losses in respect of the related mortgage loans, increasing the
percentage interest in the principal balance of the related mortgage loans
evidenced by the subordinated certificates.
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After the payment of amounts distributable in respect of the senior
certificates on each distribution date, the subordinated certificates will be
entitled on that date to the remaining portion, if any, of the Available Funds,
in an aggregate amount equal to the Accrued Certificate Interest on the
subordinated certificates for that date, any remaining undistributed Accrued
Certificate Interest from previous distribution dates and the sum of the
Allocable Shares of the subordinated certificates. Amounts so distributed to
holders of the subordinated certificates will not be available to cover any
delinquencies or any realized losses on the mortgage loans for subsequent
distribution dates.
Priority among subordinated certificates. On each distribution date,
the holders of a class of subordinated certificates will have a preferential
right to receive out of Available Funds the amounts due to them on that
distribution date, prior to any distribution being made on that date to any
class of certificates subordinated to that class. In addition, except as
described in this prospectus supplement, realized losses on the mortgage loans
will be allocated, to the extent set forth in this prospectus supplement, in
reduction of the certificate principal balances of the classes of subordinated
certificates in the inverse order of their numerical class designations. The
effect of the allocation of realized losses to a class of subordinated
certificates will be to reduce future distributions allocable to that class and
to increase the relative portion of distributions allocable to more senior
classes of subordinated certificates.
In order to maintain the relative levels of subordination among the
classes of subordinated certificates, any prepayments on the mortgage loans and
certain other unscheduled recoveries of principal in respect of the mortgage
loans (which, except as described in this prospectus supplement, will not be
distributable to the subordinated certificates for at least the first five years
after the cut-off date) will not be payable to the holders of any class of
subordinated certificates on any distribution date for which the related Class
Prepayment Distribution Trigger is not satisfied, except as described above
under the heading "--Principal." If the Class Prepayment Distribution Trigger is
not satisfied with respect to any class of subordinated certificates, the
amortization of more senior classes of subordinated certificates may occur more
rapidly than would otherwise have been the case and, in the absence of losses in
respect of the related mortgage loans, the percentage interest in the principal
balance of the mortgage loans evidenced by those subordinated certificates may
increase.
As a result of the subordination of each class of subordinated
certificates, that class of certificates will be more sensitive than more senior
classes of certificates to the rate of delinquencies and defaults on the
mortgage loans, and under certain circumstances investors in those certificates
may not recover their initial investment.
Reports to Certificateholders
On each distribution date, the securities administrator will make
available to each certificateholder, the master servicer, each servicer, the
trustee and the depositor a statement generally setting forth, among other
information:
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o the certificate principal balance of each class of certificates
immediately prior to that distribution date;
o the amount of the distribution allocable to principal on each class
of certificates, separately identifying for each mortgage loan group
(i) the aggregate amount of any principal prepayments included in
that distribution, (ii) the aggregate of all scheduled principal
(except with respect to any simple interest loans) included in that
distribution and, with respect to any simple interest loans, the
amount of principal actually received and included in that
distribution and (iii) the amount included in that distribution that
has been paid in respect of principal on each repurchased mortgage
loan or in connection with each substituted mortgage loan;
o the applicable pass-through rate and the aggregate amount of
interest accrued at such pass-through rate with respect to each
class during the related accrual period;
o the aggregate amount of interest paid to each class of certificates;
o the net interest shortfall, deferred interest, the interest portion
of realized losses and any other adjustments to interest at the
related pass-through rate necessary to account for any difference
between interest accrued at the pass-through rate for each class of
certificates and Accrued Certificate Interest for each class for
that distribution date;
o the certificate principal balance of each class of certificates
after that distribution date, separately identifying any increase
resulting from deferred interest and any decrease resulting from the
allocation of the principal portion of realized losses and other
adjustments to the certificate principal balance of that class that
account for the difference between the certificate principal balance
of that class prior to that distribution date as reduced by
distributions of principal on that distribution date and the
certificate principal balance for that class after that distribution
date;
o the amount of any advances and compensating interest paid by the
master servicer or the servicers included in such distribution,
separately stated for each mortgage loan group;
o the stated principal balance of the mortgage loans, stated
separately for each mortgage loan group;
o the amount of the master servicing fee paid to Wells Fargo and the
servicing fee paid to or retained by each servicer for the related
due period, separately stated for each mortgage loan group;
o the number and aggregate principal amounts of the mortgage loans in
each mortgage loan group (A) delinquent, exclusive of related
mortgage loans in foreclosure, (1) 31 to 60 days delinquent, (2) 61
to 90 days delinquent and (3) 91 or more days delinquent and (B) in
foreclosure and delinquent for each of the periods specified in
clause (A), in each case as of the close of business on the last day
of the calendar month preceding that distribution date;
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o with respect to any mortgage loan that was liquidated during the
preceding calendar month, the mortgage loan group, loan number and
stated principal balance of, and realized loss on, that mortgage
loan as of the end of the related prepayment period;
o whether the Delinquency Test was satisfied for that distribution
date;
o whether the Subordination Doubling Test was satisfied for that
distribution date;
o for each mortgage loan group, the number and aggregate principal
balance of all mortgage loans as to which the mortgaged property was
REO Property as of the end of the related prepayment period;
o cumulative realized losses relating to principal since the cut-off
date for the mortgage loans in each mortgage loan group through the
end of the preceding month; and
o with respect to each mortgage loan group, the related Senior
Percentage, Subordinate Percentage, Group Senior Prepayment
Percentage and Subordinate Prepayment Percentage.
The securities administrator will make the monthly statement and, at
its option, any additional files containing the same information in an
alternative format, available each month to certificateholders via the
securities administrator's internet website. The securities administrator's
internet website shall initially be located at "www.ctslink.com." Assistance in
using the securities administrator's website service can be obtained by calling
the securities administrator's customer service desk at (301) 815-6600.
To the extent timely received from the securities administrator, the
trustee will also make monthly statements available each month to
certificateholders via the trustee's internet website. The trustee's internet
website will initially be located at www.jpmorgan.com/sfr. Assistance in using
the trustee's website service can be obtained by calling the trustee's customer
service desk at (877) 722-1095.
Parties that are unable to use the above distribution options are
entitled to have a paper copy mailed to them via first class mail by calling the
securities administrator's customer service desk and indicating such. The
securities administrator may change the way monthly statements are distributed
in order to make such distributions more convenient or more accessible to the
above parties.
In addition, within a reasonable period of time after the end of each
calendar year, the trustee will prepare and deliver to the master servicer and
to each certificateholder of record during the previous calendar year a
statement containing information necessary to enable certificateholders to
prepare their tax returns. Such statements will not have been examined and
reported upon by an independent public accountant.
S-75
Amendment
The pooling and servicing agreement may be amended by the depositor,
the master servicer, EMC, as seller and servicer, the securities administrator
and the trustee, without the consent of certificateholders,
o to cure any ambiguity,
o to correct or supplement any provision therein which may be
defective or inconsistent with any other provision therein,
o to conform the terms of the pooling and servicing agreement to those
of this prospectus supplement or
o to make any other revisions with respect to matters or questions
arising under the pooling and servicing agreement which are not
inconsistent with the provisions thereof,
provided that such action will not adversely affect in any material respect the
interests of any certificateholder. An amendment will be deemed not to adversely
affect in any material respect the interests of the certificateholders if the
person requesting such amendment obtains a letter from each rating agency
stating that such amendment will not result in the downgrading or withdrawal of
the respective ratings then assigned to any class of certificates. The pooling
and servicing agreement may also be amended without the consent any of the
certificateholders, to change the manner in which the Master Servicer Collection
Account or EMC's protected account is maintained, provided that any such change
does not adversely affect the then current rating on any class of certificates.
In addition, the pooling and servicing agreement may be amended without the
consent of certificateholders to modify, eliminate or add to any of its
provisions to such extent as may be necessary to maintain the qualification of
the trust fund's REMIC elections, provided that the trustee has received an
opinion of counsel to the effect that such action is necessary or helpful to
maintain such qualification.
In addition, the pooling and servicing agreement may be amended by the
depositor, master servicer, EMC, as seller and servicer, the securities
administrator and the trustee with the consent of the holders of a majority in
interest of each class of certificates affected thereby for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of the pooling and servicing agreement or of modifying in any manner
the rights of the certificateholders; provided, however, that no such amendment
may
(a) reduce in any manner the amount of, or delay the
timing of, payments required to be distributed on any
certificate without the consent of the holder of such
certificate;
(b) cause any trust REMIC to fail to qualify as a REMIC for
federal tax purposes;
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(c) reduce the aforesaid percentage of aggregate outstanding
certificate principal balances of certificates of each
class, the holders of which are required to consent to
any such amendment, without the consent of the holders of
all certificates of such class.
The trustee will not be entitled to consent to any amendment to the
pooling and servicing agreement without having first received an opinion of
counsel to the effect that such amendment is permitted under the terms of the
pooling and servicing agreement and will not cause the trust fund's REMIC
elections to fail to qualify.
Voting Rights
As of any date of determination,
o holders of each class of certificates (other than the residual
certificates) will be allocated 98% of all voting rights, allocated
among those classes in proportion to their respective certificate
principal balances and
o holders of each class of Class R Certificate will be allocated 1% of
all voting rights.
Voting rights will be allocated among the certificates of each such
class in accordance with their respective percentage interests.
Optional Termination
EMC Mortgage Corporation will have the right to purchase all remaining
mortgage loans and REO properties, and thereby effect early retirement of all
the certificates, on and after the first distribution date on which the stated
principal balance of the mortgage loans and REO properties at the time of
repurchase is less than or equal to 10% of cut-off date principal balance of the
mortgage loans. We refer to the first such date as the "optional termination
date." In the event that EMC Mortgage Corporation, exercises such option, it
will effect such repurchase at a price equal to the sum of
o 100% of the stated principal balance of each mortgage loan plus
accrued interest thereon at the applicable mortgage rate,
o the appraised value of any REO property, up to the stated principal
balance of the related mortgage loan, and
o any unreimbursed out-of-pocket costs and expenses of the trustee,
any related servicer, the master servicer, the securities
administrator or the custodian and any unreimbursed advances
previously incurred by the related servicer or the master servicer,
as the case may be, in the performance of their respective servicing
and master servicing obligations.
Proceeds from such purchase will be distributed to the certificateholders in the
priority described above in "Description of the Certificates--Distributions."
The proceeds from any such distribution may not be sufficient to distribute the
full amount to which each class of certificates is entitled if the purchase
price is based in part on the appraised value of any REO property and such
appraised value is less than the stated principal balance of the related
mortgage loan. Any purchase of the mortgage loans and REO properties will result
in an early retirement of the certificates.
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Optional Purchase of Defaulted Loans
As to any mortgage loan which as of the first day of a calendar quarter
is delinquent in payment by 91 days or more, EMC Mortgage Corporation may, at
its option, purchase such mortgage loan at a price equal to 100% of the stated
principal balance thereof plus accrued interest thereon at the applicable
mortgage rate, from the date through which interest was last paid by the related
mortgagor or advanced to the first day of the month in which such amount is to
be distributed; provided that such mortgage loan is still delinquent in payment
by 91 days or more as of the date of such purchase and provided further, that
this limited purchase option, if not theretofore exercised, shall terminate on
the date prior to the last day of such calendar quarter. Such option, if not
exercised, shall not thereafter be reinstated as to any such mortgage loan
unless the delinquency is cured and the mortgage loan thereafter again becomes
delinquent in payment 91 days or more. In that event, the option shall again
become exercisable on the first date of the subsequent calendar quarter.
Events of Default
Events of default under the pooling and servicing agreement include:
o any failure by Wells Fargo, as master servicer, to deposit in the
Master Servicer Collection Account the required amounts or any
failure by the master servicer or EMC, as servicer, to remit to the
master servicer any payment, including an advance required to be
made under the terms of the pooling and servicing agreement, which
continues unremedied for five business days after written notice of
such failure shall have been given (i) in the case of the master
servicer, to the master servicer, by the trustee or the depositor,
or to the master servicer, and the trustee by the holders of
certificates evidencing not less than 25% of the voting rights
evidenced by the certificates and (ii) in the case of EMC, as
servicer, to EMC by the master servicer;
o any failure by the master servicer or EMC, as servicer, to observe
or perform in any material respect any other of its covenants or
agreements, or any breach of a representation or warranty made by
the master servicer or EMC, as servicer, in the pooling and
servicing agreement, which continues unremedied for 60 days after
the giving of written notice of such failure (i) in the case of the
master servicer, to the master servicer, by the trustee or the
depositor, or to the master servicer, and the trustee by the holders
of certificates evidencing not less than 25% of the voting rights
evidenced by the certificates and (ii) in the case of EMC, as
servicer, to EMC by the master servicer; or
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o insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings, and certain actions by or on
behalf of the master servicer or EMC, as servicer, indicating its
insolvency or inability to pay its obligations.
Rights Upon Event of Default
So long as an event of default under the pooling and servicing
agreement remains unremedied, in the case of an event of default with respect to
the master servicer, the trustee shall, but only upon the receipt of written
instructions from the holders of certificates having not less than 25% of the
voting rights evidenced by the certificates, terminate all of the rights and
obligations of the master servicer under the pooling and servicing agreement and
in and to the mortgage loans, whereupon EMC Mortgage Corporation will succeed,
after a transition period not exceeding 90 days, to all of the responsibilities
and duties of the master servicer under the pooling and servicing agreement,
including the limited obligation to make advances.
In the case of an event of default relating to a default by EMC, as
servicer, pursuant to the pooling and servicing agreement, the master servicer
shall terminate the rights and obligations of EMC, as servicer, and assume those
rights and obligations as successor servicer, after a transition period of 90
days.
No assurance can be given that termination of the rights and
obligations of the master servicer or any servicer under the pooling and
servicing agreement, would not adversely affect the servicing of the mortgage
loans, including the delinquency experience of the mortgage loans. The costs and
expenses of the trustee and the successor master servicer or successor servicer
in connection with the termination of the master servicer or any servicer,
appointment of a successor master servicer or successor servicer and the
transfer of servicing, to the extent not paid by the terminated master servicer
or servicer, will be paid by the trust fund.
No certificateholder, solely by virtue of such holder's status as a
certificateholder, will have any right under the pooling and servicing agreement
to institute any proceeding with respect thereto, unless such holder previously
has given to the trustee written notice of the continuation of an event of
default and unless the holders of certificates having not less than 25% of the
voting rights evidenced by the certificates have made written request to the
trustee to institute such proceeding in its own name as trustee thereunder and
have offered to the trustee reasonable indemnity and the trustee for 60 days has
neglected or refused to institute any such proceeding.
The Trustee
JPMorgan Chase Bank will be the trustee under the pooling and servicing
agreement. The depositor and the master servicer may maintain other banking
relationships in the ordinary course of business with the trustee. The trustee's
corporate trust office located at 4 New York Plaza, 6th Floor, New York, New
York 10004 Attention: Institutional Trust Services/Structured Finance Services,
or at such other address as the trustee may designate from time to time.
S-79
Wells Fargo Bank Minnesota, National Association, in its capacity as
master servicer, will pay to the trustee on each distribution date, a trustee
fee in an amount separately agreed upon between the trustee and the master
servicer.
The Securities Administrator
Wells Fargo Bank Minnesota, National Association will be the securities
administrator under the pooling and servicing agreement. The securities
administrator's corporate trust office is located at 9062 Old Annapolis Road,
Columbia, Maryland 21045 or at such other address as the securities
administrator may designate from time to time. The securities administrator will
be paid compensation by Wells Fargo Bank Minnesota, National Association, in its
capacity as master servicer.
The securities administrator may resign at any time, in which event the
trustee will be obligated to appoint a successor securities administrator. The
trustee may also remove the securities administrator if the securities
administrator ceases to be eligible to continue as such under the pooling and
servicing agreement or if the securities administrator becomes incapable of
acting, bankrupt, insolvent or if a receiver or public officer takes charge of
the securities administrator or its property. Upon such resignation or removal
of the securities administrator, the trustee will be entitled to appoint a
successor securities administrator. The securities administrator may also be
removed at any time by the holders of certificates evidencing ownership of not
less than 51% of the trust. In the event that the certificateholders remove the
securities administrator, the compensation of any successor securities
administrator shall be paid by the certificateholders to the extent that such
compensation exceeds the amount agreed to by the trustee and the securities
administrator. Any resignation or removal of the securities administrator and
appointment of a successor securities administrator will not become effective
until acceptance of the appointment by the successor securities administrator.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
General
The yield to maturity and weighted average life of each class of
certificates will be affected by the amount and timing of principal payments on
the mortgage loans, the allocation of Available Funds to that class of
certificates, the applicable pass-through rate for that class of certificates
and the purchase price paid for those certificates. In addition, the yields on
the certificates will be adversely affected by realized losses and net interest
shortfalls. The foregoing factors may affect the various classes of certificates
differently, and may have varying effects with respect to any one class of
certificates during the life of that class. No representation is made as to the
anticipated rate of prepayments on the mortgage loans, the amount and timing of
realized losses or net interest shortfalls or as to the anticipated yield to
maturity of any class of certificates. Prospective investors are urged to
consider their own estimates as to the anticipated rate of future prepayments on
the mortgage loans and the suitability of the certificates to their investment
objectives. Investors should carefully consider the associated risks discussed
below and under "Risk Factors" in this prospectus supplement.
S-80
Mortgage Loan Payments. If prevailing mortgage rates fall significantly
below the mortgage rates on the mortgage loans, the mortgage loans are likely to
be subject to higher prepayment rates than if prevailing rates remain at or
above the mortgage rates on the mortgage loans. Other factors affecting
prepayments of mortgage loans include changes in mortgagors' housing needs, job
transfers, unemployment, net equity in the mortgaged properties and servicing
decisions. Amounts received by virtue of liquidations of mortgage loans,
repurchases of mortgage loans upon breach of representations or warranties and
optional termination of the trust also affect the receipt of principal on the
mortgage loans. In addition, the rates of prepayments will be affected by the
rate and timing of the sale of mortgaged properties to the extent that the
mortgage loans contain due-on-sale clauses. The mortgage loans may be prepaid at
any time, although certain of the mortgage loans provide for payment of a
prepayment charge.
Certain of the mortgage loans are considered subprime mortgage loans.
The prepayment behavior of subprime mortgage loans may differ from that of prime
mortgage loans in that the prepayment rate may be influenced more by the rate of
defaults and liquidations than by voluntary refinancings. Subprime mortgage
loans may experience greater defaults in a rising interest rate environment as
the mortgagor's resources are stretched, thereby producing prepayments at a time
when prepayments would normally be expected to decline. Alternatively, some
mortgagors may be able to re-establish or improve their credit rating thereby
permitting them to refinance into a lower cost mortgage loan. Investors must
make their own decisions as to the appropriate prepayment assumptions to be used
in deciding whether to purchase any of the offered certificates. The depositor
does not make any representations or warranties as to the rate of prepayment or
the factors to be considered in connection with such determination.
Timing of Payments and Distributions. Unlike certain corporate bonds,
the timing and amount of principal payments on the certificates are not fixed
because they are generally determined by the timing and amount of principal
payments on the applicable mortgage loans. The timing of payments on the
mortgage loans may significantly affect an investor's yield. In general, the
earlier a prepayment of principal on the mortgage loans occurs, the greater will
be the effect on an investor's yield to maturity. As a result, the effect on an
investor's yield of principal prepayments that occur at a rate which is higher
(or lower) than the rate anticipated by the investor during the period
immediately following the issuance of the certificates will not be offset by a
subsequent like reduction (or increase) in the rate of principal prepayments.
Furthermore, the effective yield to certificateholders will be slightly lower
than the yield otherwise produced by the applicable pass-through rate and
purchase price because, while interest generally will accrue on each such
certificate from the first day of the month, the distribution of that interest
will not be made earlier than the 25th day of the month following the month of
accrual. Moreover, to the extent any net interest shortfall or the interest
portion of any realized loss is allocated to a class of certificates, the yield
to investors in that class will be reduced.
Discounts and Premiums. In the case of any certificates purchased at a
discount, a slower than assumed rate of principal payments on the applicable
mortgage loans could result in an actual yield that is lower than the assumed
yield. In the case of any certificates purchased at a premium, a faster than
assumed rate of principal payments on the applicable mortgage loans could result
in an actual yield that is lower than the anticipated yield. A discount or
premium would be determined in relation to the price at which a certificate will
yield its pass-through rate, after giving effect to any payment delay.
S-81
Reinvestment Risk. Because the mortgage loans may be prepaid at any
time, it is not possible to predict the rate at which distributions on the
certificates will be received. Since prevailing interest rates are subject to
fluctuation, there can be no assurance that investors in the certificates will
be able to reinvest the distributions thereon at yields equaling or exceeding
the yields on the certificates. Yields on any such reinvestments may be lower,
and may even be significantly lower, than yields on the certificates. Generally,
when prevailing interest rates increase, prepayment rates on mortgage loans tend
to decrease, resulting in a reduced rate of return of principal to investors at
a time when reinvestment at such higher prevailing rates would be desirable.
Conversely, when prevailing interest rates decline, prepayment rates on mortgage
loans tend to increase, resulting in a greater rate of return of principal to
investors at a time when reinvestment at comparable yields may not be possible.
Assumed Final Distribution Date
The "last scheduled distribution date" for distributions on the
certificates is the distribution date in June 2043. The last scheduled
distribution date is the distribution date in the month following the month of
the latest scheduled maturity date of any of the mortgage loans. Since the rate
of payment (including prepayments) of principal on the mortgage loans can be
expected to exceed the scheduled rate of payments, and could exceed the
scheduled rate by a substantial amount, the disposition of the last remaining
mortgage loan may be earlier, and could be substantially earlier, than the last
scheduled distribution date. In addition, EMC Mortgage Corporation, may, at its
option, repurchase all the mortgage loans from the trust on or after any
distribution date on which the aggregate stated principal balance of the
mortgage loans is less than 10% of the cut-off date principal balance of the
mortgage loans.
Weighted Average Lives
The weighted average life of a security refers to the average amount of
time that will elapse from the date of its issuance until each dollar of
principal of that security will be distributed to the investor. The weighted
average life of a certificate is determined by (a) multiplying the amount of the
net reduction, if any, of the certificate principal balance of such certificate
from one distribution date to the next distribution date by the number of years
from the date of issuance to the second such distribution date, (b) summing the
results and (c) dividing the sum by the aggregate amount of the net reductions
in the certificate principal balance of such certificate referred to in clause
(a). The weighted average lives of the certificates will be influenced by, among
other factors, the rate at which principal is paid on mortgage loans. Principal
payments of mortgage loans may be in the form of scheduled amortization,
prepayments, liquidations as a result of foreclosure proceedings or otherwise,
or by virtue of the purchase of a mortgage loan in advance of its stated
maturity as required or permitted by the agreement. Except as described under
"The Mortgage Pool--General" in this prospectus supplement, the mortgage loans
may be prepaid by the mortgagors at any time and without payment of any
prepayment fee or penalty. The actual weighted average life and term to maturity
of each class of certificates, in general, will be shortened if the level of
such prepayments of principal on the mortgage loans increase.
S-82
Prepayment Model
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The prepayment model used in this prospectus
supplement with respect to the mortgage loans represents a constant rate of
prepayment each month ("CPR") relative to the then outstanding principal balance
of a pool of mortgage loans. To assume a 25% CPR or any other CPR is to assume
that the stated percentage of the outstanding principal balance of the related
mortgage pool is prepaid over the course of a year. No representation is made
that the mortgage loans will prepay at these or any other rates.
Pricing Assumptions
The certificates were structured assuming, among other things, a 25%
CPR for the certificates. The prepayment assumption to be used for pricing
purposes for the respective classes may vary as determined at the time of sale.
The actual rate of prepayment may vary considerably from the rate used for any
prepayment assumption.
Decrement Tables
The following tables entitled "Percentage of Initial Class Certificate
Principal Balance Outstanding at the Respective Percentages of CPR" indicate the
percentages of initial certificate principal balance of each class of offered
certificates (other than the residual certificates) that would be outstanding
after each of the dates shown at various percentages of CPR and the
corresponding weighted average lives of such classes of offered certificates.
The following tables have been prepared based on the assumptions that:
o the initial certificate principal balances of the offered
certificates are as set forth on the cover page and under
"Summary--Description of the Certificates--General" in this
prospectus supplement;
o the mortgage loans prepay at the indicated percentages of CPR;
o distributions on the offered certificates are received, in cash, on
the 25th day of each month, commencing in October 2003, in
accordance with the payment priorities defined in this prospectus
supplement;
o no defaults or delinquencies in, or modifications, waivers or
amendments respecting, the payment by the mortgagors of principal
and interest on the mortgage loans occur;
o scheduled payments are assumed to be received on the first day of
each month commencing in October 2003, there are no interest
shortfalls and prepayments represent payment in full of individual
mortgage loans and are assumed to be received on the last day of
each month, commencing in September 2003, and include 30 days,
interest thereon;
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o the closing date for the Certificates is September 30, 2003;
o each index for the mortgage loans remains constant at the following
levels:
Index Rate
----- ----
1 Month LIBOR 1.12%
1 Year LIBOR 1.33%
1 Year Treasury 1.20%
3 Year Treasury 2.19%
6 Month CMT 1.00%
6 Month LIBOR 1.179%
COFI 2.018%
o the mortgage rate on each mortgage loan will be adjusted on each
interest adjustment date to a rate equal to the applicable related
index (as described above) plus the applicable gross margin, subject
to maximum lifetime mortgage rates, minimum lifetime mortgage rates
and periodic caps (as applicable),
o scheduled monthly payments of principal and interest on each
mortgage loan will be adjusted on each payment adjustment date to
equal a fully amortizing payment, subject to periodic payment caps,
as applicable.
o scheduled monthly payments of principal and interest on the mortgage
loans are calculated on their respective principal balances (prior
to giving effect to prepayments received thereon during the
preceding calendar month), mortgage rate and remaining terms to
stated maturity such that the mortgage loans will fully amortize by
their stated maturities;
o prepayments are allocated as described in this prospectus
supplement, assuming the Delinquency Test and the applicable loss
test have been satisfied;
o none of the mortgage loans provide for negative amortization;
o except as indicated with respect to the weighted average lives, EMC
does not exercise its right to purchase the assets of the trust fund
on the optional termination date; and
o the mortgage loans have the approximate characteristics described
below:
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Original Remaining
Mortgage Gross Net Amortization Amortization
Loan Current Mortgage Mortgage Term Term
Number Loan Group Balance Rate Rate (in months) (in months)
------ ---------- ------- -------- -------- ----------- -----------
1 I $ 2,060,486.83 3.8905492652% 3.3805492652% 360 320
2 I 18,212,290.65 5.0040752586 4.5447820910 360 308
3 I 4,724,130.12 5.2827098660 4.7727098660 358 320
4 I 208,962.97 5.4842956386 4.9742956386 360 148
5 I 569,315.87 6.3275946290 5.9529705540 360 311
6 I 8,346,589.88 8.0844257504 7.7105893314 360 340
7 II 69,114,270.04 5.3813781495 5.0722943209 365 355
8 II 3,345,689.76 5.7865899437 5.4785785278 353 339
9 II 3,183,689.86 5.0172437324 4.7386430457 355 332
10 II 2,061,331.76 5.0438505554 4.7358803150 360 350
11 II 4,887,574.63 6.0037395873 5.5444752576 382 374
12 III 12,970,051.27 5.1657484321 4.7275175726 389 281
13 III 20,017,933.92 5.5851840996 5.0751840996 405 249
14 III 286,721.04 4.2928131266 4.0328131266 360 239
15 III 50,351.26 6.2500000000 5.7400000000 360 221
16 III 188,846.00 6.3642370053 5.8542370053 360 110
17 III 155,848.38 5.9695039660 5.4595039660 360 164
18 III 139,868.41 5.6250000000 5.1150000000 360 163
S-85
Number of
Months to Number of Months
Next Months Months to Between
Mortgage Interest Between Next Payment Initial Subsequent
Loan Gross Rate Rate Payment Adjust- Periodic Periodic Minimum Maximum
Number Index Margin Adjustment Adjustments Adjustment ments Rate Cap Rate Cap Rate Rate
------ ----- ------ ---------- ----------- ---------- -------- -------- -------- ---- -------------
1 1 Month LIBOR 2.3666026% 12 1 12 1 4.85435% 1.30278% 2.5778000000% 11.0267700000%
2 1 Year Treasury 2.7859240 8 12 8 12 4.55566 1.69062 2.8390531676 11.5551131676
3 1 Year Treasury 2.9376796 5 1 8 12 4.41906 1.79882 2.9376800000 11.7609900000
4 6 Month CMT 3.2145993 13 6 13 6 3.50351 1.83989 4.9605100000 15.5933300000
5 1 Year LIBOR 2.4333986 13 12 13 12 4.24872 1.25043 4.3752140750 12.3573140750
6 6 Month LIBOR 5.6356854 12 6 12 6 4.78284 1.27216 7.3232164190 14.3360064190
7 1 Year Treasury 2.7603366 55 12 55 12 4.81304 1.99081 2.7849638286 10.5276738286
8 1 Year Treasury 2.7211931 52 1 53 12 4.88322 1.96842 2.7211914159 10.8120614159
9 3 Year Treasury 2.7686069 24 36 24 36 2.17998 2.00000 3.0029606867 10.7735006867
10 1 Year LIBOR 2.2500000 48 12 48 12 4.44095 2.00000 2.2500002404 10.2302002404
11 6 Month LIBOR 3.1861903 56 6 56 6 4.63186 1.80492 3.5057543297 11.7241043297
12 COFI 2.6676380 5 8 5 8 1.13664 1.13517 3.7815908595 12.4928308595
13 COFI 2.4462361 1 1 6 12 1.89043 1.32784 4.8805900000 13.5256700000
14 COFI 2.5006424 8 12 8 12 4.44887 1.00000 4.4202500000 12.0110900000
15 COFI 1.7500000 1 1 1 12 1.00000 1.00000 6.2500000000 12.9500000000
16 COFI 2.3778525 13 16 13 16 5.00000 2.14415 2.7363900000 14.6044000000
17 COFI 3.0731680 8 12 8 12 2.00000 2.00000 3.0731700000 14.1749900000
18 COFI 3.0000000 1 1 8 12 2.00000 2.00000 3.0000000000 14.2384700000
S-86
While it is assumed that each of the mortgage loans prepays at the
indicated percentages of CPR, this is not likely to be the case.
Discrepancies will exist between the characteristics of the actual
mortgage loans which will be delivered to the trustee and characteristics of the
mortgage loans assumed in preparing the tables. To the extent that the mortgage
loans have characteristics which differ from those assumed in preparing the
tables, the certificates may mature earlier or later than indicated by the
tables.
Based on the foregoing assumptions, the tables below indicate the
weighted average life of each class of offered certificates (other than the
Class R Certificates) and set forth the percentages of the initial certificate
principal balance of each such class that would be outstanding after the
distribution date in September of each of the years indicated, assuming that the
mortgage loans prepay at the indicated percentages of CPR. Neither CPR nor any
other prepayment model or assumption purports to be a historical description of
prepayment experience or a prediction of the anticipated rate of prepayment of
any pool of mortgage loans, including the mortgage loans securitized in
connection with the issuance of the certificates. Variations in the actual
prepayment experience and the balance of the mortgage loans that prepay may
increase or decrease the percentage of initial certificate principal balance
(and weighted average life) shown in the following tables. These variations may
occur even if the average prepayment experience of all such mortgage loans
equals any of the specified percentages of CPR.
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Percent of the Initial Class Certificate Principal Balance
at the Respective Percentages of CPR
------------------------------------------------------------
Class I-A
------------------------------------------------------------
CPR Percentage
------------------------------------------------------------
Distribution Date in: 10% 20% 25% 30% 40% 50%
- --------------------- --- --- --- --- --- ---
Initial Percentage 100 100 100 100 100 100
September 2004....................... 87 75 70 64 53 41
September 2005....................... 75 56 47 39 27 17
September 2006....................... 64 41 32 25 14 6
September 2007....................... 55 32 24 17 8 3
September 2008....................... 47 25 17 12 5 1
September 2009....................... 40 19 13 8 3 1
September 2010....................... 34 15 9 5 2 *
September 2011....................... 30 11 7 4 1 *
September 2012....................... 26 9 5 2 1 *
September 2013....................... 22 7 3 2 * *
September 2014....................... 19 5 2 1 * *
September 2015....................... 16 4 2 1 * *
September 2016....................... 14 3 1 * * *
September 2017....................... 12 2 1 * * *
September 2018....................... 10 2 1 * * *
September 2019....................... 9 1 * * * *
September 2020....................... 7 1 * * * *
September 2021....................... 6 1 * * * *
September 2022....................... 5 1 * * * *
September 2023....................... 4 * * * * *
September 2024....................... 3 * * * * *
September 2025....................... 2 * * * * *
September 2026....................... 2 * * * * *
September 2027....................... 1 * * * * *
September 2028....................... 1 * * * * *
September 2029....................... * * * * * *
September 2030....................... * * * * * *
September 2031....................... * * * * * *
September 2032....................... 0 0 0 0 0 0
September 2033....................... 0 0 0 0 0 0
September 2034....................... 0 0 0 0 0 0
September 2035....................... 0 0 0 0 0 0
Weighted Average Life (in years)(1).. 6.43 3.61 2.86 2.31 1.60 1.17
(1) The weighted average life of the offered certificates is determined by
(i) multiplying the amount of each principal payment by the number of years
from the date of issuance to the related distribution date, (ii) adding
the results and (iii) dividing the sum by the initial respective
certificate principal balance for such class of offered certificates.
* Indicates a number that is greater than zero but less than 0.5%.
S-88
Percent of the Initial Class Certificate Principal Balance
at the Respective Percentages of CPR
------------------------------------------------------------
Class II-A
------------------------------------------------------------
CPR Percentage
------------------------------------------------------------
Distribution Date in: 10% 20% 25% 30% 40% 50%
- --------------------- --- --- --- --- --- ---
Initial Percentage 100 100 100 100 100 100
September 2004....................... 87 76 70 64 53 42
September 2005....................... 76 57 48 40 27 17
September 2006....................... 66 42 33 25 14 6
September 2007....................... 57 32 24 17 8 3
September 2008....................... 48 25 18 12 5 2
September 2009....................... 42 20 13 8 3 1
September 2010....................... 36 15 10 6 2 *
September 2011....................... 31 12 7 4 1 *
September 2012....................... 27 9 5 3 1 *
September 2013....................... 23 7 4 2 * *
September 2014....................... 20 6 3 1 * *
September 2015....................... 18 4 2 1 * *
September 2016....................... 15 3 1 1 * *
September 2017....................... 13 3 1 * * *
September 2018....................... 11 2 1 * * *
September 2019....................... 10 1 1 * * *
September 2020....................... 8 1 * * * *
September 2021....................... 7 1 * * * *
September 2022....................... 6 1 * * * *
September 2023....................... 5 * * * * *
September 2024....................... 4 * * * * *
September 2025....................... 3 * * * * *
September 2026....................... 3 * * * * *
September 2027....................... 2 * * * * *
September 2028....................... 1 * * * * *
September 2029....................... 1 * * * * *
September 2030....................... 1 * * * * *
September 2031....................... * * * * * *
September 2032....................... * * * * * *
September 2033....................... * * * * * *
September 2034....................... * * * * * *
September 2035....................... 0 0 0 0 0 0
Weighted Average Life (in years)(1).. 6.72 3.69 2.90 2.34 1.62 1.18
- -------------------------------------
(1) The weighted average life of the offered certificates is determined by (i)
multiplying the amount of each principal payment by the number of years from
the date of issuance to the related distribution date, (ii) adding the
results and (iii) dividing the sum by the initial respective certificate
principal balance for such class of offered certificates.
* Indicates a number that is greater than zero but less than 0.5%.
S-89
Percent of the Initial Class Certificate Principal Balance
at the Respective Percentages of CPR
------------------------------------------------------------
Class III-A
------------------------------------------------------------
CPR Percentage
------------------------------------------------------------
Distribution Date in: 10% 20% 25% 30% 40% 50%
- --------------------- --- --- --- --- --- ---
Initial Percentage 100 100 100 100 100 100
September 2004....................... 86 75 69 63 52 41
September 2005....................... 74 55 47 39 27 17
September 2006....................... 63 40 31 24 13 6
September 2007....................... 53 30 23 16 8 3
September 2008....................... 45 23 16 11 4 1
September 2009....................... 38 18 12 7 3 1
September 2010....................... 32 14 8 5 1 *
September 2011....................... 27 10 6 3 1 *
September 2012....................... 23 8 4 2 * *
September 2013....................... 19 6 3 1 * *
September 2014....................... 16 4 2 1 * *
September 2015....................... 14 3 1 1 * *
September 2016....................... 11 2 1 * * *
September 2017....................... 9 2 1 * * *
September 2018....................... 7 1 * * * *
September 2019....................... 6 1 * * * *
September 2020....................... 4 1 * * * *
September 2021....................... 3 * * * * *
September 2022....................... 2 * * * * *
September 2023....................... 1 * * * * *
September 2024....................... 1 * * * * *
September 2025....................... * * * * * *
September 2026....................... * * * * * *
September 2027....................... 0 0 0 0 0 0
September 2028....................... 0 0 0 0 0 0
September 2029....................... 0 0 0 0 0 0
September 2030....................... 0 0 0 0 0 0
September 2031....................... 0 0 0 0 0 0
September 2032....................... 0 0 0 0 0 0
September 2033....................... 0 0 0 0 0 0
September 2034....................... 0 0 0 0 0 0
September 2035....................... 0 0 0 0 0 0
Weighted Average Life (in years)(1).. 5.84 3.45 2.76 2.25 1.58 1.16
- -------------------------------------
(1) The weighted average life of the offered certificates is determined by (i)
multiplying the amount of each principal payment by the number of years from
the date of issuance to the related distribution date, (ii) adding the
results and (iii) dividing the sum by the initial respective certificate
principal balance for such class of offered certificates.
* Indicates a number that is greater than zero but less than 0.5%.
S-90
Percent of the Initial Class Certificate Principal Balance
at the Respective Percentages of CPR
-------------------------------------------------------------
Class B-1, Class B-2 and Class B-3 Certificates
-------------------------------------------------------------
CPR Percentage
-------------------------------------------------------------
Distribution Date in: 10% 20% 25% 30% 40% 50%
- --------------------- --- --- --- --- --- ---
Initial Percentage 100 100 100 100 100 100
September 2004....................... 98 98 98 98 98 98
September 2005....................... 96 96 96 96 83 68
September 2006....................... 94 94 87 79 63 48
September 2007....................... 92 76 64 54 37 23
September 2008....................... 90 60 46 37 22 11
September 2009....................... 84 46 34 25 13 5
September 2010....................... 78 36 25 17 7 3
September 2011....................... 70 28 18 11 4 1
September 2012....................... 61 21 13 8 2 1
September 2013....................... 53 16 9 5 1 *
September 2014....................... 46 13 7 3 1 *
September 2015....................... 39 10 5 2 * *
September 2016....................... 33 7 3 2 * *
September 2017....................... 28 6 2 1 * *
September 2018....................... 24 4 2 1 * *
September 2019....................... 20 3 1 * * *
September 2020....................... 17 2 1 * * *
September 2021....................... 14 2 1 * * *
September 2022....................... 11 1 * * * *
September 2023....................... 9 1 * * * *
September 2024....................... 7 1 * * * *
September 2025....................... 6 * * * * *
September 2026....................... 4 * * * * *
September 2027....................... 3 * * * * *
September 2028....................... 2 * * * * *
September 2029....................... 2 * * * * *
September 2030....................... 1 * * * * *
September 2031....................... 1 * * * * *
September 2032....................... * * * * * *
September 2033....................... * * * * * *
September 2034....................... * * * * * *
September 2035....................... 0 0 0 0 0 0
Weighted Average Life (in years)(1).. 11.37 6.75 5.64 4.91 3.85 3.08
- -------------------------------------
(1) The weighted average life of the offered certificates is determined by (i)
multiplying the amount of each principal payment by the number of years from
the date of issuance to the related distribution date, (ii) adding the
results and (iii) dividing the sum by the initial respective certificate
principal balance for such class of offered certificates.
* Indicates a number that is greater than zero but less than 0.5%.
S-91
Additional Information
The depositor intends to file certain additional yield tables and other
computational materials with respect to the certificates with the Securities and
Exchange Commission in a report on Form 8-K. Such tables and materials were
prepared by the underwriter at the request of certain prospective investors,
based on assumptions provided by, and satisfying the special requirements of,
such prospective investors. Such tables and assumptions may be based on
assumptions that differ from the modeling assumptions. Accordingly, such tables
and other materials may not be relevant to or appropriate for investors other
than those specifically requesting them.
USE OF PROCEEDS
The depositor will apply the net proceeds of the sale of the offered
certificates against the purchase price of the mortgage loans due to the seller.
FEDERAL INCOME TAX CONSEQUENCES
The pooling and servicing agreement provides that multiple REMIC
elections will be made with respect to the assets in the trust fund, creating a
tiered REMIC structure.
Upon the issuance of the offered certificates, Stroock & Stroock &
Lavan LLP ("Tax Counsel") will deliver its opinion concluding that for federal
income tax purposes and assuming compliance with the pooling and servicing
agreement, each REMIC comprising the trust fund will qualify as a REMIC within
the meaning of Section 860D of the Internal Revenue Code of 1986, as amended
(the "Code") and the offered certificates, other than the Class R Certificates,
will represent regular interests in a REMIC, and the Class R Certificates will
each represent the residual interest in a REMIC.
Taxation of Regular Interests
A holder of an offered certificate (other than a Class R Certificate)
will be treated for federal income tax purposes as owning a regular interest in
a REMIC.
Assuming that an offered certificate (other than a Class R Certificate)
is held as a "capital asset" within the meaning of section 1221 of the Code,
gain or loss on the disposition of the associated REMIC regular interest should
generally, subject to the limitation described below, be capital gain or loss.
Gain will be treated as ordinary income, however, to the extent such gain
represents accrued but untaxed market discount, if any, or such gain does not
exceed the excess, if any, of (x) the amount that would have been includable in
the holder's gross income with respect to the regular interest had income
thereon accrued at a rate equal to 110% of the applicable federal rate as
defined in Section 1274(d) of the Code determined as of the date of purchase of
the regular interest over (y) the amount actually included in such holder's
income with respect to the regular interest.
Interest on a regular interest must be included in income by a holder
under the accrual method of accounting, regardless of the holder's regular
method of accounting. In addition, a regular interest could be considered to
have been issued with original issue discount, known as OID. The prepayment
assumption that will be used in determining the accrual of OID, market discount,
or bond premium, if any, will be a rate equal to 25% CPR as described above. No
representation is made that the mortgage loans will prepay at such rate or at
any other rate. OID must be included in income as it accrues on a constant yield
method, regardless of whether the holder receives currently the cash
attributable to such OID. We refer you to "Material Federal Income Tax
Considerations--Taxation of Debt Securities" in the prospectus. It should be
noted that as a result of the enactment of the Jobs and Growth Act of 2003 on
May 23, 2003, the current backup withholding rate referenced under "Material
Federal Income Tax Considerations--Miscellaneous Tax Aspects" is now 28% (as
opposed to 30%).
S-92
Status of the Offered Certificates
Each holder of an offered certificate (other than the residual
certificates) is deemed to own an undivided beneficial ownership interest in a
REMIC Regular Interest. The REMIC regular interests will be assets described in
Section 7701(a)(19)(C) of the Code and "real estate assets" under Section
856(c)(5)(B) of the Code, generally, in the same proportion that the assets of
the trust fund would be so treated. In addition, to the extent a regular
interest represents real estate assets under Section 856(c)(5)(B) of the Code,
the interest derived from that regular interest would be interest on obligations
secured by interests in real property for purposes of section 856(c)(3) of the
Code in that proportion.
Taxation of Class R Certificates
The Class R-I and Class R-II Certificates represent respectively the
beneficial ownership of the sole class of "residual interests" in its related
REMIC within the trust fund. Each holder of a Class R Certificate should refer
to "Material Federal Income Tax Considerations--Taxation of Holders of Residual
Interest Securities" in the prospectus for information regarding the material
tax consequences of acquiring, holding and disposing of the Class R
Certificates, as well as other portions of "Material Federal Income Tax
Considerations" in the prospectus as they relate to holders of residual
interests in a REMIC.
In order to satisfy the second safe harbor test set forth in "Material
Federal Income Tax Considerations--Taxation of Holders of Residual Interest
Securities--Restrictions on Ownership and Transfer of Residual Interest
Securities" at (iv)(b), the transferee of the residual interest must, in
addition to satisfying the conditions described in (iv)(b)(1)-(3), have at the
time of the transfer of the residual interest, and at the close of its two
preceding fiscal years, gross assets and net assets for financial reporting
purposes exceeding $100 million and $10 million, respectively.
It should be noted that the Treasury Department recently issued
proposed regulations providing that, to clearly reflect income, an inducement
fee paid to a transferee of a noneconomic residual interest in a REMIC, such as
the Class R Certificates, must be included in income over a period that is
reasonably related to the period during which the applicable REMIC is expected
to generate taxable income or net loss allocable to the transferee. The proposed
regulations set forth two safe harbor methods under which a taxpayer's
accounting for the inducement fee will be considered to clearly reflect income
for these purposes. The proposed regulations also provide that an inducement fee
shall be treated as income from sources within the United States. If finalized
as proposed, the regulations would be effective for taxable years ending on or
after the publication of the final regulations in the Federal Register. The
proposed regulations contain additional details regarding their application and
you should consult your own tax advisor regarding the application of the
proposed regulations.
S-93
Prohibited Transactions Tax and Other Taxes
The Code imposes a tax on REMICs equal to 100% of the net income
derived from "prohibited transactions," called the "Prohibited Transactions
Tax." In general, subject to certain specified exceptions, a prohibited
transaction means the disposition of a mortgage loan, the receipt of income from
a source other than a mortgage loan or certain other permitted investments, the
receipt of compensation for services, or gain from the disposition of an asset
purchased with the payments on the mortgage loans for temporary investment
pending distribution on the certificates. It is not anticipated that any REMIC
comprising the trust fund will engage in any prohibited transactions in which it
would recognize a material amount of net income.
In addition, certain contributions to a trust fund that elects to be
treated as a REMIC made after the day on which such trust fund issues all of its
interests could result in the imposition of a tax on the trust fund equal to
100% of the value of the contributed property, called the "Contributions Tax."
None of the REMICs comprising the trust fund will accept contributions that
would subject it to such tax.
In addition, a trust fund that elects to be treated as a REMIC may also
be subject to federal income tax at the highest corporate rate on "net income
from foreclosure property," determined by reference to the rules applicable to
real estate investment trusts. "Net income from foreclosure property" generally
means gain from the sale of a foreclosure property held as inventory.
Where any Prohibited Transactions Tax, Contributions Tax, tax on net
income from foreclosure property or state or local income or franchise tax that
may be imposed on a REMIC arises out of a breach of the master servicer's, the
securities administrator's or the trustee's obligations, or the obligations of
EMC, as servicer, as the case may be, under the pooling and servicing agreement
or in respect of compliance with then applicable law, such tax will be borne by
the master servicer, the securities administrator, the trustee or EMC, as
applicable, in either case out of its own funds. In the event that either the
master servicer, the securities administrator the trustee or EMC, as the case
may be, fails to pay or is not required to pay any such tax as provided above,
such tax will be paid by the relevant REMIC within the trust fund with amounts
otherwise distributable to the holders of certificates in the manner provided in
the pooling and servicing agreement.
For further information regarding the federal income tax consequences
of investing in the offered certificates, we refer you to "Material Federal
Income Tax Considerations" in the prospectus.
S-94
STATE TAXES
None of the depositor, the master servicer, the seller, the trustee or
the securities administrator makes any representations regarding the tax
consequences of purchase, ownership or disposition of the offered certificates
under the tax laws of any state. Investors considering an investment in the
offered certificates should consult their own tax advisors regarding such tax
consequences.
All investors should consult their own tax advisors regarding the
federal, state, local or foreign income tax consequences of the purchase,
ownership and disposition of the offered certificates.
ERISA CONSIDERATIONS
Fiduciaries of employee benefit plans subject to Title I of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA") should
consider the ERISA fiduciary investment standards before authorizing an
investment by a plan in the certificates. In addition, fiduciaries of employee
benefit plans subject to Title I of ERISA, as well as certain plans or other
retirement arrangements not subject to ERISA, but which are subject to Section
4975 of the Code (such as individual retirement accounts and Keogh plans
covering only a sole proprietor or partners), or any entity whose underlying
assets include plan assets by reason of a plan or account investing in such
entity, including an insurance company general account (collectively,
"Plan(s)"), should consult with their legal counsel to determine whether an
investment in the certificates will cause the assets of the trust to be
considered plan assets pursuant to the plan asset regulations set forth at 29
C.F.R. ss. 2510.3-101 (the "Plan Asset Regulations"), thereby subjecting the
Plan to the prohibited transaction rules with respect to such assets and the
trustee or the master servicer to the fiduciary investments standards of ERISA,
or cause the excise tax provisions of Section 4975 of the Code to apply to such
assets, unless an exemption granted by the Department of Labor applies to the
purchase, sale, transfer or holding of the certificates.
The certificates may not be acquired for or on behalf of a purchaser
which is acquiring such certificates directly or indirectly for or on behalf of
a Plan unless the proposed transfer and/or holding of that certificate and the
servicing, management and operation of the trust will neither (i) result in a
prohibited transaction under Section 406 of ERISA or Section 4975 of the Code
because any such transaction is covered under an individual or class prohibited
transaction exemption including but not limited to Prohibited Transaction
Exemption ("PTE") 84-14 (class exemption for plan asset transaction determined
by independent qualified professional asset managers); PTE 91-38 (class
exemption for certain transactions involving bank collective investment funds);
PTE 90-1 (class exemption for certain transactions involving insurance company
pooled separate accounts); PTE 95-60 (class exemption for certain transactions
involving insurance company general accounts); and PTE 96-23 (class exemption
for plan asset transactions determined by in-house asset managers)
("Investor-Based Exemptions") nor (ii) give rise to any additional fiduciary
duties under ERISA on the part of the master servicer, any servicer, the
securities administrator or the trustee, all of which will be deemed represented
by an owner of a book-entry certificate and will be evidenced by representations
to such effect by or on behalf of a holder of a physical certificate.
S-95
Any Plan fiduciary which proposes to cause a Plan to purchase offered
certificates should consult with its own counsel with respect to the potential
consequences under ERISA and the Code of the Plan's acquisition and ownership of
the offered certificates. Assets of a Plan should not be invested in offered
certificates unless it is clear that an exemption will apply and exempt all
potential prohibited transactions.
A governmental plan as defined in Section 3(32) of ERISA is not subject
to ERISA, or Code Section 4975. However, such governmental plan may be subject
to Federal, state and local laws, which may, to a material extent, be similar to
the provisions of ERISA or Code Section 4975. A fiduciary of a governmental plan
should make its own determination as to the propriety of such investment under
applicable fiduciary or other investment standards, and the need for and the
availability of any exemptive relief under any such similar laws.
RESTRICTIONS ON PURCHASE AND TRANSFER
OF THE RESIDUAL CERTIFICATES
The residual certificates are not offered for sale to any investor that
is a "disqualified organization" as described in "Material Federal Income Tax
Considerations--Taxation of Holders of Residual Interest
Securities--Restrictions on Transfer of Residual Interest Securities" in the
prospectus.
As a prerequisite to any transfer of a residual certificate, the
proposed transferee must provide an affidavit that the proposed transferee is
not a disqualified organization or publicly traded partnership and that it is a
U.S. Person. In the event that legislation is enacted which would subject the
trust fund to tax (or disqualify any REMIC as a REMIC) on the transfer of an
interest in a residual certificate to any other person or persons, the pooling
and servicing agreement may be amended, without certificateholder consent, to
restrict or prohibit prospectively such transfer. A transfer in violation of the
restrictions set forth herein may subject a holder of a residual certificate to
taxation. Moreover, certain transfers of a residual certificate that are
effective to transfer legal ownership may nevertheless be ineffective to
transfer ownership for federal income tax purposes, if at the time of the
transfer a residual certificate represents a "noneconomic residual interest" as
defined in the REMIC Regulations and if avoiding or impeding the assessment or
collection of tax is a significant purpose of the transfer. See "Federal Income
Tax Consequences" in this prospectus supplement and "Material Federal Income Tax
Considerations--Taxation of Holders of Residual Interest Securities--
Restrictions on Transfer of Residual Interest Securities" in the accompanying
prospectus. Further, unless permitted under the pooling and servicing agreement,
a residual certificate (including a beneficial interest therein) may not be
purchased by or transferred to any person who is not a "United States person,"
as such term is defined in Section 7701(a)(30) of the Code (a "U.S. Person").
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the underwriting
agreement, dated September 26, 2003, among the depositor and Bear, Stearns & Co.
Inc., as underwriter (the "underwriter"), the depositor has agreed to sell all
of the offered certificates to the underwriter, and the underwriter has agreed
to purchase such offered certificates from the depositor.
S-96
The offered certificates will be offered by the underwriter when, as
and if issued and sold by the depositor to the underwriter, subject to the
underwriter's right to reject any subscription, in whole or in part.
Distribution of the offered certificates will be made by the underwriter from
time to time in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. In connection with the sale of the offered
certificates, the underwriter may be deemed to have received compensation from
the depositor in the form of underwriting discounts. It is expected that the
proceeds to the depositor from the sale of the offered certificates will be
approximately $139,680,000 plus accrued interest, before deducting issuance
expenses payable by the depositor, estimated to be approximately $550,000.
The depositor has been advised by the underwriter that it intends to
make a market in the offered certificates, but the underwriter has no obligation
to do so. There can be no assurance that a secondary market for the offered
certificates, or any particular class thereof, will develop or, if it does
develop, that it will continue or that such market will provide sufficient
liquidity to certificateholders.
The depositor has agreed to indemnify the underwriter against, or make
contributions to the underwriter with respect to, certain liabilities, including
liabilities under the Securities Act of 1933, as amended. Bear, Stearns & Co.
Inc. is an affiliate of the depositor, EMC Mortgage Corporation and Bear Stearns
Financial Products, Inc. From time to time the underwriter or its affiliates may
perform investment banking and advisory services for, and may provide general
financing and banking services to, the depositor and the seller, and other
affiliates of the depositor and the seller.
The depositor has agreed to indemnify the underwriter against, or make
contributions to the underwriter with respect to, certain liabilities, including
liabilities under the Securities Act of 1933, as amended.
LEGAL MATTERS
The validity of the certificates, including certain federal income tax
consequences with respect thereto, will be passed upon for the depositor by
Stroock & Stroock & Lavan LLP, New York, New York. Stroock & Stroock & Lavan
LLP, New York, New York, will also pass upon certain legal matters on behalf of
the seller, the depositor and the underwriter.
S-97
RATINGS
It is a condition of the issuance of the offered certificates that each
class of offered certificates be assigned the ratings designated below by
Moody's, Standard & Poor's and Fitch Ratings.
Rating
Class Moody's Standard and Poor's Fitch Ratings
----- ------- ------------------- -------------
I-A Aaa AAA AAA
II-A Aaa AAA AAA
III-A Aaa AAA AAA
B-1 Aa2 AA AA
B-2 A2 A A
B-3 Baa2 BBB BBB
R-I -- AAA AAA
R-II -- AAA AAA
The security ratings assigned to the offered certificates should be
evaluated independently from similar ratings on other types of securities. A
security rating is not a recommendation to buy, sell or hold securities and may
be subject to revision or withdrawal at any time by the respective rating
agency. The ratings on the offered certificates do not, however, constitute
statements regarding the likelihood or frequency of prepayments on the mortgage
loans or the anticipated yields in light of prepayments.
The depositor has not requested ratings of the offered certificates by
any rating agency other than Moody's, Standard & Poor's and Fitch Ratings.
However, there can be no assurance as to whether any other rating agency will
rate the offered certificates or, if it does, what ratings would be assigned by
such other rating agency. The ratings assigned by such other rating agency to
the offered certificates could be lower than the respective ratings assigned by
the rating agencies.
S-98
INDEX OF DEFINED TERMS
1-Year CMT.............................................................S-31
6-month LIBOR..........................................................S-31
accrual period.........................................................S-10
Accrued Certificate Interest...........................................S-63
Allocable Share........................................................S-69
Available Funds........................................................S-60
certificate principal balance..........................................S-64
Class Prepayment Distribution Trigger..................................S-69
Class R Certificates....................................................S-8
Clearstream............................................................S-54
Code...................................................................S-92
COFI....................................................................S-6
compensating interest..................................................S-50
CPR....................................................................S-83
cross-over date........................................................S-61
cut-off date principal balance..........................................S-4
deferred interest......................................................S-63
Delinquency Test.......................................................S-61
Distribution Account...................................................S-50
DTC....................................................................S-54
EMC....................................................................S-39
ERISA..................................................................S-95
Euroclear..............................................................S-54
Fitch Ratings..........................................................S-13
Group Available Funds..................................................S-59
group I mortgage loans..................................................S-5
group I senior certificates.............................................S-8
group II mortgage loans.................................................S-5
group II senior certificates............................................S-8
group III mortgage loans................................................S-5
group III senior certificates...........................................S-8
Group Senior Optimal Principal Amount..................................S-65
hybrid mortgage loans...................................................S-5
insurance proceeds.....................................................S-70
interest adjustment date...............................................S-30
interest shortfall.....................................................S-50
last scheduled distribution date.......................................S-82
LIBOR..................................................................S-31
liquidation proceeds...................................................S-70
Master Servicer Collection Account.....................................S-49
MOM loan...............................................................S-35
Moody's................................................................S-13
mortgage loan group.....................................................S-5
S-99
mortgage loan group I...................................................S-5
mortgage loan group II..................................................S-5
mortgage loan group III.................................................S-5
mortgage pool..........................................................S-28
net interest shortfalls................................................S-50
net mortgage rate.......................................................S-9
offered certificates....................................................S-8
optional termination date..............................................S-12
other subordinated certificates.........................................S-8
pass-through rate.......................................................S-9
pass-through rates.....................................................S-62
Plan Asset Regulations.................................................S-95
Plan(s)................................................................S-95
Portfolio..............................................................S-44
prepayment period......................................................S-70
Prohibited Transactions Tax............................................S-94
PTE....................................................................S-95
realized loss..........................................................S-70
Relief Act.............................................................S-26
residual certificates...................................................S-8
senior certificate group................................................S-8
senior certificate group I..............................................S-8
senior certificate group II.............................................S-8
senior certificate group III............................................S-8
senior certificates.....................................................S-8
Senior Percentage......................................................S-66
simple interest loans...................................................S-6
Standard & Poor's......................................................S-13
stated principal balance...............................................S-71
Subordinate Optimal Principal Amount...................................S-68
Subordinate Percentage.................................................S-68
Subordinate Prepayment Percentage......................................S-68
Subordinated Certificate Writedown Amount..............................S-64
subordinated certificates...............................................S-8
Subordination Doubling Test............................................S-61
underwriter............................................................S-96
WAMU...................................................................S-36
Washington Mutual Sellers..............................................S-36
Wells Fargo............................................................S-39
WFHM...................................................................S-36
S-100
SCHEDULE A
Mortgage Loan Statistical Data
The following sets forth in tabular format certain
information, as of the cut-off date, about the mortgage loans. This information
is presented separately for each mortgage loan group and for the total mortgage
pool. Other than with respect to rates of interest, percentages are approximate
and are stated by cut-off date principal balance of the related mortgage loans.
The sum of the respective columns may not equal the total indicated due to
rounding.
Mortgage Rates as of the Cut-off Date of the Group I Mortgage Loans
Aggregate Scheduled
Principal Balance
Number of Outstanding as % of Mortgage
Mortgage Interest Rates (%) Mortgage Loans of Cut-off Date Loan Group I
- --------------------------- -------------------------------------------------------------------
2.501 - 3.000 1 $ 59,552 0.17%
3.001 - 3.500 5 1,109,230 3.25
3.501 - 4.000 27 7,537,709 22.09
4.001 - 4.500 39 5,867,955 17.20
4.501 - 5.000 20 3,445,520 10.10
5.001 - 5.500 16 1,757,176 5.15
5.501 - 6.000 10 2,301,342 6.74
6.001 - 6.500 6 1,128,900 3.31
6.501 - 7.000 15 1,642,061 4.81
7.001 - 7.500 9 1,844,269 5.40
7.501 - 8.000 11 1,630,666 4.78
8.001 - 8.500 8 1,595,127 4.67
8.501 - 9.000 5 414,451 1.21
9.001 - 9.500 8 889,626 2.61
9.501 - 10.000 10 1,677,650 4.92
10.001 - 10.500 7 770,385 2.26
10.501 - 11.000 6 450,159 1.32
-------------------------------------------------------------------
Total 203 $34,121,776 100.00%
===================================================================
As of the cut-off date, the weighted average mortgage rate of the group I
mortgage loans was approximately 5.7539% per annum.
A-1
Original Loan-to-Value Ratios in Mortgage Loan Group I
Aggregate Scheduled
Number of Principal Balance
Mortgage Outstanding as % of Mortgage
Original Loan-to-Value Ratios(%) Loans of Cut-off Date Loan Group I
- -------------------------------- -------------------------------------------------------------------
20.01 - 30.00 2 $ 261,399 0.77%
30.01 - 40.00 1 44,662 0.13
40.01 - 50.00 2 207,546 0.61
50.01 - 60.00 9 1,162,533 3.41
60.01 - 70.00 35 8,112,696 23.78
70.01 - 80.00 74 14,667,082 42.98
80.01 - 90.00 42 5,212,805 15.28
90.01 - 100.00 35 4,287,229 12.56
100.01 - 110.00 1 38,124 0.11
110.01 - 120.00 1 91,406 0.27
120.01 and Greater 1 36,294 0.11
-------------------------------------------------------------------
Total 203 $34,121,776 100.00%
===================================================================
As of the cut-off date, the weighted average original loan-to-value ratio of the
group I mortgage loans was approximately 76.93%.
Scheduled Principal Balances as of the Cut-off Date of Mortgage Loan Group I
Aggregate Scheduled
Principal Balance
Number of Outstanding as % of Mortgage
Scheduled Principal Balance ($) Mortgage Loans of Cut-off Date Loan Group I
- ------------------------------- -------------------------------------------------------------------
1 - 50,000 26 $ 941,704 2.76%
50,001 - 100,000 51 3,860,444 11.31
100,001 - 150,000 62 7,476,815 21.91
150,001 - 200,000 19 3,316,121 9.72
200,001 - 250,000 7 1,585,812 4.65
250,001 - 300,000 11 3,023,124 8.86
300,001 - 350,000 4 1,278,271 3.75
350,001 - 400,000 6 2,316,687 6.79
450,001 - 500,000 5 2,366,750 6.94
500,001 - 550,000 5 2,643,103 7.75
550,001 - 600,000 3 1,742,308 5.11
650,001 - 700,000 1 669,892 1.96
700,001 - 750,000 2 1,464,136 4.29
800,001 and Greater 1 1,436,607 4.21
-------------------------------------------------------------------
Total 203 $34,121,776 100.00%
===================================================================
As of the cut-off date, the average scheduled principal balance
of the group I mortgage loans was approximately $168,088.
A-2
Credit Scores as of the Date of Origination of Mortgage Loan Group I
Aggregate Scheduled
Principal Balance
Number of Outstanding as % of Mortgage
Range of Credit Scores Mortgage Loans of Cut-off Date Loan Group I
- ---------------------- -------------------------------------------------------------------
Not Available 7 $ 883,685 2.59%
1 - 500 29 5,136,800 15.05
501 - 520 16 3,472,140 10.18
521 - 540 29 4,507,644 13.21
541 - 560 21 2,281,066 6.69
561 - 580 18 4,931,935 14.45
581 - 600 7 950,258 2.78
601 - 620 11 906,783 2.66
621 - 640 11 2,334,254 6.84
641 - 660 11 1,947,409 5.71
661 - 680 5 776,886 2.28
681 - 700 11 1,584,841 4.64
701 - 720 8 1,299,373 3.81
721 - 740 7 644,583 1.89
741 - 760 1 40,323 0.12
761 - 780 7 1,574,210 4.61
781 - 800 2 715,761 2.10
801 and Greater 2 133,827 0.39
-------------------------------------------------------------------
Total 203 $34,121,776 100.00%
===================================================================
As of the cut-off date, the weighted average credit score of the group I
mortgage loans for which credit scores are available was
approximately 585.
A-3
Geographic Distribution of the Mortgaged
Properties in Mortgage Loan Group I
Aggregate Scheduled
Principal Balance
Number of Outstanding as % of Mortgage
Geographic Distribution Mortgage Loans of Cut-off Date Loan Group I
- ----------------------- -------------------------------------------------------------------
Alabama 1 $ 463,592 1.36%
Arkansas 5 315,853 0.93
Arizona 1 134,193 0.39
California 39 8,214,815 24.07
Colorado 1 183,284 0.54
Connecticut 7 1,422,609 4.17
Florida 21 4,296,536 12.59
Georgia 9 923,784 2.71
Iowa 9 3,168,840 9.29
Illionois 3 285,451 0.84
Indiana 1 104,940 0.31
Kansas 2 156,542 0.46
Louisana 2 167,182 0.49
Massachusetts 1 46,719 0.14
Maryland 4 912,961 2.68
Maine 7 1,315,968 3.86
Michigan 4 478,774 1.40
Minnesota 3 628,158 1.84
Montana 6 416,693 1.22
North Carolina 3 810,275 2.37
New Hampshire 1 77,945 0.23
New Jersey 13 1,663,698 4.88
New Mexico 1 84,955 0.25
Nevada 10 1,756,406 5.15
New York 4 756,122 2.22
Ohio 3 334,940 0.98
Oregon 4 309,396 0.91
Pennsylvania 6 639,270 1.87
Rhode Island 1 77,592 0.23
South Carolina 3 415,394 1.22
Texas 13 1,669,072 4.89
Utah 2 244,470 0.72
Virginia 4 501,006 1.47
Washington 8 1,110,882 3.26
Wisconsin 1 33,457 0.10
-------------------------------------------------------------------
Total 203 $34,121,776 100.00%
===================================================================
A-4
Property Types of the Mortgaged Properties in Mortgage Loan Group I
Aggregate Scheduled
Principal Balance
Number of Outstanding as % of Mortgage
Property Type Mortgage Loans of Cut-off Date Loan Group I
- ------------- -------------------------------------------------------------------
2-4 Family 7 $ 1,199,475 3.52%
Condominium 21 3,502,078 10.26
Mobile/Manufactured Home 1 182,453 0.53
PUD 8 3,086,600 9.05
Single Family 165 26,087,475 76.45
Town House 1 63,696 0.19
-------------------------------------------------------------------
Total 203 $34,121,776 100.00%
===================================================================
Occupancy Status of Mortgaged Properties in Mortage Loan Group I*
Aggregate Scheduled
Principal Balance
Number of Outstanding as % of Mortgage
Occupancy Status Mortgage Loans of Cut-off Date Loan Group I
- ---------------- -------------------------------------------------------------------
Investor 14 $ 1,584,610 4.64%
Owner Occupied 179 29,865,432 87.53
Second Home 5 1,503,928 4.41
Unknown 5 1,167,807 3.42
-------------------------------------------------------------------
Total 203 $34,121,776 100.00%
===================================================================
*Based upon representations of the related mortgagors at the time of
origination.
A-5
Remaining Terms to Stated Maturity of Mortgage Loan Group I
Aggregate Scheduled
Principal Balance
Number of Outstanding as % of Mortgage
Stated Remaining Term Mortgage Loans of Cut-off Date Loan Group I
- --------------------- -------------------------------------------------------------------
1 - 48 Months 3 $ 72,737 0.21%
61 - 120 Months 4 167,326 0.49
121 - 180 Months 25 1,668,961 4.89
181 - 240 Months 10 867,181 2.54
241 - 300 Months 21 3,135,501 9.19
301 - 360 Months 139 27,613,660 80.93
361 and Greater 1 596,411 1.75
-------------------------------------------------------------------
Total 203 $34,121,776 100.00%
===================================================================
As of the cut-off date, the weighted average remaining months
to scheduled maturity of the group I mortgage loans was
approximately 317 months.
Loan Purposes of Mortgage Loan Group I
Aggregate Scheduled
Principal Balance
Number of Outstanding as % of Mortgage
Loan Purpose Mortgage Loans of Cut-off Date Loan Group I
- ------------ -------------------------------------------------------------------
Cash Out Refinance 65 $12,540,762 36.75%
Construction 1 121,239 0.36
Purchase 103 14,316,433 41.96
Rate / Term Refinance 30 6,729,879 19.72
Unknown 4 413,463 1.21
-------------------------------------------------------------------
Total 203 $34,121,776 100.00%
===================================================================
A-6
Product Types & Weighed Average
Months to Roll of Mortgage Loan Group I
Weighted Aggregate Scheduled
Average Principal Balance
Months to Number of Outstanding as % of Mortgage
Product Type Roll Mortgage Loans of Cut-off Date Loan Group I
- ------------ ---------- ------------------- -------------------- ----------------
1CMT 5.55 92 $14,740,675 43.20%
1MLIBOR 1.09 2 523,842 1.54
2/1CMT 8.29 2 506,648 1.49
2/1LIBOR 2.08 2 261,029 0.77
2/6LIBOR 13.65 45 6,107,453 17.90
3/1CMT 12.82 23 4,604,992 13.50
3/1LIBOR 21.80 3 308,287 0.90
3/1MLIBOR 1.00 1 100,038 0.29
3/6LIBOR 20.23 2 234,511 0.69
3/6MCMT 22.00 1 104,237 0.31
5/1CMT 10.20 13 3,084,105 9.04
5/1MLIBOR 17.00 1 1,436,607 4.21
6LIBOR 4.31 14 2,004,626 5.88
6MCMT 4.64 2 104,726 0.31
-----------------------------------------------------------------------------
Total 9.04 203 $34,121,776 100.00%
=============================================================================
A-7
Mortgage Rates as of the Cut-Off Date
of Mortgage Loan Group II
Aggregate Scheduled
Principal Balance
Number of Outstanding as % of Mortgage
Mortgage Interest Rates (%) Mortgage Loans of Cut-off Date Loan Group II
- --------------------------- -------------------------------------------------------------------
3.001 - 3.500 1 $ 71,531 0.09%
3.501 - 4.000 2 435,662 0.53
4.001 - 4.500 25 4,988,549 6.04
4.501 - 5.000 74 18,352,096 22.22
5.001 - 5.500 128 36,616,525 44.33
5.501 - 6.000 50 10,080,417 12.20
6.001 - 6.500 27 5,173,384 6.26
6.501 - 7.000 19 4,664,010 5.65
7.001 - 7.500 8 1,468,353 1.78
7.501 - 8.000 1 215,491 0.26
8.001 - 8.500 2 128,666 0.16
8.501 - 9.000 2 269,247 0.33
9.001 - 9.500 1 59,189 0.07
10.501 - 11.000 1 69,437 0.08
-------------------------------------------------------------------
Total 341 $82,592,556 100.00%
===================================================================
As of the cut-off date, the weighted average mortgage rate of
the group II mortgage loans was approximately 5.4122% per
annum.
Original Loan-to-Value Ratios in Mortgage Loan Group II
Aggregate Scheduled
Principal Balance
Number of Outstanding as % of Mortgage
Original Loan-to-Value Ratios(%) Mortgage Loans of Cut-off Date Loan Group II
- -------------------------------- -------------------------------------------------------------------
10.01 - 20.00 2 $ 208,493 0.25%
20.01 - 30.00 4 1,430,773 1.73
30.01 - 40.00 12 2,616,890 3.17
40.01 - 50.00 16 5,534,171 6.70
50.01 - 60.00 26 8,100,039 9.81
60.01 - 70.00 37 14,660,024 17.75
70.01 - 80.00 115 28,241,525 34.19
80.01 - 90.00 74 13,410,411 16.24
90.01 - 100.00 54 8,263,759 10.01
100.01 - 110.00 1 126,471 0.15
-------------------------------------------------------------------
Total 341 $82,592,556 100.00%
===================================================================
As of the cut-off date, the weighted average original
loan-to-value ratio of the group II mortgage loans was
approximately 71.92%.
A-8
Scheduled Principal Balances as of the Cut-off Date
of Mortgage Loan Group II
Aggregate Scheduled
Principal Balance
Number of Outstanding as % of Mortgage
Scheduled Principal Balance ($) Mortgage Loans of Cut-off Date Loan Group II
- ------------------------------- -------------------------------------------------------------------
1 - 50,000 6 $ 208,386 0.25%
50,001 - 100,000 37 3,013,518 3.65
100,001 - 150,000 80 9,968,557 12.07
150,001 - 200,000 60 10,422,168 12.62
200,001 - 250,000 47 10,500,857 12.71
250,001 - 300,000 39 10,681,276 12.93
300,001 - 350,000 11 3,501,750 4.24
350,001 - 400,000 18 6,839,464 8.28
400,001 - 450,000 12 5,173,610 6.26
450,001 - 500,000 5 2,396,450 2.90
500,001 - 550,000 4 2,051,067 2.48
550,001 - 600,000 1 572,424 0.69
600,001 - 650,000 6 3,795,216 4.60
650,001 - 700,000 3 2,058,802 2.49
700,001 - 750,000 1 720,000 0.87
750,001 - 800,000 3 2,311,800 2.80
800,001 and Greater 8 8,377,210 10.14
-------------------------------------------------------------------
Total 341 $82,592,556 100.00%
===================================================================
As of the cut-off date, the average scheduled principal balance
of the group II mortgage loans was approximately $242,207.
A-9
Credit Scores as of the Date of Origination of Mortgage Loan Group II
Aggregate Scheduled
Principal Balance
Number of Outstanding as % of Mortgage
Range of Credit Scores Mortgage Loans of Cut-off Date Loan Group II
- ---------------------- -------------------------------------------------------------------
Not Available 4 $ 808,641 0.98%
1 - 500 11 1,439,319 1.74
501 - 520 10 1,741,025 2.11
521 - 540 6 661,856 0.80
541 - 560 9 1,492,936 1.81
561 - 580 7 1,359,499 1.65
581 - 600 9 1,621,517 1.96
601 - 620 16 2,809,788 3.40
621 - 640 17 4,180,127 5.06
641 - 660 17 3,445,576 4.17
661 - 680 32 8,017,544 9.71
681 - 700 35 8,824,468 10.68
701 - 720 34 8,398,150 10.17
721 - 740 29 6,923,651 8.38
741 - 760 36 9,295,549 11.25
761 - 780 42 14,127,984 17.11
781 - 800 22 5,421,233 6.56
801 and Greater 5 2,023,694 2.45
-------------------------------------------------------------------
Total 341 $82,592,556 100.00%
===================================================================
As of the cut-off date, the weighted average credit score of the group II
mortgage loans 3.77% for which credit scores were available was approximately
701.
A-10
Geographic Distribution of the
Mortgaged Properties in Mortgage Loan Group II
Aggregate Scheduled
Principal Balance
Number of Outstanding as % of Mortgage
Geographic Distribution Mortgage Loans of Cut-off Date Loan Group II
- ----------------------- -------------------------------------------------------------------
Alabama 1 $ 69,178 0.08%
Arizona 8 1,297,856 1.57
Arkansas 3 475,638 0.58
California 57 19,767,700 23.93
Colorado 21 5,582,215 6.76
Connecticut 3 2,566,599 3.11
District of Columbia 3 1,115,970 1.35
Florida 25 4,873,503 5.90
Georgia 11 2,306,205 2.79
Hawaii 1 278,564 0.34
Idaho 2 340,540 0.41
Illionois 24 5,207,832 6.31
Louisana 1 111,974 0.14
Maine 1 265,947 0.32
Maryland 10 2,679,234 3.24
Massachusetts 10 2,897,178 3.51
Michigan 11 1,848,965 2.24
Minnesota 21 3,816,203 4.62
Montana 6 1,493,990 1.81
Nevada 4 688,326 0.83
New Hampshire 1 156,744 0.19
New Jersey 25 6,311,569 7.64
New York 9 3,453,886 4.18
North Carolina 10 1,504,645 1.82
Ohio 3 276,978 0.34
Oregon 4 646,735 0.78
Pennsylvania 6 1,392,878 1.69
Rhode Island 2 264,296 0.32
South Carolina 6 763,662 0.92
Tennessee 4 749,985 0.91
Texas 15 2,508,263 3.04
Utah 3 391,593 0.47
Virginia 11 2,979,885 3.61
Washington 12 2,158,050 2.61
West Virginia 1 180,178 0.22
Wisconsin 6 1,169,593 1.42
-------------------------------------------------------------------
Total 341 $82,592,556 100.00%
===================================================================
A-11
Property Types of the Mortgaged Properties in Mortgage Loan Group II
Aggregate Scheduled
Principal Balance
Number of Outstanding as % of Mortgage
Property Type Mortgage Loans of Cut-off Date Loan Group II
- ------------- -------------------------------------------------------------------
2-4 Family 10 $ 2,188,102 2.65%
Condominium 46 8,594,407 10.41
Other 2 304,693 0.37
PUD 24 9,674,811 11.71
Single Family 255 61,047,319 73.91
Town House 4 783,223 0.95
-------------------------------------------------------------------
Total 341 $82,592,556 100.00%
===================================================================
Occupancy Status of Mortgaged Properties in Mortgage Loan Group II*
Aggregate Scheduled
Principal Balance
Number of Outstanding as % of Mortgage
Occupancy Status Mortgage Loans of Cut-off Date Loan Group II
- ---------------- -------------------------------------------------------------------
Investor 11 $ 1,842,963 2.23%
Owner Occupied 308 76,471,905 92.59
Second Home 22 4,277,689 5.18
-------------------------------------------------------------------
Total 341 $82,592,556 100.00%
===================================================================
*Based upon representations of the related mortgagors at the
time of origination.
A-12
Remaining Terms to Stated Maturity of Mortgage Loan Group II
Aggregate Scheduled
Principal Balance
Number of Outstanding as % of Mortgage
Stated Remaining Term Mortgage Loans of Cut-off Date Loan Group II
- --------------------- -------------------------------------------------------------------
121 - 180 Months 5 $ 281,861 0.34%
181 - 240 Months 1 169,322 0.21
301 - 360 Months 318 78,378,535 94.90
361 and Greater 17 3,762,838 4.56
------------------------------------------------------------------
Total 341 $82,592,556 100.00%
==================================================================
As of the cut-off date, the weighted average remaining months
to scheduled maturity of the group II mortgage loans was
approximately 354 months.
Loan Purposes of the Mortgage Loan Group II
Aggregate Scheduled
Principal Balance
Number of Outstanding as % of Mortgage
Loan Purpose Mortgage Loans of Cut-off Date Loan Group II
- ------------ -------------------------------------------------------------------
Cash Out Refinance 90 $23,390,907 28.32%
Construction 8 1,469,200 1.78
Purchase 150 32,049,802 38.80
Rate / Term Refinance 92 25,513,326 30.89
Unknown 1 169,322 0.21
------------------------------------------------------------------
Total 341 $82,592,556 100.00%
==================================================================
A-13
Product Types & Weighed Average Months to
Roll of Mortgage Loan Group II
Weighted Aggregate Scheduled
Average Principal Balance
Months to Number of Outstanding as % of Mortgage
Product Type Roll Mortgage Loans of Cut-off Date Loan Group II
- ------------ ----------- -------------- -------------------- ---------------
1CMT 48.14 22 $ 4,201,280 5.09%
3/1CMT 30.75 28 4,488,511 5.44
3/1LIBOR 27.63 2 384,131 0.47
3/3CMT 24.05 21 3,444,323 4.17
3/6LIBOR 25.93 5 705,785 0.86
5/1CMT 54.59 201 56,302,356 68.17
5/1LIBOR 52.57 7 1,677,201 2.03
5/6LIBOR 59.97 15 3,626,430 4.39
6LIBOR 28.00 1 111,974 0.14
7/1CMT 72.78 38 7,207,179 8.73
7/6LIBOR 75.00 1 443,386 0.54
----------------------------------------------------------------------------------
Total 53.18 341 $82,592,556 100.00%
==================================================================================
A-14
Mortgage Rates as of the Cut-off Date of Mortgage Loan Group III
Aggregate Scheduled
Principal Balance
Number of Outstanding as % of Mortgage
Mortgage Interest Rates (%) Mortgage Loans of Cut-off Date Loan Group III
- --------------------------- -------------------------------------------------------------------
3.501 - 4.000 4 $ 530,562 1.57%
4.001 - 4.500 45 5,135,037 15.19
4.501 - 5.000 56 9,374,963 27.73
5.001 - 5.500 66 8,604,742 25.45
5.501 - 6.000 23 2,351,952 6.96
6.001 - 6.500 10 608,921 1.80
6.501 - 7.000 55 7,072,275 20.92
7.001 - 7.500 3 49,488 0.15
7.501 - 8.000 2 81,680 0.24
------------------------------------------------------------------
Total 264 $33,809,620 100.00%
==================================================================
As of the cut-off date, the weighted average mortgage rate of the group III
mortgage loans was approximately 5.4206% per annum.
Original Loan-to-Value Ratios in Mortgage Loan Group III
Aggregate Scheduled
Principal Balance
Number of Outstanding as % of Mortgage
Original Loan-to-Value Ratios(%) Mortgage Loans of Cut-off Date Loan Group III
- -------------------------------- -------------------------------------------------------------------
20.01 - 30.00 1 $ 29,964 0.09%
30.01 - 40.00 2 146,105 0.43
40.01 - 50.00 3 618,769 1.83
50.01 - 60.00 12 846,265 2.50
60.01 - 70.00 28 4,422,527 13.08
70.01 - 80.00 153 21,334,258 63.10
80.01 - 90.00 56 5,949,455 17.60
90.01 - 100.00 9 462,276 1.37
------------------------------------------------------------------
Total 264 $33,809,620 100.00%
==================================================================
As of the cut-off date, the weighted average original loan-to-value ratio of
the group III mortgage loans was approximately 76.85%.
A-15
Scheduled Principal Balances as of the Cut-Off Date
in Mortgage Loan Group III
Aggregate Scheduled
Principal Balance
Number of Outstanding as % of Mortgage
Scheduled Principal Balance ($) Mortgage Loans of Cut-off Date Loan Group III
- ------------------------------- -------------------------------------------------------------------
1 - 50,000 52 $ 1,733,931 5.13%
50,001 - 100,000 82 6,340,721 18.75
100,001 - 150,000 54 6,602,710 19.53
150,001 - 200,000 44 7,472,719 22.10
200,001 - 250,000 16 3,535,449 10.46
250,001 - 300,000 4 1,081,182 3.20
300,001 - 350,000 3 934,388 2.76
350,001 - 400,000 1 395,216 1.17
400,001 - 450,000 1 408,977 1.21
550,001 - 600,000 2 1,124,759 3.33
650,001 - 700,000 2 1,334,066 3.95
700,001 - 750,000 1 703,845 2.08
800,001 and Greater 2 2,141,658 6.33
------------------------------------------------------------------
Total 264 $33,809,620 100.00%
==================================================================
As of the cut-off date, the average scheduled principal balance
of the group III mortgage loans was approximately $128,067.
A-16
Credit Scores as of the Date of Origination of
Mortgage Loan Group III
Aggregate Scheduled
Principal Balance
Number of Outstanding as % of Mortgage
Range of Credit Scores Mortgage Loans of Cut-off Date Loan Group III
- ---------------------- -------------------------------------------------------------------
Not Available 25 $ 3,935,982 11.64%
1 - 500 27 3,555,331 10.52
501 - 520 14 2,009,652 5.94
521 - 540 20 2,469,174 7.30
541 - 560 26 3,881,839 11.48
561 - 580 16 1,743,832 5.16
581 - 600 19 1,384,063 4.09
601 - 620 14 1,925,868 5.70
621 - 640 8 1,307,243 3.87
641 - 660 11 970,461 2.87
661 - 680 15 1,554,155 4.60
681 - 700 13 1,860,830 5.50
701 - 720 11 2,003,369 5.93
721 - 740 11 1,311,392 3.88
741 - 760 12 1,100,160 3.25
761 - 780 11 1,551,108 4.59
781 - 800 7 848,889 2.51
801 and Greater 4 396,274 1.17
------------------------------------------------------------------
Total 264 $33,809,620 100.00%
==================================================================
As of the cut-off date, the weighted average credit score of
the group III mortgage loans for which credit scores are available is
approximately 614.
A-17
Geographic Distribution of the Mortgaged Properties
in Mortgage Loan Group III
Aggregate Scheduled
Principal Balance
Number of Outstanding as % of Mortgage
Geographic Distribution Mortgage Loans of Cut-off Date Loan Group III
- ----------------------- -------------------------------------------------------------------
Arizona 12 $ 643,703 1.90%
California 147 22,134,141 65.47
Colorado 1 110,177 0.33
Connecticut 3 544,859 1.61
District of Columbia 1 239,537 0.71
Florida 27 1,630,466 4.82
Georgia 7 634,336 1.88
Illionois 7 688,142 2.04
Indiana 1 40,088 0.12
Kansas 2 68,239 0.20
Maine 4 435,709 1.29
Maryland 2 143,447 0.42
Massachusetts 1 113,020 0.33
Montana 3 158,843 0.47
Nebraska 1 19,245 0.06
Nevada 1 302,648 0.90
New Jersey 5 1,007,739 2.98
New York 16 1,949,248 5.77
North Carolina 1 52,254 0.15
Ohio 1 56,259 0.17
Pennsylvania 2 364,246 1.08
Tennessee 2 221,414 0.65
Texas 12 1,172,122 3.47
Utah 1 25,572 0.08
Virginia 2 804,861 2.38
Washington 2 249,307 0.74
------------------------------------------------------------------
Total 264 $33,809,620 100.00%
==================================================================
A-18
Property Types of the Mortgaged Properties in Mortgage Loan Group III
Aggregate Scheduled
Principal Balance
Number of Outstanding as % of Mortgage
Property Type Mortgage Loans of Cut-off Date Loan Group III
- ------------- -------------------------------------------------------------------
2-4 Family 26 $ 2,955,602 8.74%
Condominium 20 1,806,415 5.34
PUD 10 1,378,318 4.08
Single Family 208 27,669,285 81.84
------------------------------------------------------------------
Total 264 $33,809,620 100.00%
==================================================================
Occupancy Status of Mortgaged Properties
in Mortgage Loan Group III*
Aggregate Scheduled
Principal Balance
Number of Outstanding as % of Mortgage
Occupancy Status Mortgage Loans of Cut-off Date Loan Group III
- ---------------- -------------------------------------------------------------------
Investor 53 $ 5,381,367 15.92%
Owner Occupied 210 28,388,284 83.97
Second Home 1 39,969 0.12
------------------------------------------------------------------
Total 264 $33,809,620 100.00%
==================================================================
*Based upon representations of the related mortgagors at the
time of origination.
A-19
Remaining Terms to Stated Maturity of Mortgage Loan Group III
Aggregate Scheduled
Principal Balance
Number of Outstanding as % of Mortgage
Stated Remaining Term Mortgage Loans of Cut-off Date Loan Group III
- --------------------- -------------------------------------------------------------------
1 - 48 Months 2 $ 53,512 0.16%
61 - 120 Months 11 352,240 1.04
121 - 180 Months 58 4,273,691 12.64
181 - 240 Months 76 8,779,091 25.97
241 - 300 Months 65 9,578,377 28.33
301 - 360 Months 47 10,028,201 29.66
361 and Greater 5 744,509 2.20
------------------------------------------------------------------
Total 264 $33,809,620 100.00%
==================================================================
As of the cut-off date, the weighted average remaining months
to scheduled maturity of the group III mortgage loans was
approximately 259 months.
Loan Purpose of the Group III Mortgage Loans
Aggregate Scheduled
Principal Balance
Number of Outstanding as % of Mortgage
Loan Purpose Mortgage Loans of Cut-off Date Loan Group III
- ------------ -------------------------------------------------------------------
Cash Out Refinance 65 $ 6,964,719 20.60%
Construction 1 56,191 0.17
Purchase 165 19,518,410 57.73
Rate / Term Refinance 32 7,200,271 21.30
Unknown 1 70,028 0.21
------------------------------------------------------------------
Total 264 $33,809,620 100.00%
==================================================================
A-20
Product Types & Weighed Average Months to
Roll of Mortgage Loan Group III
Aggregate Scheduled
Weighted Average Number of Principal Balance
Months to Mortgage Outstanding as % of Mortgage
Product Type Roll Loans of Cut-off Date Loan Group III
- ------------ ------------------- ------------- ------------------- --------------
10/11DIST.COFI 2.91 2 $ 415,731 1.23%
11DIST.COFI 2.45 240 31,431,308 92.97
2/11DIST.COFI 5.00 1 138,032 0.41
3/11DIST.COFI 23.42 2 81,417 0.24
3/11DISTCOFI 1.00 1 54,621 0.16
5/11DIST.COFI 1.00 1 571,165 1.69
7/11DIST.COFI 3.00 1 166,340 0.49
8/11DIST.COFI 1.00 1 129,371 0.38
FHLMC.COFI 7.10 4 337,072 1.00
M.NATIONAL 13.21 7 188,846 0.56
MEDIAN.COFI 4.66 4 295,717 0.88
----------------------------------------------------------------------------
Total 2.61 264 $33,809,620 100.00%
============================================================================
Mortgage Rates as of the Cut-Off Date in Total Portfolio
Aggregate Scheduled
Number of Principal Balance
Mortgage Outstanding as % of Total
Mortgage Interest Rates (%) Loans of Cut-off Date Mortgage Pool
- --------------------------- -------------------------------------------------------------------
2.501 - 3.000 1 $ 59,552 0.04%
3.001 - 3.500 6 1,180,760 0.78
3.501 - 4.000 33 8,503,933 5.65
4.001 - 4.500 109 15,991,542 10.62
4.501 - 5.000 150 31,172,578 20.71
5.001 - 5.500 210 46,978,443 31.21
5.501 - 6.000 83 14,733,711 9.79
6.001 - 6.500 43 6,911,205 4.59
6.501 - 7.000 89 13,378,346 8.89
7.001 - 7.500 20 3,362,109 2.23
7.501 - 8.000 14 1,927,837 1.28
8.001 - 8.500 10 1,723,793 1.15
8.501 - 9.000 7 683,698 0.45
9.001 - 9.500 9 948,815 0.63
9.501 - 10.000 10 1,677,650 1.11
10.001 - 10.500 7 770,385 0.51
10.501 - 11.000 7 519,596 0.35
-------------------------------------------------------------------
Total 808 $150,523,953 100.00%
===================================================================
As of the cut-off date, the weighted average mortgage rate of the mortgage loans
in the total portfolio was approximately 5.4915% per annum.
Original Loan-to-Value Ratios in Total Portfolio
Aggregate Scheduled
Number of Principal Balance
Mortgage Outstanding as % of Total
Original Loan-to-Value Ratios(%) Loans of Cut-off Date Mortgage Pool
- -------------------------------- -------------------------------------------------------------------
10.01 - 20.00 2 $ 208,493 0.14%
20.01 - 30.00 7 1,722,137 1.14
30.01 - 40.00 15 2,807,657 1.87
40.01 - 50.00 21 6,360,486 4.23
50.01 - 60.00 47 10,108,837 6.72
60.01 - 70.00 100 27,195,248 18.07
70.01 - 80.00 342 64,242,865 42.68
80.01 - 90.00 172 24,572,671 16.32
90.01 - 100.00 98 13,013,263 8.65
100.01 - 110.00 2 164,594 0.11
110.01 - 120.00 1 91,406 0.06
120.01 and Greater 1 36,294 0.02
-------------------------------------------------------------------
Total 808 $150,523,953 100.00%
===================================================================
As of the cut-off date, the weighted average original loan-to-value ratio of the
mortgage loans in the total portfolio was approximately 70.46%.
A-21
Scheduled Principal Balances of the Mortgage Loans
as of the Cut-Off Date in Total Portfolio
Aggregate Scheduled
Number of Principal Balance
Mortgage Outstanding as % of Total
Scheduled Principal Balance ($) Loans of Cut-off Date Mortgage Pool
- ------------------------------- -------------------------------------------------------------------
1 - 50,000 84 $ 2,884,020 1.92%
50,001 - 100,000 170 13,214,684 8.78
100,001 - 150,000 196 24,048,082 15.98
150,001 - 200,000 123 21,211,007 14.09
200,001 - 250,000 70 15,622,119 10.38
250,001 - 300,000 54 14,785,582 9.82
300,001 - 350,000 18 5,714,409 3.80
350,001 - 400,000 25 9,551,368 6.35
400,001 - 450,000 13 5,582,587 3.71
450,001 - 500,000 10 4,763,200 3.16
500,001 - 550,000 9 4,694,170 3.12
550,001 - 600,000 6 3,439,491 2.29
600,001 - 650,000 6 3,795,216 2.52
650,001 - 700,000 6 4,062,760 2.70
700,001 - 750,000 4 2,887,981 1.92
750,001 - 800,000 3 2,311,800 1.54
800,001 and Greater 11 11,955,475 7.94
-------------------------------------------------------------------
Total 808 $150,523,953 100.00%
===================================================================
As of the cut-off date, the average scheduled principal balance of the mortgage
Loans in the total portfolio was approximately $186,292.
Credit Scores as of the Date of Origination
of the Mortgage Loans in Total Portfolio
Aggregate Scheduled
Number of Principal Balance
Mortgage Outstanding as % of Total
Range of Credit Scores Loans of Cut-off Date Mortgage Pool
- ---------------------- -------------------------------------------------------------------
Not Available 36 $ 5,628,307 3.74%
1 - 500 67 10,131,451 6.73
501 - 520 40 7,222,817 4.80
521 - 540 55 7,638,673 5.07
541 - 560 56 7,655,841 5.09
561 - 580 41 8,035,266 5.34
581 - 600 35 3,955,838 2.63
601 - 620 41 5,642,439 3.75
621 - 640 36 7,821,624 5.20
641 - 660 39 6,363,446 4.23
661 - 680 52 10,348,585 6.88
681 - 700 59 12,270,138 8.15
701 - 720 53 11,700,892 7.77
721 - 740 47 8,879,625 5.90
741 - 760 49 10,436,032 6.93
761 - 780 60 17,253,302 11.46
781 - 800 31 6,985,883 4.64
801 and Greater 11 2,553,794 1.70
-------------------------------------------------------------------
Total 808 $150,523,953 100.00%
===================================================================
As of the cut-off date, the weighted average credit score of
the mortgage loans in the total portfolio for which
credit scores were available was approximately 656.
A-22
Geographic Distribution of the Mortgaged
Properties in Total Portfolio
Aggregate Scheduled
Number of Principal Balance
Mortgage Outstanding as % of Total
Geographic Distribution Loans of Cut-off Date Mortgage Pool
- ----------------------- -------------------------------------------------------------------
Alabama 2 $ 532,770 0.35%
Arkansas 4 609,831 0.41
Arizona 25 2,257,412 1.50
California 243 50,116,656 33.29
Colorado 23 5,875,676 3.90
Connecticut 13 4,534,067 3.01
District of Columbia 4 1,355,506 0.90
Florida 73 10,800,505 7.18
Georgia 27 3,864,324 2.57
Hawaii 1 278,564 0.19
Iowa 1 104,940 0.07
Idaho 2 340,540 0.23
Illionois 40 9,064,813 6.02
Indiana 4 325,539 0.22
Kansas 4 224,781 0.15
Louisana 3 279,156 0.19
Massachusetts 18 4,326,166 2.87
Maryland 16 3,735,641 2.48
Maine 2 312,666 0.21
Michigan 15 2,327,740 1.55
Minnesota 28 4,880,070 3.24
Montana 15 2,069,526 1.37
North Carolina 15 2,313,021 1.54
Nebraska 1 19,245 0.01
New Hampshire 2 234,689 0.16
New Jersey 43 8,983,006 5.97
New Mexico 1 84,955 0.06
Nevada 8 1,801,250 1.20
New York 35 7,159,540 4.76
Ohio 7 668,177 0.44
Oregon 8 956,131 0.64
Pennsylvania 14 2,396,395 1.59
Rhode Island 3 341,888 0.23
South Carolina 9 1,179,056 0.78
Tennessee 6 971,399 0.65
Texas 40 5,349,457 3.55
Utah 6 661,635 0.44
Virginia 17 4,285,751 2.85
Washington 22 3,518,239 2.34
Wisconsin 7 1,203,050 0.80
West Virginia 1 180,178 0.12
-------------------------------------------------------------------
Total 808 $150,523,953 100.00%
===================================================================
A-23
Property Types of the Mortgaged Properties in Total Portfolio
Aggregate Scheduled
Number of Principal Balance
Mortgage Outstanding as % of Total
Property Type Loans of Cut-off Date Mortgage Pool
- ------------- -------------------------------------------------------------------
2-4 Family 43 $ 6,343,179 4.21%
Condominium 87 13,902,899 9.24
Mobile/Manufactured Home 1 182,453 0.12
Other 2 304,693 0.20
PUD 42 14,139,730 9.39
Single Family 628 114,804,080 76.27
Town House 5 846,919 0.56
-------------------------------------------------------------------
Total 808 $150,523,953 100.00%
===================================================================
Occupancy Status of Mortgaged Properties in Total Portfolio*
Aggregate Scheduled
Number of Principal Balance
Mortgage Outstanding as % of Total
Occupancy Status Loans of Cut-off Date Mortgage Pool
- ---------------- -------------------------------------------------------------------
Investor 78 $ 8,808,940 5.85%
Owner Occupied 697 134,725,620 89.50
Second Home 28 5,821,586 3.87
Unknown 5 1,167,807 0.78
-------------------------------------------------------------------
Total 808 $150,523,953 100.00%
===================================================================
*Based upon representations of the related mortgagors at the
time of origination.
A-24
Remaining Terms to Stated Maturity of the Mortgage Loans in Total Portfolio
Aggregate Scheduled
Number of Principal Balance
Mortgage Outstanding as % of Total
Stated Remaining Term Loans of Cut-off Date Mortgage Pool
- --------------------- -------------------------------------------------------------------
1 - 48 Months 5 $ 126,248 0.08%
61 - 120 Months 15 519,566 0.35
121 - 180 Months 88 6,224,512 4.14
181 - 240 Months 87 9,815,594 6.52
241 - 300 Months 86 12,713,877 8.45
301 - 360 Months 504 116,020,397 77.08
361 and Greater 23 5,103,758 3.39
-------------------------------------------------------------------
Total 808 $150,523,953 100.00%
===================================================================
As of the cut-off date, the weighted average remaining months
to scheduled maturity of the mortgage loans in the total
portfolio was approximately 324 months.
Loan Purpose of the Mortgage Loans in Total Portfolio
Aggregate Scheduled
Number of Principal Balance
Mortgage Outstanding as % of Total
Loan Purpose Loans of Cut-off Date Mortgage Pool
- ------------ -------------------------------------------------------------------
Cash Out Refinance 220 $ 42,896,388 28.50%
Construction 10 1,646,630 1.09
Purchase 418 65,884,645 43.77
Rate / Term Refinance 154 39,443,477 26.20
Unknown 6 652,813 0.43
-------------------------------------------------------------------
Total 808 $150,523,953 100.00%
===================================================================
A-25
Product Types & Weighed Average Months to
Roll of the Mortgage Loans in Total Portfolio
Aggregate Scheduled
Principal Balance
Weighted Average Number of Outstanding as % of Total
Product Type Months to Roll Mortgage Loans of Cut-off Date Mortgage Pool
- ------------ ------------------- -------------- ------------------- -------------
10/11DIST.COFI 2.91 2 $ 415,731 0.28%
11DIST.COFI 2.45 240 31,431,308 20.88
1CMT 15.00 114 18,941,955 12.58
1MLIBOR 1.09 2 523,842 0.35
2/11DIST.COFI 5.00 1 138,032 0.09
2/1CMT 8.29 2 506,648 0.34
2/1LIBOR 2.08 2 261,029 0.17
2/6LIBOR 13.65 45 6,107,453 4.06
3/11DIST.COFI 23.42 2 81,417 0.05
3/11DIST.COFI 1.00 1 54,621 0.04
3/1CMT 21.67 51 9,093,504 6.04
3/1LIBOR 25.03 5 692,418 0.46
3/1MLIBOR 1.00 1 100,038 0.07
3/3CMT 24.05 21 3,444,323 2.29
3/6LIBOR 24.51 7 940,295 0.63
3/6MCMT 22.00 1 104,237 0.07
5/11DIST.COFI 1.00 1 571,165 0.38
5/1CMT 52.29 214 59,386,461 39.45
5/1LIBOR 52.57 7 1,677,201 1.11
5/1MLIBOR 17.00 1 1,436,607 0.95
5/6LIBOR 59.97 15 3,626,430 2.41
6LIBOR 5.57 15 2,116,600 1.41
6MCMT 4.64 2 104,726 0.07
7/11DIST.COFI 3.00 1 166,340 0.11
7/1CMT 72.78 38 7,207,179 4.79
7/6LIBOR 75.00 1 443,386 0.30
8/11DIST.COFI 1.00 1 129,371 0.09
FHLMC.COFI 7.10 4 337,072 0.22
M.NATIONAL 13.21 7 188,846 0.13
MEDIAN.COFI 4.66 4 295,717 0.20
----------------------------------------------------------------------------
Total 31.82 808 $150,523,953 100.00%
============================================================================
A-26
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except under limited circumstances, the globally offered Bear Stearns
Asset Backed Securities, Inc. Asset-Backed Certificates, Series 2003-SD2 (the
"Global Securities") will be available only in book-entry form. Investors in the
Global Securities may hold the Global Securities through any of DTC, Euroclear
or Clearstream. 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 Euroclear and Clearstream 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 Asset-Backed Certificates issues.
Secondary cross-market trading between Euroclear or Clearstream and DTC
participants holding Certificates will be effected on a delivery-against-payment
basis through the respective depositaries of Euroclear and Clearstream and as
DTC participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless the holders meet established
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, Euroclear and
Clearstream will hold positions on behalf of their participants through their
respective depositaries, which in turn will hold the positions in accounts as
DTC participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to prior 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 Euroclear or
Clearstream 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.
I-1
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
Asset-Backed Certificates issues in same-day funds.
Trading between Euroclear and/or Clearstream Participants. Secondary
market trading between Euroclear participants or Clearstream participants will
be settled using the procedures applicable to conventional eurobonds in same-day
funds.
Trading between DTC seller and Euroclear or Clearstream Purchaser. When
Global Securities are to be transferred from the account of a DTC participant to
the account of a Euroclear participant or a Clearstream participant, the
purchaser will send instructions to Euroclear or Clearstream through a Euroclear
participant or Clearstream participant at least one business day prior to
settlement. Euroclear or Clearstream will instruct the respective depositary, as
the case may be, to receive the Global Securities against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment date to and excluding the settlement date, on the basis of either
the actual number of days in the applicable accrual period and a year assumed to
consist of 360 days or a 360-day year of 12 30-day months as applicable to the
related class of Global Securities. For transactions settling on the 31st of the
month, payment will include interest accrued to and excluding the first day of
the following month. Payment will then be made by the respective depositary of
the DTC participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Euroclear participant's or Clearstream 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 Euroclear or Clearstream cash debt will be valued
instead as of the actual settlement date.
Euroclear participants and Clearstream 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 Euroclear or Clearstream. Under
this approach, they may take on credit exposure to Euroclear or Clearstream
until the Global Securities are credited to their accounts one day later.
As an alternative, if Euroclear or Clearstream has extended a line of
credit to them, Euroclear participants or Clearstream participants can elect not
to preposition funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, Euroclear participants or Clearstream
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 the overdraft charges, although this result will depend
on each Euroclear participant's or Clearstream participant's particular cost of
funds.
I-2
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 Euroclear participants
or Clearstream 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 Euroclear or Clearstream seller and DTC Purchaser. Due
to time zone differences in their favor, Euroclear participants and Clearstream
participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective depositary, to a DTC participant. The seller will send
instructions to Euroclear or Clearstream through a Euroclear participant or
Clearstream participant at least one business day prior to settlement. In these
cases Euroclear or Clearstream will instruct the respective depositary, as
appropriate, to deliver the Global Securities to the DTC participant's account
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment to and excluding the settlement date
on the basis of either the actual number of days in the applicable accrual
period and a year assumed to consist of 360 days or a 360-day year of 12 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 Euroclear participant or Clearstream participant
the following day, and receipt of the cash proceeds in the Euroclear
participant's or Clearstream 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 Euroclear participant or Clearstream 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 Euroclear participant's or Clearstream participant's
account would instead be valued as of the actual settlement date.
Finally, day traders that use Euroclear or Clearstream and that
purchase Global Securities from DTC participants for delivery to Euroclear
participants or Clearstream 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 Euroclear or Clearstream for one day (until the
purchase side of the day trade is reflected in their Euroclear or
Clearstream accounts) in accordance with the clearing system's
customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC participant
no later than one day prior to settlement, which would give the
Global Securities sufficient time to be reflected in their
Euroclear or Clearstream account in order to settle the sale side
of the trade; or
I-3
(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
Euroclear participant or Clearstream participant.
U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through
Clearstream or Euroclear (or through DTC if the holder has an address outside
the U.S.) will be subject to the 30% (or in some cases 31%) U.S. withholding tax
that generally applies to payments of interest on registered debt issued by U.S.
persons, unless (1) 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
(2) 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-8BEN). Beneficial owners of
Global Securities that are non-U.S. persons can obtain a complete exemption from
the withholding tax by filing a signed Form W-8 BEN. If the information shown on
Form W-8 BEN changes, a new Form W-8 BEN 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.
Exemption or reduced rate for non-U.S. persons resident in treaty
countries (Form W-8 BEN). 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-8
BEN.
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.
U.S. Federal Income Tax Reporting Procedure. The Global Securities
holder files by submitting the appropriate form to the person through whom he
holds (e.g., the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Forms W-8 BEN and W-8ECI are generally effective
for three calendar years.
o U.S. Person. As used in this prospectus supplement the term "U.S.
person" means a beneficial owner of a Certificate that is for United
States federal income tax purposes
o a citizen or resident of the United States,
I-4
o a corporation or partnership created or organized in or under the
laws of the United States or of any State thereof or the District of
Columbia,
o an estate the income of which is subject to United States federal
income taxation regardless of its source, or
o a trust if a court within the United States is able to exercise
primary supervision of the administration of the trust and one or
more United States persons have the authority to control all
substantial decisions of the trust.
As used in this prospectus supplement, the term "non-U.S. person" means
a beneficial owner of a Certificate that is not a U.S. person.
This summary does not deal with all aspects of U.S. Federal income tax
withholding that may be relevant to foreign holders of the Global Securities or
with the application of the extensive withholding regulations that are generally
effective with respect to payments made after December 31, 2000 which have
detailed rules regarding the determination of beneficial ownership. Investors
are advised to consult their own tax advisors for specific tax advice concerning
their holding and disposing of the Global Securities.
I-5
PROSPECTUS
Mortgage-Backed/Asset-Backed Securities (Issuable in Series)
Bear Stearns Asset Backed Securities, Inc.
Depositor
Consider carefully the risk factors beginning on page 4 of this prospectus.
The securities represent obligations of the trust only and do not represent an
interest in or obligation of the depositor, the seller, the master servicer or
any of their affiliates.
This prospectus may be used to offer and sell the securities only if accompanied
by a prospectus supplement.
The Securities
Each issue of securities will have its own series designation and will evidence
either the ownership of assets in the related trust fund or debt obligations
secured by assets of the related trust fund.
o Each series of securities will consist of one or more classes of
mortgage-backed or asset-backed certificates or notes.
o Each class of securities will represent the entitlement to a specified
portion of interest payments and a specified portion of principal payments
on the trust assets.
o A series may include classes of securities that are senior in right of
payment to other classes. Classes of securities may be entitled to receive
distributions of principal, interest or both prior to other classes or
before or after specified events.
o No market will exist for the securities of any series before they are
issued. In addition, even after the securities of a series have been
issued and sold, there can be no assurance that a resale market for them
will develop.
Offers of the securities will be made through Bear, Stearns & Co. Inc. and the
other underwriters listed in the related prospectus supplement.
The Trust Fund and Its Assets
As specified in the related prospectus supplement, each trust fund will consist
primarily of assets from one of the following categories:
o mortgage loans secured by senior or junior liens on one- to four-family
residential properties;
o closed-end and/or revolving home equity loans secured by senior or junior
liens on one- to four-family residential or mixed-use properties;
o home improvement installment sales contracts and loan agreements that are
either unsecured or secured by senior or junior liens on one- to
four-family residential or mixed-use properties or by purchase money
security interests in the related home improvements;
o installment sales contracts and installment loan agreements secured by
senior or junior liens on manufactured homes or by mortgages on the
related real estate;
o mortgage-backed securities issued or guaranteed by Ginnie Mae, Freddie Mac
or Fannie Mae; and
o private label mortgage-backed or asset-backed securities.
Neither the Securities and Exchange Commission nor any state securities
commission has approved these securities or determined that this prospectus is
accurate or complete. Any representation to the contrary is a criminal offense.
Bear, Stearns & Co. Inc.
September 25, 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.
Although the accompanying prospectus supplement cannot contradict the
information contained in this prospectus, insofar as the prospectus supplement
contains specific information about a particular series of securities that
differs from the more general information contained in this prospectus, you
should rely on the information in the prospectus supplement.
You should rely only on the information contained in this prospectus and the
accompanying prospectus supplement. We have not authorized anyone to provide you
with information that is different from that contained in this prospectus and
the accompanying prospectus supplement.
Each prospectus supplement generally will include the following information with
respect to the related series of securities:
o the principal amount, interest rate and authorized denominations of each
class of securities;
o information concerning the mortgage loans, home equity loans, home
improvement contracts, manufactured housing contracts, mortgage backed
securities and/or private securities in the related trust fund;
o information concerning the seller or sellers of the mortgage loans, home
equity loans, home improvement contracts, manufactured housing contracts,
mortgage backed securities and/or private securities and information
concerning any servicer;
o the terms of any credit enhancement with respect to particular classes of
the securities;
o information concerning other trust fund assets, including any reserve
fund;
o the final scheduled distribution date for each class of securities;
o the method for calculating the amount of principal to be paid to each
class of securities, and the timing and order of priority of principal
payments;
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o information about any REMIC or FASIT tax elections for some or all of the
trust fund assets; and
o particulars of the plan of distribution for the securities.
We include cross-references in this prospectus and the accompanying
prospectus supplement to captions in these materials where you can find further
related discussions. The Table of Contents included in the accompanying
prospectus supplement lists the pages on which these captions are located.
There is also a Glossary of Terms beginning on page 127 where you will
find definitions of certain capitalized terms used in this prospectus.
If you require additional information, the mailing address of our
principal executive offices is Bear Stearns Asset Backed Securities, Inc., 383
Madison Avenue, New York, New York, 10179 and our telephone number is (212)
272-2000. For other means of acquiring additional information about us or a
series of securities, see "Incorporation of Certain Information by Reference"
beginning on page 125 of this prospectus.
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Risk Factors
You should consider carefully the following information, together with
the information set forth under "Risk Factors" in the accompanying prospectus
supplement, since it identifies the principal risk factors associated with an
investment in the securities.
You may have difficulty selling your
securities or obtaining your desired
price................................ No market will exist for the
securities before they are issued.
In addition, we cannot give you any
assurance that a resale market will
develop following the issuance and
sale of any series of the
securities. Even if a resale market
does develop, you may not be able to
sell your securities when you wish
or at the price you want.
Only the assets of the related trust
fund are available to pay your
securities........................... The securities of each series will
be payable solely from the assets of
the related trust fund, including
any applicable credit enhancement,
and will not have a claim against
the assets of any other trust. In
the case of securities that are in
the form of notes, the related
indenture will require that
noteholders proceed only against the
assets of the related trust fund. We
cannot give you any assurance that
the market value of the assets in
any trust fund will be equal to or
greater than the total principal
amount of the related securities
then outstanding, plus accrued
interest. Moreover, if the assets of
a trust fund are ever sold, the sale
proceeds will be applied first to
reimburse any related trustee,
servicer and credit enhancement
provider for their unpaid fees and
expenses before any remaining
amounts are distributed to
securityholders.
In addition, at the times specified
in the related prospectus
supplement, assets of the trust fund
and the related security accounts
may be released to the depositor,
the servicer, the credit enhancement
provider or other persons, if
o all payments then due on the
related securities have been
made, and
o any other payments specified
in the related prospectus
supplement have been made.
Once released, such assets will no
longer be available to make payments
to securityholders.
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You will have no recourse against
the depositor or any other person if
any required distribution on the
securities is not made or for any
other default. The only obligations
of the depositor with respect to a
trust fund or the related securities
would result from a breach of the
representations and warranties that
the depositor may make concerning
the trust assets. However, because
of the depositor's very limited
assets, even if the depositor should
be required to repurchase a loan
from a particular trust fund because
of the breach of a representation or
warranty, its sole source of funds
for the repurchase would be:
o funds obtained from enforcing
any similar obligation of the
originator of the loan, or
o monies from any reserve fund
established to pay for loan
repurchases.
Credit enhancement may be
insufficient to provide against
particular risks..................... Although credit enhancement is
intended to reduce the effect of
delinquent payments or loan losses
on particular classes of securities,
the amount of any credit enhancement
is subject to the limits described
in the related prospectus
supplement. In addition, the amount
of credit enhancement may decline or
be depleted before the related
securities are paid in full. As a
result, securityholders may suffer
losses.
Principal payments on the loans may
adversely affect the average life of,
and rate of return on, your
securities........................... You may be unable to reinvest the
principal payments on your
securities at a rate of return equal
to the rate on your securities. The
timing of principal payments on the
securities of a series will be
affected by a number of factors,
including the following:
o the extent of prepayments on
the underlying loans in the
trust fund or, if the trust
fund contains underlying
securities, on the loans
backing the underlying
securities;
o how payments of principal are
allocated among the classes of
securities of that series as
specified in the related
prospectus supplement;
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o if any party has an option to
terminate the related trust
early, the effect of the
exercise of the option;
o the rate and timing of defaults
and losses on the assets in the
related trust fund;
o repurchases of assets in the
related trust fund as a result
of material breaches of
representations and warranties
made by the depositor or a
seller; and
o in the case of a trust fund
that contains revolving credit
line loans, any provisions for
non-amortization, early
amortization or scheduled
amortization periods described
in the related prospectus
supplement.
All the above factors may affect the
yield to maturity of the securities.
The interest accrual period may
reduce the effective yield on your
securities........................... Interest payable on the securities
on any given distribution date will
include all interest accrued during
the related interest accrual period.
Each prospectus supplement will
specify the interest accrual period
for the related securities. If
interest accrues during the calendar
month before the related
distribution date, your effective
yield will be less than it would be
if the interest accrual period ended
the day before the distribution
date. As a result, your effective
yield at par may be less than the
indicated coupon rate.
Loans with balloon payments may
increase your risk of loss........... Certain underlying loans may not be
fully amortizing over their terms to
maturity and may require a
substantial principal payment (a
"balloon" payment) at their stated
maturity. Loans of this type involve
greater risk than fully amortizing
loans since the borrower generally
must be able to refinance the loan
or sell the related property prior
to the loan's maturity date. The
borrower's ability to do so will
depend on such factors as the level
of available mortgage rates at the
time of sale or refinancing, the
relative strength of the local
housing market, the borrower's
equity in the property, the
borrower's general financial
condition and tax laws.
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Adjustable rate loans may be
underwritten to less stringent
standards than fixed rate
loans................................ A trust fund may include adjustable
rate loans that were underwritten on
the assumption that the borrowers
would be able to make higher monthly
payments in a relatively short
period of time. In fact, however,
the borrowers' income may not be
sufficient to meet their loan
payments as payment amounts
increase, thus increasing the risk
of default.
Junior lien loans generally are
riskier than senior lien
loans................................ If the mortgage or home equity loans
in a trust fund are primarily in a
junior lien position, any proceeds
from liquidations, insurance
recoveries or condemnations must be
used first to satisfy the claims of
the related senior lien loans (and
related foreclosure expenses) before
being available to satisfy the
junior lien loans. In addition, a
junior mortgage lender may only
foreclose subject to the related
senior mortgage. As a result, the
junior mortgage lender must either
pay the related senior mortgage
lender in full, at or before the
foreclosure sale, or agree to make
the regular payments on the senior
mortgage. The trust will not have a
source of funds to satisfy any
senior mortgages or to continue
making payments on them. As a
result, the trust's ability, as a
practical matter, to foreclose on
any junior mortgage loan will be
quite limited.
A decline in property values could
reduce the amount and delay the
timing of recoveries on defaulted
mortgage loans....................... The following factors, among others,
could adversely affect property
values in such a way that the
outstanding balance of the related
loans, together with any senior
financing on the same properties,
would equal or exceed those values:
o an overall decline in the
residential real estate markets
where the properties are
located;
o failure of borrowers to
maintain their properties
adequately; and
o natural disasters that may not
be covered by hazard insurance,
such as earthquakes and floods.
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If property values decline, actual
rates of delinquencies, foreclosures
and losses on the underlying loans
could be higher than those currently
experienced by the mortgage lending
industry in general.
Some mortgaged properties may not be
owner occupied....................... The mortgaged properties in the
trust fund may not be owner
occupied. Rates of delinquencies,
foreclosures and losses on mortgage
loans secured by non-owner occupied
properties may be higher than those
on mortgage loans secured by the
borrower's primary residence.
Home improvement contracts and other
loans may not have sufficient
security............................. A trust fund may include home
improvement contracts that are not
secured by an interest in real
estate or otherwise. A trust fund
may also include mortgage or home
equity loans with original
loan-to-value ratios (or combined
loan-to-value ratios in the case of
junior loans) greater than 100%. In
these cases, the trust fund could be
treated as a general unsecured
creditor for the unsecured portion
of these loans.
If a loan of this type goes into
default, the trust fund will have
recourse only against the borrower's
assets generally for the unsecured
portion of the loan, along with the
borrower's other general unsecured
creditors. In a bankruptcy
proceeding, the unsecured portion of
the loan may be discharged, even if
the value of the borrower's assets
available to the trust fund would be
insufficient to pay the remaining
amounts owing on the loan.
Home improvement contracts will not
be stamped........................... The depositor will ensure that a
UCC-1 financing statement is filed
that identifies as collateral the
home improvement contracts included
in a trust fund. However, unless the
related prospectus supplement
provides otherwise, the home
improvement contracts themselves
will not be stamped or marked to
reflect their assignment to the
trust fund. Thus, if as a result of
negligence, fraud or otherwise, a
subsequent purchaser were able to
take physical possession of the
contracts without notice of the
assignment to the trust fund, the
interests of the related
securityholders in those contracts
could be defeated.
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If amounts in any pre-funding account
are not used to purchase trust
assets, you will receive a prepayment
on the related securities............ The related prospectus supplement
may provide that the depositor or
seller will deposit a specified
amount in a pre-funding account on
the date the securities are issued.
In this case, the deposited funds
may be used only to acquire
additional assets for the trust
during a specified period after the
initial issuance of the securities.
Any amounts remaining in the account
at the end of that period will be
distributed as a prepayment of
principal to the holders of the
related securities. The resulting
prepayment could adversely affect
the yield to maturity on those
securities.
Bankruptcy laws may result in adverse
claims against trust fund assets..... The federal bankruptcy code and
state debtor relief laws may
adversely affect the ability of the
trust fund, as a secured lender, to
realize upon its security. For
example, in a federal bankruptcy
proceeding, a lender may not
foreclose on mortgaged property
without the bankruptcy court's
permission. Similarly, the debtor
may propose a rehabilitation plan,
in the case of mortgaged property
that is not his principal residence,
that would reduce the amount of the
lender's secured indebtedness to the
value of the property as of the
commencement of the bankruptcy. As a
result, the lender would be treated
as a general unsecured creditor for
the reduced amount, the amount of
the monthly payments due on the loan
could be reduced, and the interest
rate and loan payment schedule could
be changed.
Any such actions could result in
delays in receiving payments on the
loans underlying the securities and
result in the reduction of total
payments.
Environmental risks may adversely
affect trust fund assets............. Federal, state and local laws and
regulations impose a wide range of
requirements on activities that may
affect the environment, health and
safety. In certain circumstances,
these laws and regulations impose
obligations on owners or operators
of residential properties such as
those that secure the loans. Failure
to comply with these laws and
regulations can result in fines and
penalties that could be assessed
against the trust fund as owner of
the related property.
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In some states, a lien on the
property due to contamination has
priority over the lien of an
existing mortgage. Further, a
mortgage lender may be held liable
as an "owner" or "operator" for
costs associated with the release of
petroleum from an underground
storage tank under certain
circumstances. If the trust fund is
considered the owner or operator of
a property, it will suffer losses as
a result of any liability imposed
for environmental hazards on the
property.
Consumer protection laws may
adversely affect trust fund assets... The loans and contracts in each
trust fund also may be subject to
federal laws relating to loan
origination and underwriting. These
laws
o require certain disclosures to
the borrowers regarding the
terms of the loans;
o prohibit discrimination on the
basis of age, race, color, sex,
religion, marital status,
national origin, receipt of
public assistance or the
exercise of any right under the
consumer credit protection act,
in the extension of credit;
o regulate the use and reporting
of information related to the
borrower's credit experience;
and
o require additional application
disclosures, limit changes that
may be made to the loan
documents without the
borrower's consent and restrict
a lender's ability to declare a
default or to suspend or reduce
a borrower's credit limit to
certain enumerated events.
Loans may also be subject to federal
laws that impose additional
disclosure requirements on creditors
with respect to non-purchase money
mortgage loans with high interest
rates or high up-front fees and
charges. These laws can impose
specific liabilities upon creditors
that fail to comply and may affect
the enforceability of the related
loans. In addition, the trust fund,
as assignee of the creditor, would
generally be subject to all claims
and defenses that the borrower could
assert against the creditor,
including the right to rescind the
loan.
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Home improvement contracts may be
subject to federal laws that protect
the borrower from defective or
incomplete work by a contractor.
These laws permit the borrower to
withhold payment if the work does
not meet the quality and durability
standards agreed to between the
borrower and the contractor. These
laws have the effect of subjecting
the trust fund, as assignee of the
creditor, to all claims and defenses
which the borrower in a sale
transaction could assert against the
seller of defective goods.
If certain provisions of these
federal laws are violated, the
servicer may be unable to collect
all or part of the principal or
interest on the loans. The trust
fund also could be subject to
damages and administrative
enforcement.
Subordinate securities are subject to
additional risk...................... If you invest in any class of
subordinate securities, your rights
as an investor to receive payments
otherwise due you will be
subordinate to the rights of the
servicer and the holders of the
related senior securities. As a
result, before investing in any
subordinate securities, you must be
prepared to bear the risk that
payments on your securities may be
delayed and that you might not
recover all of your initial
investment.
Any credit support provided by
financial instruments may be
insufficient to protect against
particular risks..................... As described under "Credit
Enhancement--Financial Instruments"
in this prospectus, a trust fund may
include financial instruments to
protect against certain risks or to
provide certain cash flow
characteristics for particular
classes of the securities of a
series. If you invest in one of
these classes and the issuer of the
financial instruments fails to
perform its obligations, the yield
to maturity, market price and
liquidity of your securities could
be materially adversely affected. In
addition, if the issuer of the
related financial instruments
experiences a credit rating
downgrade, the market price and
liquidity of your securities could
be reduced. Finally, if the
financial instruments are intended
to provide an approximate or partial
hedge for certain risks or cashflow
characteristics, the yield to
maturity, market price and liquidity
of your securities could be
adversely affected to the extent
that the financial instrument does
not provide a perfect hedge.
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REMIC residual securities are subject
to additional risk................... If you invest in any class of
securities that represent the
"residual interest" in a real estate
mortgage investment conduit (REMIC),
you will be required to report as
ordinary income your pro rata share
of the REMIC's taxable income,
whether or not you actually received
any cash. Thus, as the holder of a
REMIC residual interest security,
you could have taxable income and
tax liabilities in a year that are
in excess of your ability to deduct
servicing fees and any other REMIC
expenses. In addition, because of
their special tax treatment, your
after-tax yield on a REMIC residual
interest security may be
significantly less than that of a
corporate bond with similar
cash-flow characteristics and
pre-tax yield. Transfers of REMIC
residual interest securities are
also restricted.
FASIT ownership securities are
subject to additional risk........... If you are a fully taxable domestic
corporation that invests in any
class of securities representing the
"ownership interest" in a financial
asset securitization investment
trust (FASIT), you will be required
to report as ordinary income your
pro rata share of the FASIT's
taxable income, whether or not you
actually received any cash. Thus, as
the holder of a FASIT ownership
interest security, you could have
taxable income and tax liabilities
in a year that are in excess of your
ability to deduct servicing fees and
any other FASIT expenses. In
addition, because of their special
tax treatment, your after-tax yield
on a FASIT ownership interest
security may be significantly less
than that of a corporate bond with
similar cash-flow characteristics
and pre-tax yield. Transfers of
FASIT ownership interest securities
are also restricted.
Book-entry registration may limit
your ability to sell securities and
delay your receipt of payments....... Limit on Liquidity of Securities.
Securities issued in book-entry form
may have only limited liquidity in
the resale market, since investors
may be unwilling to purchase
securities for which they cannot
obtain physical instruments.
Limit on Ability to Transfer or
Pledge. Transactions in book-entry
securities can be effected only
through The Depository Trust
Company, its participating
organizations, its indirect
participants and certain banks. As a
result, your ability to transfer or
pledge securities issued in
book-entry form may be limited.
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Delays in Distributions. You may
experience some delay in the receipt
of distributions on book-entry
securities since the distributions
will be forwarded by the trustee to
DTC for DTC to credit to the
accounts of its participants. In
turn, these participants will credit
the distributions to your account
either directly or indirectly
through indirect participants.
Ratings of the securities do not
address all investment risks and must
be viewed with caution............... Any class of securities issued under
this prospectus and the accompanying
prospectus supplement will be rated
in one of the four highest rating
categories of a nationally
recognized rating agency. A rating
is based on the adequacy of the
value of the trust fund assets and
any credit enhancement for that
class and reflects the rating
agency's assessment of the
likelihood that holders of the class
of securities will receive the
payments to which they are entitled.
A rating is not an assessment of the
likelihood that principal
prepayments on the underlying loans
will be made, the degree to which
the rate of prepayments might differ
from that originally anticipated or
the likelihood of an early
termination of the securities. You
should not view a rating as a
recommendation to purchase, hold or
sell securities because it does not
address the market price or
suitability of the securities for
any particular investor.
There is no assurance that any
rating will remain in effect for any
given period or that the rating
agency will not lower or withdraw
the rating in the future. The rating
agency could lower or withdraw its
rating due to:
o any decrease in the adequacy of
the value of the trust fund
assets or any related credit
enhancement, or
o an adverse change in the
financial or other condition of
a credit enhancement provider.
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Description of the Securities
General
Bear Stearns Asset Backed Securities, Inc., as depositor, will
establish a trust fund for each series of its securities. A particular series of
certificates will consist of mortgage-backed or asset-backed certificates or
notes or both certificates and notes.
Each series of certificates will be issued under a pooling and
servicing agreement or a trust agreement among the depositor, the trustee and,
if the trust fund includes loans, the related servicer. A form of pooling and
servicing agreement has been filed as an exhibit to the registration statement
of which this prospectus forms a part.
Each series of notes will be issued under an indenture between the
related trust fund and the trustee named in the prospectus supplement for that
series. A form of indenture has been filed as an exhibit to the registration
statement of which this prospectus forms a part. If the trust fund includes
loans, the trust fund and the servicer of the loans will also enter into a
servicing agreement.
Each seller named in the related prospectus supplement, from which the
depositor will have purchased assets to be included in the trust fund, may agree
to reimburse the depositor for certain fees and expenses that the depositor
incurs in connection with the offering of the securities.
The following summaries describe the material provisions which may
appear in each pooling and servicing agreement or trust agreement, in the case
of a series of certificates, and in each indenture and servicing agreement, in
the case of a series of notes. The prospectus supplement for each series of
securities will describe any provision of the pooling and servicing agreement or
trust agreement, in the case of a series of certificates, and of the indenture
and servicing agreement, in the case of a series of notes, which materially
differs from the description contained in this prospectus. The summaries do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all of the provisions of the prospectus supplement and the
governing agreements for that series.
Each series of securities will consist of one or more classes which may
be compound interest securities, variable interest securities, planned balance
(PAC) securities, zero coupon securities, principal only securities, interest
only securities or participating securities. A series may also include one or
more classes of subordinated securities. The securities of each series will be
issued only in fully registered form, without coupons, in the authorized
denominations for each class specified in the related prospectus supplement.
Upon satisfaction of any conditions applicable to a particular class as
described in the related prospectus supplement, the transfer of the securities
may be registered, and the securities may be exchanged, at the office of the
trustee without the payment of any service charge, other than any tax or
governmental charge payable in connection with the registration of transfer or
exchange. If specified in the related prospectus supplement, one or more classes
of a series may be available in book-entry form only.
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Unless otherwise provided in the related prospectus supplement,
payments of principal of and interest on a series of securities will be made on
each distribution date specified in the prospectus supplement by check mailed to
holders of that series, registered as such at the close of business on the
record date specified in the prospectus supplement that is applicable to that
distribution date, at their addresses appearing on the security register.
However, payments may be made by wire transfer (at the expense of the holder
requesting payment by wire transfer) in circumstances described in the
prospectus supplement. However, final payments of principal in retirement of
each security will be made only upon presentation and surrender of the security
at the office of the related trustee. Notice of the final payment on a security
will be mailed to each holder before the distribution date on which the final
principal payment is expected to be made.
Payments of principal of and interest on the securities will be made by
the trustee, or a paying agent on behalf of the trustee, as specified in the
related prospectus supplement. Unless otherwise provided in the related
prospectus supplement, the following amounts will be deposited directly into the
collection account established for a particular series of securities with the
trustee (or with the servicer in the name of the trustee):
o all payments with respect to the primary assets for that series (see,
"--The Primary Assets and Their Valuation" below), together with
reinvestment income thereon;
o amounts withdrawn from any cash, letters of credit, short-term
investments or other instruments acceptable to the rating agencies
identified in the prospectus supplement as rating that series and
deposited in each reserve fund for the series established in the name
of the trustee; and
o amounts available pursuant to any other credit enhancement for the
series.
If provided in the related prospectus supplement, the deposits may be
net of certain amounts payable to the servicer and any other person specified in
the prospectus supplement. These amounts thereafter will be deposited into the
separate distribution account established for the series and will be available
to make payments on the related securities on the next distribution date. See
"The Trust Funds--Collection and Distribution Accounts" in this prospectus.
The Primary Assets and Their Valuation
The primary assets of each trust fund may include one or more pools of
the following:
o Residential Loans,
o Home Equity Loans,
o Home Improvement Contracts,
o Manufactured Housing Contracts,
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o Agency Securities, and
o Private Label Securities.
When we use the term "loans" in this prospectus, we include Residential
Loans, Home Equity Loans, Home Improvement Contracts and Manufactured Housing
Contracts. The residential or mixed-use properties that secure the loans are
collectively referred to in this prospectus as the "mortgaged properties."
If specified in the related prospectus supplement for a series of
notes, each primary asset included in the related trust fund will be assigned an
initial Asset Value. Unless otherwise specified in the related prospectus
supplement, the initial Asset Value of the primary assets of the trust fund will
be at least equal to the principal amount of the related notes on the date of
issuance.
Payments of Interest
The securities of each class that by their terms are entitled to
receive interest will bear interest (calculated, unless otherwise specified in
the related prospectus supplement, on the basis of a 360-day year of twelve
30-day months) from the date and at the rate specified in the prospectus
supplement, or will be entitled to receive interest payment amounts calculated
in the method described in the prospectus supplement. Interest on the
interest-bearing securities of a series will be payable on the distribution date
specified in the related prospectus supplement. The rate of interest on
securities of a series may be variable or may change with changes in the annual
interest rates of the loans (or underlying loans) included in the related trust
fund and/or as prepayments occur with respect to the loans (or underlying
loans). Principal only securities may not be entitled to receive any interest
distributions or may be entitled to receive only nominal interest distributions.
Any interest on zero coupon securities that is not paid on the related
distribution date will accrue and be added to principal on that date.
Interest payable on the securities on a distribution date will include
all interest accrued during the period specified in the related prospectus
supplement. In the event interest accrues during the calendar month preceding a
distribution date, the effective yield to holders will be reduced from the yield
that would otherwise be obtainable if interest payable on the securities were to
accrue through the day immediately preceding that distribution date.
Payments of Principal
On each distribution date for a series, principal payments will be made
to the holders of the securities on which principal is then payable, to the
extent set forth in the prospectus supplement. The payments will be made in a
total amount determined as specified in the prospectus supplement and will be
allocated among the respective classes of the series in the manner, at the times
and in the priority (which may include allocation by random lot) set forth in
the prospectus supplement.
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Final Scheduled Distribution Date
The final scheduled distribution date with respect to each class of a
series of notes is the date no later than which the total principal balance of
the class will be fully paid, and the final scheduled distribution date with
respect to each class of a series of certificates is the date on which the
principal balance of the class is expected to be reduced to zero, in each case
calculated on the basis of the assumptions applicable to that series described
in the related prospectus supplement. The final scheduled distribution date for
each class of a series will be specified in the related prospectus supplement.
Since payments on the primary assets of each trust fund will be used to
make distributions that reduce the outstanding principal amount of the related
securities, it is likely that the actual final distribution date of any class
will occur earlier, and may occur substantially earlier, than its final
scheduled distribution date. Furthermore, with respect to a series of
certificates, unless otherwise specified in the related prospectus supplement,
the actual final distribution date of any certificate may occur later than its
final scheduled distribution date as a result of delinquencies, defaults and
liquidations of the primary assets of the related trust fund. No assurance can
be given as to the actual prepayment experience with respect to any series. See
"--Weighted Average Lives of the Securities" below.
Special Redemption
If so specified in the prospectus supplement relating to a series of
securities having other than monthly distribution dates, one or more classes of
the securities may be subject to special redemption, in whole or in part, on the
special redemption date specified in the related prospectus supplement if, as a
consequence of prepayments on the loans (or underlying loans) or low yields then
available for reinvestment, the entity specified in the prospectus supplement
determines, based on assumptions set forth in the applicable agreement, that the
available interest amount that will have accrued on the securities through the
designated interest accrual date specified in the related prospectus supplement
is less than the amount of interest that will have accrued on the securities to
that date. In this event and as further described in the related prospectus
supplement, the trustee will redeem a principal amount of outstanding securities
of the series sufficient to cause the available interest amount to equal the
amount of interest that will have accrued through the designated interest
accrual date for the securities outstanding immediately after the redemption.
Optional Redemption, Purchase or Termination
The depositor or the servicer or any other entity that may be
designated in the related prospectus supplement will have the option, on any
distribution date, to purchase one or more classes of certificates of any series
or redeem, in whole or in part, one or more classes of notes of any series under
the circumstances, if any, specified in the related prospectus supplement.
Alternatively, if the prospectus supplement for a series of certificates so
provides, the depositor, the servicer or another entity designated in the
prospectus supplement will have the option to cause an early termination of the
related trust fund by repurchasing all of the primary assets from the trust fund
on or after a date specified in the prospectus supplement, or on or after such
time as the total outstanding principal amount of the certificates or primary
assets (as specified in the prospectus supplement) is equal to or less than the
amount or percentage specified in the prospectus supplement. Notice of the
redemption, purchase or termination must be given by the depositor or the
trustee prior to the related date. The redemption, purchase or repurchase price
will be set forth in the prospectus supplement. If specified in the prospectus
supplement, in the event that a REMIC election has been made, the trustee shall
receive a satisfactory opinion of counsel that the optional redemption, purchase
or termination will be conducted so as to constitute a "qualified liquidation"
under Section 860F of the Internal Revenue Code of 1986, as amended.
17
In addition, the prospectus supplement may provide other circumstances
under which holders of securities of a series could be fully paid significantly
earlier than would otherwise be the case if payments or distributions were
solely based on the activity of the related primary assets.
Weighted Average Lives of the Securities
Weighted average life refers to the average amount of time that will
elapse from the date of issue of a security until each dollar of principal of
the security will be repaid to the investor. Unless otherwise specified in the
related prospectus supplement, the weighted average life of the securities of a
class will be influenced by the rate at which the amount financed under the
loans (or underlying loans relating to the Agency Securities or Private Label
Securities, as applicable), included in the trust fund for a series is paid,
whether in the form of scheduled amortization or prepayments.
Prepayments on loans and other receivables can be measured relative to
a prepayment standard or model. The prospectus supplement for each series of
securities will describe the prepayment standard or model, if any, that is used
and may contain tables setting forth the projected weighted average life of each
class of securities of the series and the percentage of the original principal
amount of each class of securities of the series that would be outstanding on
specified distribution dates based on the assumptions stated in the prospectus
supplement, including assumptions that prepayments on the loans (or underlying
loans relating to the Agency Securities or Private Label Securities, as
applicable) included in the related trust fund are made at rates corresponding
to various percentages of the prepayment standard or model specified in the
prospectus supplement.
There is, however, no assurance that prepayment of the loans (or
underlying loans relating to the Agency Securities or Private Label Securities,
as applicable) included in the related trust fund will conform to any level of
any prepayment standard or model specified in the related prospectus supplement.
The rate of principal prepayments on pools of loans may be influenced by a
variety of factors, including job-related factors such as transfers, layoffs or
promotions and personal factors such as divorce, disability or prolonged
illness. Economic conditions, either generally or within a particular geographic
area or industry, also may affect the rate of principal prepayments. Demographic
and social factors may influence the rate of principal prepayments in that some
borrowers have greater financial flexibility to move or refinance than do
others. The deductibility of mortgage interest payments, servicing decisions and
other factors also can affect the rate of principal prepayments. As a result,
there can be no assurance as to the rate or timing of principal prepayments of
the loans (or underlying loans) either from time to time or over the lives of
the loans (or underlying loans).
18
The rate of prepayments of conventional housing loans and other
receivables has fluctuated significantly in recent years. In general, however,
if prevailing interest rates fall significantly below the interest rates on the
loans (or underlying loans) for a series, the loans are likely to prepay at
rates higher than if prevailing interest rates remain at or above the interest
rates borne by the loans. In this regard, it should be noted that the loans (or
underlying loans) for a series may have different interest rates. In addition,
the weighted average life of a class of securities may be affected by the
varying maturities of the loans (or underlying loans). If any loans (or
underlying loans) for a series have actual terms to stated maturity that are
less than those that were assumed in calculating the final scheduled
distribution date of the related securities, one or more classes of the series
may be fully paid prior to their respective final scheduled distribution date,
even in the absence of prepayments and a reinvestment return higher than the
Assumed Reinvestment Rate established by the rating agencies named in the
related prospectus supplement.
The Trust Funds
General
The notes of each series will be secured by the pledge of the assets of
the related trust fund, and the certificates of each series will represent
interests in the assets of the related trust fund. Unless otherwise specified in
the related prospectus supplement, the trust fund of each series will include
assets purchased by the depositor from the seller composed of:
o the primary assets of the trust fund;
o amounts available from the reinvestment of payments on the primary
assets at any Assumed Reinvestment Rate that may be established by
the rating agencies specified in the related prospectus supplement;
o any credit enhancement in the form of an irrevocable letter of
credit, surety bond, insurance policy or other form of credit
support;
o REO property consisting of any mortgaged property or home improvement
that secured a loan but which is acquired by foreclosure or deed in
lieu of foreclosure or repossession; and
o the amount, if any, initially deposited into the collection account
or distribution account(s) for the series as specified in the related
prospectus supplement.
The securities will be non-recourse obligations of the related trust
fund. Unless the prospectus supplement indicates otherwise, the assets of the
trust fund specified in the related prospectus supplement will serve as
collateral only for that series of securities. Holders of a series of notes may
only proceed against the collateral securing that series in the case of a
default with respect to the notes and may not proceed against any assets of the
depositor or the related trust fund not pledged to secure the notes.
19
The primary assets for a series will be sold by the seller to the
depositor or purchased by the depositor in the open market or in privately
negotiated transactions (which may include transactions with affiliates) and
will be transferred by the depositor to the related trust fund. Loans relating
to a series will be serviced by the servicer (which may be the seller) that is
specified in the related prospectus supplement. The servicer will service the
loans pursuant to a pooling and servicing agreement with respect to a series of
certificates, or a servicing agreement between the trust fund and servicer with
respect to a series of notes.
If the prospectus supplement so provides, a trust fund relating to a
series of securities may be a business trust formed under the laws of the state
specified in the prospectus supplement pursuant to a trust agreement between the
depositor and the trustee.
Each trust fund, prior to the initial offering of the related series of
securities, will have no assets or liabilities. No trust fund is expected to
engage in any activities other than:
o to acquire, manage and hold the related primary assets and other
assets contemplated in this prospectus and in the related prospectus
supplement, and the proceeds thereof,
o to issue the related securities,
o to make payments and distributions on the securities, and
o to perform certain related activities.
No trust fund is expected to have any source of capital other than its assets
and any related credit enhancement.
Primary assets included in the trust fund for a series may consist of
any combination of loans, Agency Securities and Private Label Securities, as and
to the extent the related prospectus supplement specifies.
The Loans
General. Loans in each trust fund may consist of Residential Loans,
Home Equity Loans, Home Improvement Contracts or Manufactured Housing Contracts.
If specified in the related prospectus supplement, the loans in the related
trust fund may include cooperative apartment loans secured by security interests
in shares issued by private, non-profit, cooperative housing corporations and in
the related proprietary leases or occupancy agreements granting exclusive rights
to occupy specific dwelling units in the cooperatives' buildings. As more fully
described in the related prospectus supplement, the loans may be either
"conventional" loans or loans that are insured or guaranteed by a governmental
agency like the FHA or VA. The loans will have been originated in accordance
with the underwriting criteria specified in the related prospectus supplement.
20
In general, the loans in a pool will have monthly payments due on the
first day of each month. However, as described in the related prospectus
supplement, the loans in a pool may have payments due more or less frequently
than monthly. In addition, payments may be due on any day during a month. The
payment terms of the loans to be included in a trust fund will be described in
the related prospectus supplement and may include any of the following features,
all as described in this prospectus or in the related prospectus supplement:
o Interest may be payable at
- a fixed rate,
- a rate that adjusts from time to time in relation to an index
that will be specified in the related prospectus supplement,
- a rate that is fixed for a period of time or under certain
circumstances and is followed by an adjustable rate,
- a rate that otherwise varies from time to time, or
- a rate that is convertible from an adjustable rate to a fixed
rate.
Changes to an adjustable rate may be subject to periodic limitations,
maximum rates, minimum rates or a combination of these limitations. As
specified in the related prospectus supplement, the loans may provide
for payments in level monthly installments, for balloon payments, or
for payments that are allocated to principal and interest according to
the "sum of the digits" or "Rule of 78s" methods. Accrued interest may
be deferred and added to the principal of a loan for the periods and
under the circumstances as may be specified in the related prospectus
supplement. Loans may provide for the payment of interest at a rate
lower than the specified loan rate for a period of time or for the life
of the loan, and the amount of any difference may be contributed from
funds supplied by the seller of the property or another source.
o Principal may be
- payable on a level debt service basis to fully amortize the loan
over its term,
- calculated on the basis of an assumed amortization schedule that
is significantly longer than the original term to maturity or on
an interest rate that is different from the loan rate, or
- nonamortizing during all or a portion of the original term.
Payment of all or a substantial portion of the principal may be due on
maturity in the form of a balloon payment. Principal may include
interest that has been deferred and added to the principal balance of
the loan.
21
o Monthly payments of principal and interest may
- be fixed for the life of the loan,
- increase over a specified period of time or
- change from period to period.
Loans may include limits on periodic increases or decreases in the
amount of monthly payments and may include maximum or minimum amounts
of monthly payments.
Prepayments of principal may be conditioned on payment of a prepayment
fee, which may be fixed for the life of the loan or may decline over time, and
may be prohibited for the life of the loan or for particular lockout periods.
Some loans may permit prepayments after expiration of the applicable lockout
period and may require the payment of a prepayment fee in connection with any
subsequent prepayment. Other loans may permit prepayments without payment of a
fee unless the prepayment occurs during specified time periods. The loans may
include "due on sale" clauses which permit the mortgagee to demand payment of
the entire loan in connection with the sale or transfers of the related
property. Other loans may be assumable by persons meeting the then applicable
underwriting standards of the related seller.
A trust fund may contain buydown loans that include provisions for a
third party to subsidize partially the monthly payments of the borrowers on
those loans during the early years of those loans, the difference to be made up
from a buydown fund contributed by that third party at the time of origination
of the loan. A buydown fund will be in an amount equal either to the discounted
value or full aggregate amount of future payment subsidies. The underlying
assumption of buydown plans is that the income of the borrower will increase
during the buydown period as a result of normal increases in compensation and
inflation, so that the borrower will be able to meet the full loan payments at
the end of the buydown period. If assumption of increased income is not
fulfilled, the possibility of defaults on buydown loans is increased. The
related prospectus supplement will contain information with respect to any
buydown loan concerning limitations on the interest rate paid by the borrower
initially, on annual increases in the interest rate and on the length of the
buydown period.
When we use the term "mortgaged property" in this prospectus, we mean
the real property which secures repayment of the related loan. Home Improvement
Contracts and Manufactured Housing Contracts may, and the other loans will, be
secured by mortgages or deeds of trust or other similar security instruments
creating a lien on a mortgaged property. In the case of Home Equity Loans, the
related liens may be subordinated to one or more senior liens on the related
mortgaged properties as described in the prospectus supplement. As specified in
the related prospectus supplement, home improvement contracts and manufactured
housing contracts may be unsecured or secured by purchase money security
interests in the financed home improvements and the financed manufactured homes.
When we use the term "properties" in this prospectus supplement, we mean the
related mortgaged properties, home improvements and manufactured homes. The
properties relating to the loans will consist primarily of single-family
properties, meaning detached or semi-detached one- to four-family dwelling
units, townhouses, rowhouses, individual condominium units, individual units in
planned unit developments and other dwelling units, or mixed-use properties. Any
mixed-use property will not exceed three stories and its primary use will be for
one- to four-family residential occupancy, with the remainder of its space for
retail, professional or other commercial uses. Any non-residential use will be
in compliance with local zoning laws and regulations. Properties may include
vacation and second homes, investment properties and leasehold interests. In the
case of leasehold interests, the term of the leasehold will exceed the scheduled
maturity of the related loan by a time period specified in the related
prospectus supplement. The properties may be located in any one of the fifty
states, the District of Columbia, Guam, Puerto Rico or any other territory of
the United States.
22
Loans with specified loan-to-value ratios and/or principal balances may
be covered wholly or partially by primary mortgage guaranty insurance policies.
The existence, extent and duration of any coverage provided by primary mortgage
guaranty insurance policies will be described in the related prospectus
supplement.
Home Equity Loans. The primary assets for a series may consist, in
whole or in part, of, closed-end home equity loans, revolving credit line home
equity loans or certain balances forming a part of the revolving credit line
loans, secured by mortgages creating senior or junior liens primarily on one- to
four-family residential or mixed-use properties. The full principal amount of a
closed-end loan is advanced at origination of the loan and generally is
repayable in equal (or substantially equal) installments of an amount sufficient
to fully amortize the loan at its stated maturity. Unless otherwise described in
the related prospectus supplement, the original terms to stated maturity of
closed-end loans will not exceed 360 months. Principal amounts of a revolving
credit line loan may be drawn down (up to the maximum amount set forth in the
related prospectus supplement) or repaid from time to time, but may be subject
to a minimum periodic payment. Except to the extent provided in the related
prospectus supplement, the trust fund will not include any amounts borrowed
under a revolving credit line loan after the cut-off date designated in the
prospectus supplement. As more fully described in the related prospectus
supplement, interest on each revolving credit line loan, excluding introductory
rates offered from time to time during promotional periods, is computed and
payable monthly on the average daily principal balance of that loan. Under
certain circumstances, a borrower under either a revolving credit line loan or a
closed-end loan may choose an interest-only payment option. In this case only
the amount of interest that accrues on the loan during the billing cycle must be
paid. An interest-only payment option may be available for a specified period
before the borrower must begin making at least the minimum monthly payment of a
specified percentage of the average outstanding balance of the loan.
The rate of prepayment on Home Equity Loans cannot be predicted. Home
Equity Loans have been originated in significant volume only during the past few
years and the depositor is not aware of any publicly available studies or
statistics on the rate of their prepayment. The prepayment experience of the
related trust fund may be affected by a wide variety of factors, including
general economic conditions, prevailing interest rate levels, the availability
of alternative financing and homeowner mobility and the frequency and amount of
any future draws on any revolving credit line loans. Other factors that might be
expected to affect the prepayment rate of a pool of Home Equity Loans include
the amounts of, and interest rates on, the underlying first mortgage loans, and
the use of first mortgage loans as long-term financing for home purchase and
junior mortgage loans as shorter-term financing for a variety of purposes,
including home improvement, education expenses and purchases of consumer
durables such as automobiles. Accordingly, Home Equity Loans may experience a
higher rate of prepayment than traditional fixed-rate first mortgage loans. On
the other hand, because Home Equity Loans such as the revolving credit line
loans generally are not fully amortizing, the absence of voluntary borrower
prepayments could cause rates of principal payments to be lower than, or similar
to, those of traditional fully-amortizing first mortgage loans. Any future
limitations on the right of borrowers to deduct interest payments on Home Equity
Loans for federal income tax purposes may further increase the rate of
prepayments of the Home Equity Loans. Moreover, the enforcement of a
"due-on-sale" provision (as described below) will have the same effect as a
prepayment of the related Home Equity Loans. See "Material Legal Aspects of the
Loans--Due-on-Sale Clauses in Mortgage Loans" in this prospectus.
23
Collections on revolving credit line loans may vary for a number of
reasons, including those listed below.
o A borrower may make a payment during a month in an amount that is as
little as the minimum monthly payment for that month or, during the
interest-only period for certain revolving credit line loans (and, in
more limited circumstances, closed-end loans with respect to which an
interest-only payment option has been selected), the interest, fees
and charges for that month.
o A borrower may make a payment that is as much as the entire principal
balance plus accrued interest and related fees and charges during a
month.
o A borrower may fail to make the required periodic payment.
o Collections on the mortgage loans may vary due to seasonal purchasing
and the payment habits of borrowers.
Each single family property will be located on land owned in fee simple
by the borrower or on land leased by the borrower for a term at least ten years
(unless otherwise provided in the related prospectus supplement) greater than
the term of the related loan. Attached dwellings may include owner-occupied
structures where each borrower owns the land upon which the unit is built, with
the remaining adjacent land owned in common or dwelling units subject to a
proprietary lease or occupancy agreement in a cooperatively owned apartment
building. Unless otherwise specified in the related prospectus supplement,
mortgages on cooperative dwelling units consist of a lien on the shares issued
by the cooperative dwelling corporation and the proprietary lease or occupancy
agreement relating to the cooperative dwelling.
The aggregate principal balance of loans secured by single family
properties that are owner-occupied will be disclosed in the related prospectus
supplement. Unless otherwise specified in the prospectus supplement, the sole
basis for a representation that a given percentage of the loans are secured by
single family property that is owner-occupied will be either
24
o a representation by the borrower at origination of the loan either
that the underlying mortgaged property will be used by the borrower
for a period of at least six months every year or that the borrower
intends to use the mortgaged property as a primary residence, or
o a finding that the address of the underlying mortgaged property is
the borrower's mailing address as reflected in the servicer's
records.
To the extent specified in the related prospectus supplement, single family
properties may include non-owner occupied investment properties and vacation and
second homes.
Home Improvement Contracts. The primary assets for a series may
consist, in whole or in part, of home improvement installment sales contracts
and installment loan agreements originated by home improvement contractors in
the ordinary course of business. As specified in the related prospectus
supplement, the Home Improvement Contracts will be either unsecured or secured
by senior or junior mortgages primarily on single family properties, or by
purchase money security interests in the related home improvements. Unless
otherwise specified in the applicable prospectus supplement, the Home
Improvement Contracts will be fully amortizing and may have fixed interest rates
or adjustable interest rates and may provide for other payment characteristics
as described below and in the related prospectus supplement.
Unless otherwise specified in the related prospectus supplement, the
home improvements securing the Home Improvement Contracts include, but are not
limited to, replacement windows, house siding, new roofs, swimming pools,
satellite dishes, kitchen and bathroom remodeling goods and solar heating
panels.
Manufactured Housing Contracts. The trust fund assets for a series may
consist, in whole or part, of conventional manufactured housing installment
sales contracts and installment loan agreements originated by a manufactured
housing dealer in the ordinary course of business. As specified in the related
prospectus supplement, the Manufactured Housing Contracts will be secured by
manufactured homes, located in any of the fifty states or the District of
Columbia or by mortgages on the real estate on which the manufactured homes are
located.
The manufactured homes securing the Manufactured Housing Contracts will
consist of manufactured homes within the meaning of 42 United States Code,
Section 5402(6), or manufactured homes meeting those other standards as shall be
described in the related prospectus supplement. Section 5402(6) defines a
"manufactured home" as "a structure, transportable in one or more sections,
which, in the traveling mode, is eight body feet or more in width or forty body
feet or more in length, or, when erected on site, is three hundred twenty or
more square feet, and which is built on a permanent chassis and designed to be
used as a dwelling with or without a permanent foundation when connected to the
required utilities, and includes the plumbing, heating, air conditioning and
electrical systems contained therein; except that the term shall include any
structure which meets all the requirements of [this] paragraph except the size
requirements and with respect to which the manufacturer voluntarily files a
certification required by the Secretary of Housing and Urban Development and
complies with the standards established under [this] chapter."
25
Manufactured homes, unlike mortgaged properties, generally depreciate
in value. Consequently, at any time after origination it is possible, especially
in the case of contracts with high loan-to-value ratios at origination, that the
market value of a manufactured home or home improvement may be lower than the
principal amount outstanding under the related contract.
Additional Information. The selection criteria applicable to the loans
will be specified in the related prospectus supplement. These include, but are
not limited to, the combined loan-to-value ratios or loan-to-value ratios, as
applicable, original terms to maturity and delinquency information.
The loans for a series of securities may include loans that do not
amortize their entire principal balance by their stated maturity in accordance
with their terms but require a balloon payment of the remaining principal
balance at maturity, as specified in the related prospectus supplement. As
further described in the related prospectus supplement, the loans for a series
of securities may include loans that do not have a specified stated maturity.
The loans will be either conventional contracts or contracts insured by
the Federal Housing Administration (FHA) or partially guaranteed by the Veterans
Administration (VA). Loans designated in the related prospectus supplement as
insured by the FHA will be insured under various FHA programs as authorized
under the United States Housing Act of 1937, as amended.. These programs
generally limit the principal amount and interest rates of the mortgage loans
insured. Loans insured by the FHA generally require a minimum down payment of
approximately 5% of the original principal amount of the loan. No FHA-insured
loans relating to a series of securities may have an interest rate or original
principal amount exceeding the applicable FHA limits at the time or origination
of such loan.
The insurance premiums for loans insured by the FHA are collected by
lenders approved by the Department of Housing and Urban Development (HUD) and
are paid to the FHA. The regulations governing FHA single-family mortgage
insurance programs provide that insurance benefits are payable either upon
foreclosure (or other acquisition of possession) and conveyance of the mortgaged
premises to HUD or upon assignment of the defaulted loan to HUD. With respect to
a defaulted FHA-insured loan, the servicer is limited in its ability to initiate
foreclosure proceedings. When it is determined, either by the servicer or HUD,
that default was caused by circumstances beyond the borrower's control, the
servicer is expected to make an effort to avoid foreclosure by entering, if
feasible, into one of a number of available forms of forbearance plans with the
borrower. Such plans may involve the reduction or suspension of regular mortgage
payments for a specified period, with such payments to be made upon or before
the maturity date of the mortgage, or the recasting of payments due under the
mortgage up to or beyond the maturity date. In addition, when a default caused
by such circumstances is accompanied by certain other criteria, HUD may provide
relief by making payments to the servicer in partial or full satisfaction of
amounts due under the loan (which payments are to be repaid by the borrower to
HUD) or by accepting assignment of the loan from the servicer. With certain
exceptions, at least three full monthly installments must be due and unpaid
under the loan and HUD must have rejected any request for relief from the
borrower before the servicer may initiate foreclosure proceedings.
26
HUD has the option, in most cases, to pay insurance claims in cash or
in debentures issued by HUD. Currently, claims are being paid in cash, and
claims have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. The servicer of each FHA-insured loan will be obligated
to purchase any such debenture issued in satisfaction of a loan upon default for
an amount equal to the principal amount of the debenture.
The amount of insurance benefits generally paid by the FHA is equal to
the entire unpaid principal amount of the defaulted loan adjusted to reimburse
the servicer for certain costs and expenses and to deduct certain amounts
received or retained by the servicer after default. When entitlement to
insurance benefits results from foreclosure (or other acquisition of possession)
and conveyance to HUD, the servicer is compensated for no more than two-thirds
of its foreclosure costs, and is compensated for interest accrued and unpaid
prior to the date of foreclosure but in general only to the extent it was
allowed pursuant to a forbearance plan approved by HUD. When entitlement to
insurance benefits results from assignment of the loan to HUD, the insurance
payment includes full compensation for interest accrued and unpaid to the
assignment date. The insurance payment itself, upon foreclosure of an
FHA-insured loan, bears interest from a date 30 days after the borrower's first
uncorrected failure to perform any obligation to make any payment due under the
loan and, upon assignment, from the date of assignment to the date of payment of
the claim, in each case at the same interest rate as the applicable HUD
debenture interest rate as described above.
Loans designated in the related prospectus supplement as guaranteed by
the VA will be partially guaranteed by the VA under the Serviceman's
Readjustment Act of 1944, as amended. The Serviceman's Readjustment Act permits
a veteran (or in certain instances, the spouse of a veteran) to obtain a
mortgage loan guaranty by the VA covering mortgage financing of the purchase of
a one- to four-family dwelling unit at interest rates permitted by the VA. The
program has no mortgage loan limits, requires no down payment from the purchaser
and permits the guarantee of mortgage loans of up to 30 years' duration.
The maximum guaranty that may be issued by the VA under a VA-guaranteed
mortgage loan depends upon the original principal amount of the mortgage loan,
as further described in 38 United States Code Section 1803(a), as amended. The
liability on the guaranty is reduced or increased pro rata with any reduction or
increase in the amount of indebtedness, but in no event will the amount payable
on the guaranty exceed the amount of the original guaranty. The VA may, at its
option and without regard to its guaranty, make full payment to a mortgage
holder of unsatisfied indebtedness on a mortgage upon its assignment to the VA.
With respect to a defaulted VA-guaranteed loan, the servicer is, absent
exceptional circumstances, authorized to announce its intention to foreclose
only when the default has continued for three months. Generally, a claim for the
guaranteed amount is submitted to the VA after liquidation of the related
mortgaged property.
The amount payable under a VA guaranty will be the percentage of the
VA-insured loan originally guaranteed by the VA applied to the indebtedness
outstanding as of the applicable date of computation specified in the VA
regulations. Payments under the guaranty will be equal to the unpaid principal
amount of the loan, interest accrued on the unpaid balance of the loan to the
appropriate date of computation and limited expenses of the mortgagee, but in
each case only to the extent that such amounts have not been recovered through
liquidation of the mortgaged property. The amount payable under the guaranty may
in no event exceed the amount of the original guaranty.
27
The prospectus supplement for each series will provide information with
respect to the loans that are primary assets of the related trust fund as of the
cut-off date, including, among other things, and to the extent relevant:
o the aggregate unpaid principal balance of the loans;
o the range and weighted average interest rates on the loans and, in
the case of adjustable rate loans, the range and weighted average of
the current interest rates and the lifetime interest rate caps, if
any;
o the range and average principal balance of the loans;
o the weighted average original and remaining terms to stated maturity
of the loans and the range of original and remaining terms to stated
maturity, if applicable;
o the range and weighted average of combined loan-to-value ratios or
loan-to-value ratios for the loans, as applicable;
o the percentage (by principal balance as of the cut-off date) of loans
that accrue interest at adjustable or fixed interest rates;
o any special hazard insurance policy or bankruptcy bond or other
enhancement relating to the loans;
o the percentage (by principal balance as of the cut-off date) of loans
that are secured by mortgaged properties or home improvements or that
are unsecured;
o the geographic distribution of any mortgaged properties securing the
loans;
o for loans that are secured by single family properties, the
percentage (by principal balance as of the cut-off date) secured by
shares relating to cooperative dwelling units, condominium units,
investment property and vacation or second homes;
o the lien priority of the loans;
o the delinquency status and year of origination of the loans;
28
o whether the loans are closed-end loans and/or revolving credit line
loans; and
o in the case of revolving credit line loans, the general payments and
credit line terms of those loans and other pertinent features.
The prospectus supplement will also specify any other limitations on
the types or characteristics of the loans in the trust fund for the related
series of securities.
If information of the nature described above respecting the loans is
not known to the depositor at the time the securities are initially offered,
more general or approximate information of the nature described above will be
provided in the prospectus supplement and additional information will be set
forth in a Current Report on Form 8-K to be available to investors on the date
of issuance of the related series of securities and to be filed with the SEC
within 15 days after the initial issuance of the securities.
Private Label Securities
General. Primary assets for a series may consist, in whole or in part,
of Private Label Securities or PLS (i.e., private mortgage-backed asset-backed
securities) that include:
o pass-through certificates representing beneficial interests in
underlying loans of a type that would otherwise be eligible to be
loans held directly by the trust fund, or
o collateralized obligations secured by underlying loans of a type that
would otherwise be eligible to be loans held directly by the trust
fund.
The Private Label Securities will previously have been
o offered and distributed to the public pursuant to an effective
registration statement, or
o purchased in a transaction not involving any public offering from a
person that is not an affiliate of the Private Label Securities at
the time of sale (nor its affiliate at any time during the three
preceding months) and a period of two years has elapsed since the
date the Private Label Securities were acquired from the issuer or
its affiliate, whichever is later.
Although individual underlying loans may be insured or guaranteed by
the United States or one of its agencies or instrumentalities, they need not be,
and the Private Label Securities themselves may be, but need not be, insured or
guaranteed.
The Private Label Securities will have been issued pursuant to a
pooling and servicing agreement, a trust agreement or similar agreement. The
seller/servicer of the underlying loans will have entered into a PLS agreement
with the PLS trustee. The PLS trustee, its agent or a custodian will take
possession of the underlying loans. The underlying loans will be serviced by the
PLS servicer directly or by one or more sub-servicers subject to the supervision
of the PLS servicer.
29
The issuer Private Label Securities will be
o a financial institution or other entity engaged generally in the
business of lending,
o a public agency or instrumentality of a state, local or federal
government, or
o a limited purpose corporation organized for the purpose of, among
other things, establishing trusts and acquiring and selling loans to
such trusts, and selling beneficial interests in trusts.
If specified in the prospectus supplement, the PLS issuer may be an affiliate of
the depositor. The obligations of the PLS issuer generally will be limited to
certain representations and warranties that it makes with respect to the assets
it conveys to the related trust. Unless otherwise specified in the related
prospectus supplement, the PLS issuer will not have guaranteed any of the assets
conveyed to the related trust or any of the Private Label Securities issued
under the PLS agreement.
Distributions of principal and interest will be made on the Private
Label Securities on the dates specified in the related prospectus supplement.
The Private Label Securities may be entitled to receive nominal or no principal
distributions or nominal or no interest distributions. Principal and interest
distributions will be made on the Private Label Securities by the PLS trustee or
the PLS servicer. The PLS issuer or the PLS servicer may have the right to
repurchase the underlying loans after a certain date or under other
circumstances specified in the related prospectus supplement.
The loans underlying the Private Label Securities may be fixed rate,
level payment, fully amortizing loans or adjustable rate loans or loans having
balloon or other irregular payment features. The underlying loans will be
secured by mortgages on mortgaged properties.
Credit Support Relating to Private Label Securities. Credit support in
the form of reserve funds, subordination of other private securities issued
under the PLS agreement, guarantees, cash collateral accounts, security policies
or other types of credit support may be provided with respect to the underlying
loans or with respect to the Private Label Securities themselves. The type,
characteristics and amount of credit support will be a function of the
characteristics of the underlying loans and other factors and will be based on
the requirements of the nationally recognized statistical rating organization
that rated the Private Label Securities.
Additional Information. If the primary assets of a trust fund include
Private Label Securities, the related prospectus supplement will specify the
items listed below, to the extent relevant and to the extent information is
reasonably available to the depositor and the depositor reasonably believes the
information to be reliable:
o the total approximate principal amount and type of the Private Label
Securities to be included in the trust fund,
o the maximum original term to stated maturity of the Private Label
Securities,
30
o the weighted average term to stated maturity of the Private Label
Securities,
o the pass-through or certificate rate or range of rates of the Private
Label Securities,
o the PLS issuer, the PLS servicer (if other than the PLS issuer) and
the PLS trustee,
o certain characteristics of any credit support such as reserve funds,
security policies or guarantees relating to the underlying loans or
to the Private Label Securities themselves;
o the terms on which underlying loans may, or are required to, be
purchased prior to their stated maturity or the stated maturity of
the Private Label Securities, and
o the terms on which underlying loans may be substituted for those
originally underlying the Private Label Securities.
In addition, the related prospectus supplement will provide information about
the loans underlying the Private Label Securities, including
o the payment features of the underlying loans (i.e., whether
closed-end loans or revolving credit line loans, whether fixed rate
or adjustable rate, whether level payment or balloon payment loans),
o the approximate aggregate principal balance, if known, of the
underlying loans insured guaranteed by a governmental entity,
o the servicing fee or range of servicing fees with respect to the
underlying loans,
o the minimum and maximum stated maturities of the underlying loans at
origination,
o the lien priority of the underlying loans, and
o the delinquency status and year of origination of the underlying
loans.
The above disclosure may be on an approximate basis and will be as of
the date specified in the related prospectus supplement. If information of the
nature described above for the Private Label Securities is not known to the
depositor at the time the securities are initially offered, more general or
approximate information of a similar nature will be provided in the prospectus
supplement and the additional information, if available, will be set forth in a
Current Report on Form 8-K to be available to investors on the date of issuance
of the related series of securities and to be filed with the SEC within 15 days
of the initial issuance of the securities.
Agency Securities
Ginnie Mae. The Government National Mortgage Association (Ginnie Mae)
is a wholly-owned corporate instrumentality of HUD. Section 306(g) of Title II
of the National Housing Act of 1934, as amended, authorizes Ginnie Mae to, among
other things, guarantee the timely payment of principal of and interest on
certificates which represent an interest in a pool of mortgage loans insured by
the FHA under the National Housing Act of 1934 or Title V of the National
Housing Act of 1949, or partially guaranteed by the VA under the Servicemen's
Readjustment Act of 1944, as amended, or Chapter 37 of Title 38 of the United
States Code.
31
Section 306 (g) of the National Housing Act of 1934 provides that "the
full faith and credit of the United States is pledged to the payment of all
amounts which may be required to be paid under any guarantee under this
subsection." In order to meet its obligations under any guarantee under Section
306 (g) of the National Housing Act, Ginnie Mae may, under Section 306(d) of the
National Housing Act, borrow from the United States Treasury in an amount which
is at any time sufficient to enable Ginnie Mae, with no limitations as to
amount, to perform its obligations under its guarantee.
Ginnie Mae Certificates. Each Ginnie Mae certificate held in a trust
fund for a series of securities will be a "fully modified pass-through"
mortgaged-backed certificate issued and serviced by a mortgage banking company
or other financial concern approved by Ginnie Mae or approved by Fannie Mae as a
seller-servicer of FHA loans and/or VA loans. Each Ginnie Mae certificate may be
a GNMA I certificate or a GNMA II certificate. The mortgage loans underlying the
Ginnie Mae certificates will consist of FHA loans and/or VA loans. Each mortgage
loan of this type is secured by a one- to four-family residential property or a
manufactured home. Ginnie Mae will approve the issuance of each Ginnie Mae
certificate in accordance with a guaranty agreement between Ginnie Mae and the
issuer and servicer of the Ginnie Mae certificate. Pursuant to its guaranty
agreement, a Ginnie Mae servicer will be required to advance its own funds in
order to make timely payments of all amounts due on each of the related Ginnie
Mae certificates, even if the payments received by the Ginnie Mae servicer on
the FHA loans or VA loans underlying each of those Ginnie Mae certificates are
less than the amounts due on those Ginnie Mae certificates.
The full and timely payment of principal of and interest on each Ginnie
Mae certificate will be guaranteed by Ginnie Mae, which obligation is backed by
the full faith and credit of the United States. Each Ginnie Mae certificate will
have an original maturity of not more than 40 years (but may have original
maturities of substantially less than 40 years). Each Ginnie Mae certificate
will provide for the payment by or on behalf of the Ginnie Mae servicer to the
registered holder of the Ginnie Mae certificate of scheduled monthly payments of
principal and interest equal to the registered holder's proportionate interest
in the aggregate amount of the monthly principal and interest payment on each
FHA loan or VA loan underlying the Ginnie Mae certificate, less the applicable
servicing and guarantee fee which together equal the difference between the
interest on the FHA loans or VA loans and the pass-through rate on the Ginnie
Mae certificate. In addition, each payment will include proportionate
pass-through payments of any prepayments of principal on the FHA loans or VA
loans underlying the Ginnie Mae certificate and liquidation proceeds in the
event of a foreclosure or other disposition of any the related FHA loans or VA
loans.
If a Ginnie Mae servicer is unable to make the payments on a Ginnie Mae
certificate as it becomes due, it must promptly notify Ginnie Mae and request
Ginnie Mae to make the payment. Upon notification and request, Ginnie Mae will
make payments directly to the registered holder of a Ginnie Mae certificate. In
the event no payment is made by a Ginnie Mae servicer and the Ginnie Mae
servicer fails to notify and request Ginnie Mae to make the payment, the holder
of the related Ginnie Mae certificate will have recourse only against Ginnie Mae
to obtain the payment. The trustee or its nominee, as registered holder of the
Ginnie Mae certificates held in a trust fund, will have the right to proceed
directly against Ginnie Mae under the terms of the guaranty agreements relating
to the Ginnie Mae certificates for any amounts that are not paid when due.
32
Except for pools of mortgage loans secured by manufactured homes, all
mortgage loans underlying a particular Ginnie Mae certificate must have the same
interest rate over the term of the loan. The interest rate on a GNMA I
certificate will equal the interest rate on the mortgage loans included in the
pool of mortgage loans underlying the GNMA I certificate, less one-half
percentage point per year of the unpaid principal balance of the mortgage loans.
Mortgage loans underlying a particular GNMA II certificate may have
annual interest rates that vary from each other by up to one percentage point.
The interest rate on each GNMA II certificate will be between one-half
percentage point and one and one-half percentage points lower than the highest
interest rate on the mortgage loans included in the pool of mortgage loans
underlying the GNMA II certificate (except for pools of mortgage loans secured
by manufactured homes).
Regular monthly installment payments on each Ginnie Mae certificate
will be comprised of interest due as specified on a Ginnie Mae certificate plus
the scheduled principal payments on the FHA loans or VA loans underlying the
Ginnie Mae certificate due on the first day of the month in which the scheduled
monthly installments on the Ginnie Mae certificate is due. Regular monthly
installments on each Ginnie Mae certificate, are required to be paid to the
trustee identified in the related prospectus supplement as registered holder by
the 15th day of each month in the case of a GNMA I certificate, and are required
to be mailed to the trustee by the 20th day of each month in the case of a GNMA
II certificate. Any principal prepayments on any FHA loans or VA loans
underlying a Ginnie Mae certificate held in a trust fund or any other early
recovery of principal on a loan will be passed through to the trustee identified
in the related prospectus supplement as the registered holder of the Ginnie Mae
certificate.
Ginnie Mae certificates may be backed by graduated payment mortgage
loans or by "buydown" mortgage loans for which funds will have been provided,
and deposited into escrow accounts, for application to the payment of a portion
of the borrowers' monthly payments during the early years of those mortgage
loans. Payments due the registered holders of Ginnie Mae certificates backed by
pools containing "buydown" mortgage loans will be computed in the same manner as
payments derived from other Ginnie Mae certificates and will include amounts to
be collected from both the borrower and the related escrow account. The
graduated payment mortgage loans will provide for graduated interest payments
that, during the early years of the mortgage loans, will be less than the amount
of stated interest on the mortgage loans. The interest not so paid will be added
to the principal of the graduated payment mortgage loans and, together with
interest on that interest, will be paid in subsequent years. The obligations of
Ginnie Mae and of a Ginnie Mae issuer/servicer will be the same irrespective of
whether the Ginnie Mae certificates are backed by graduated payment mortgage
loans or "buydown" mortgage loans. No statistics comparable to the FHA's
prepayment experience on level payment, non-buydown loans are available in
inspect of graduated payment or buydown mortgages. Ginnie Mae certificates
related to a series of certificates may be held in book-entry form.
33
Fannie Mae. The Federal National Mortgage Association (Fannie Mae) is a
federally chartered and privately owned corporation organized and existing under
the Federal National Mortgage Association Charter Act. Fannie Mae was originally
established in 1938 as a United States government agency to provide supplemental
liquidity to the mortgage market and was transformed into a stockholder-owned
and privately managed corporation by legislation enacted in 1968.
Fannie Mae provides funds to the mortgage market primarily by
purchasing mortgage loans from lenders. Fannie Mae acquires funds to purchase
mortgage loans from many capital market investors that may not ordinarily invest
in mortgages. In so doing, it expands the total amount of funds available for
housing. Operating nationwide, Fannie Mae helps to redistribute mortgage funds
from capital-surplus to capital-short areas.
Fannie Mae Certificates. Fannie Mae certificates are either guaranteed
mortgage pass-through certificates or stripped mortgage-backed securities. The
following discussion of Fannie Mae certificates applies equally to both types of
Fannie Mae certificates, except as otherwise indicated. Each Fannie Mae
certificate to be included in the trust fund for a series of securities will
represent a fractional undivided interest in a pool of mortgage loans formed by
Fannie Mae. Each pool formed by Fannie Mae will consist of mortgage loans of one
of the following types:
o fixed-rate level installment conventional mortgage loans,
o fixed-rate level installment mortgage loans that are insured by FHA
or partially guaranteed by the VA,
o adjustable rate conventional mortgage loans, or
o adjustable rate mortgage loans that are insured by the FHA or
partially guaranteed by the VA.
Each mortgage loan must meet the applicable standards set forth under the Fannie
Mae purchase program and will be secured by a first lien on a one- to
four-family residential property.
Each Fannie Mae certificate will be issued pursuant to a trust
indenture. Original maturities of substantially all of the conventional, level
payment mortgage loans underlying a Fannie Mae certificate are expected to be
between either eight to 15 years or 20 to 40 years. The original maturities of
substantially all of the fixed rate level payment FHA loans or VA loans are
expected to be 30 years.
Mortgage loans underlying a Fannie Mae certificate may have annual
interest rates that vary by as much as two percentage points from one another.
The rate of interest payable on a Fannie Mae guaranteed mortgage-backed
certificate and the series pass-through rate payable with respect to a Fannie
Mae stripped mortgage-backed security is equal to the lowest interest rate of
any mortgage loan in the related pool, less a specified minimum annual
percentage representing servicing compensation and Fannie Mae's guaranty fee.
Under a regular servicing option pursuant to which the mortgagee or other
servicer assumes the entire risk of foreclosure losses, the annual interest
rates on the mortgage loans underlying a Fannie Mae certificate will be between
50 basis points and 250 basis points greater than the annual pass-through rate,
in the case of a Fannie Mae guaranteed mortgage-backed certificate, or the
series pass-through rate in the case of a Fannie Mae stripped mortgage-backed
security. Under a special servicing option pursuant to which Fannie Mae assumes
the entire risk for foreclosure losses, the annual interest rates on the
mortgage loans underlying a Fannie Mae certificate will generally be between 55
basis points and 255 basis points greater than the annual pass-through rate, in
the case of a Fannie Mae guaranteed mortgage-backed certificate, or the series
pass-through rate in the case of a Fannie Mae stripped mortgage-backed security.
34
Fannie Mae guarantees to each registered holder of a Fannie Mae
certificate that it will distribute on a timely basis amounts representing the
holder's proportionate share of scheduled principal and interest payments at the
applicable pass-through rate provided for by the Fannie Mae certificate on the
underlying mortgage loans, whether or not received, and the holder's
proportionate share of the full principal amount of any foreclosed or other
finally liquidated mortgage loan, whether or not the principal amount is
actually recovered. The obligations of Fannie Mae under its guarantees are
obligations solely of Fannie Mae and are not backed by, or entitled to, the full
faith and credit of the United States. If Fannie Mae were unable to satisfy its
obligations, distributions to holders of Fannie Mae certificates would consist
solely of payments and other recoveries on the underlying mortgage loans and,
accordingly, monthly distributions to holders of Fannie Mae certificates would
be affected by delinquent payments and defaults on those mortgage loans.
Fannie Mae stripped mortgage-backed securities are issued in series of
two or more classes, with each class representing a specified undivided
fractional interest in principal distributions and interest distributions,
adjusted to the series pass-through rate, on the underlying pool of mortgage
loans. The fractional interests of each class in principal and interest
distributions are not identical, but the classes in the aggregate represent 100%
of the principal distributions and interest distributions, adjusted to the
series pass-through rate, on the respective pool. Because of the difference
between the fractional interests in principal and interest of each class, the
effective rate of interest on the principal of each class of Fannie Mae stripped
mortgage-backed securities may be significantly higher or lower than the series
pass-through rate and/or the weighted average interest rate of the underlying
mortgage loans.
Unless otherwise specified by Fannie Mae, Fannie Mae certificates
evidencing interests in pools of mortgages formed on or after May 1, 1985 will
be available in book-entry form only. Distributions of principal and interest on
each Fannie Mae certificate will be made by Fannie Mae on the 25th day of each
month to the persons in whose name the Fannie Mae certificate is entered in the
books of the Federal Reserve Banks, or registered on the Fannie Mae certificate
register in the case of fully registered Fannie Mae certificates as of the close
of business on the last day of the preceding month. With respect to Fannie Mae
certificates issued in book-entry form, distributions on the Fannie Mae
certificates will be made by wire, and with respect to fully registered Fannie
Mae certificates, distributions on the Fannie Mae certificates will be made by
check.
35
Freddie Mac. The Federal Home Loan Mortgage Corporation (Freddie Mac)
is a shareholder-owned, United States government-sponsored enterprise created
pursuant to the Federal Home loan Mortgage Corporation Act, Title III of the
Emergency Home Finance Act of 1970, as amended. The common stock of Freddie Mac
is owned by the Federal Home loan Banks. Freddie Mac was established primarily
for the purpose of increasing the availability of mortgage credit for the
financing of urgently needed housing. It seeks to provide an enhanced degree of
liquidity for residential mortgage investments primarily by assisting in the
development of secondary markets for conventional mortgages. The principal
activity of Freddie Mac currently consists of the purchase of first lien
conventional mortgage loans FHA loans, VA loans or participation interests in
those mortgage loans and the sale of the loans or participations so purchased in
the form of mortgage securities, primarily Freddie Mac certificates. Freddie Mac
is confined to purchasing, so far as practicable, mortgage loans that it deems
to be of the quality, type and class which meet generally the purchase standards
imposed by private institutional mortgage investors.
Freddie Mac Certificates. Each Freddie Mac certificate included in a
trust fund for a series will represent an undivided interest in a pool of
mortgage loans that may consist of first lien conventional loans, FHA loans or
VA loans. Freddie Mac certificates are sold under the terms of a mortgage
participation certificate agreement. A Freddie Mac certificate may be issued
under either Freddie Mac's Cash Program or Guarantor Program. Typically,
mortgage loans underlying the Freddie Mac certificates held by a trust fund will
consist of mortgage loans with original terms to maturity of from ten to 40
years. Each of those mortgage loans must meet the applicable standards set forth
in the law governing Freddie Mac. A Freddie Mac certificate group may include
whole loans, participation interests in whole loans and undivided interests in
whole loans and/or participations comprising another Freddie Mac certificate
group. Under the guarantor program, any Freddie Mac certificate group may
include only whole loans or participation interests in whole loans.
Freddie Mac guarantees to each registered holder of a Freddie Mac
certificate the timely payment of interest on the underlying mortgage loans to
the extent of the applicable certificate rate on the registered holder's pro
rata share of the unpaid principal balance outstanding on the underlying
mortgage loans in the Freddie Mac certificate group represented by a Freddie Mac
certificate, whether or not received. Freddie Mac also guarantees to each
registered holder of a Freddie Mac certificate ultimate receipt by a holder of
all principal on the underlying mortgage loans, without any offset or deduction,
to the extent of that holder's pro rata share. However, Freddie Mac does not
guarantee, except if and to the extent specified in the prospectus supplement
for a series, the timely payment of scheduled principal. Under Freddie Mac's
Gold PC Program, Freddie Mac guarantees the timely payment of principal based on
the difference between the pool factor published in the month preceding the
month of distribution and the pool factor published in the related month of
distribution. Pursuant to its guarantees, Freddie Mac indemnifies holders of
Freddie Mac certificates against any diminution in principal by reason of
charges for property repairs, maintenance and foreclosure. Freddie Mac may remit
the amount due on account of its guarantee of collection of principal at any
time after default on an underlying mortgage loan, but not later than (x) 30
days following foreclosure sale, (y) 30 days following payment of the claim by
any mortgage insurer, or (z) 30 days following the expiration of any right of
redemption, whichever occurs later, but in any event no later than one year
after demand has been made upon the mortgagor for accelerated payment of
principal. In taking actions regarding the collection of principal after default
on the mortgage loans underlying Freddie Mac certificates, including the timing
of demand for acceleration, Freddie Mac reserves the right to exercise its
judgment with respect to the mortgage loans in the same manner as for mortgage
loans which it has purchased but not sold. The length of time necessary for
Freddie Mac to determine that a mortgage loan should be accelerated varies with
the particular circumstances of each borrower, and Freddie Mac has not adopted
standards which require that the demand be made within any specified period.
36
Freddie Mac certificates are not guaranteed by the United States or by
any Federal Home loan Bank and do not constitute debts or obligations of the
United States or any Federal Home loan Bank. The obligations of Freddie Mac
under its guarantee are obligations solely of Freddie Mac and are not backed by,
nor entitled to, the full faith and credit of the United States. If Freddie Mac
were unable to satisfy its obligations, distributions to holders of Freddie Mac
certificates would consist solely of payments and other recoveries on the
underlying mortgage loans and, accordingly, monthly distributions to holders of
Freddie Mac certificates would be affected by delinquent payments and defaults
on those mortgage loans.
Registered holders of Freddie Mac certificates are entitled to receive
their monthly pro rata share of all principal payments on the underlying
mortgage loans received by Freddie Mac, including any scheduled principal
payments, full and partial prepayments of principal and principal received by
Freddie Mac by virtue of condemnation, insurance, liquidation or foreclosure,
and repurchases of the mortgage loans by Freddie Mac or by the party that sold
the related mortgage loans to Freddie Mac. Freddie Mac is required to remit each
registered Freddie Mac certificateholder's pro rata share of principal payments
on the underlying mortgage loans, interest at the Freddie Mac pass-through rate
and any other sums like prepayment fees, within 60 days of the date on which
those payments are deemed to have been received by Freddie Mac.
Under Freddie Mac's Cash Program, with respect to pools formed prior to
June 1, 1987, there is no limitation on be amount by which interest rates on the
mortgage loans underlying a Freddie Mac certificate may exceed the pass-through
rate on the Freddie Mac certificate. With respect to Freddie Mac certificates
issued on or after June 1, 1987, the maximum interest rate on the mortgage loans
underlying the Freddie Mac certificates may exceed the pass-through rate of the
Freddie Mac certificates by 50 to 100 basis points. Under that program, Freddie
Mac purchases group of whole mortgage loans from sellers at specified
percentages of their unpaid principal balances, adjusted for accrued or prepaid
interest, which when applied to the interest rate of the mortgage loans and
participations purchased, results in the yield expressed as a percentage
required by Freddie Mac. The required yield, which includes a minimum servicing
fee retained by the servicer, is calculated using the outstanding principal
balance. The range of interest rates on the mortgage loans and participations in
a Freddie Mac certificate group under the Cash Program will vary since mortgage
loans and participations are purchased and assigned to a Freddie Mac certificate
group based upon their yield to Freddie Mac rather than on the interest rate on
the underlying mortgage loans.
37
Under Freddie Mac's Guarantor Program, the pass-through rate on a
Freddie Mac certificate is established based upon the lowest interest rate on
the underlying mortgage loans, minus a minimum servicing fee and the amount of
Freddie Mac's management and guaranty income as agreed upon between the seller
and Freddie Mac. For Freddie Mac certificate group formed under the Guarantor
Program with certificate numbers beginning with 18-012, the range between the
lowest and the highest annual interest rates on the mortgage loans in a Freddie
Mac certificate group may not exceed two percentage points.
Freddie Mac certificates duly presented for registration of ownership
on or before the last business day of a month are registered effective as of the
first day of the month. The first remittance to a registered holder of a Freddie
Mac certificate will be distributed so as to be received normally by the 15th
day of the second month following the month in which the purchaser became a
registered holder of the Freddie Mac certificates. Subsequent remittances will
be distributed monthly to the registered holder so as to be received normally by
the 15th day of each month. The Federal Reserve Bank of New York maintains
book-entry accounts with respect to Freddie Mac certificates sold by Freddie Mac
on or after January 2, 1985, and makes payments of principal and interest each
month to the registered holders of Freddie Mac certificates in accordance with
the holders' instructions.
Stripped Mortgage-Backed Securities. Agency Securities may consist of
one or more stripped mortgage-backed securities, each as described in this
prospectus and in the related prospectus supplement. Each Agency Security of
this type will represent an undivided interest in all or part of either the
principal distributions or the interest distributions, or in some specified
portion of the principal and interest distributions, on particular Freddie Mac,
Fannie Mae, Ginnie Mae or other government agency or government-sponsored agency
certificates. The underlying securities will be held under a trust agreement by
Freddie Mac, Fannie Mae, Ginnie Mae or another government agency or
government-sponsored agency, each as trustee, or by another trustee named in the
related prospectus supplement. Freddie Mac, Fannie Mae, Ginnie Mae or another
government agency or government-sponsored agency will guarantee each stripped
agency security to the same extent as the applicable entity guarantees the
underlying securities backing the stripped Agency Security, unless otherwise
specified in the related prospectus supplement.
Other Agency Securities. If specified in the related prospectus
supplement, a trust fund may include other mortgage pass-through certificates
issued or guaranteed by Ginnie Mae, Fannie Mae, Freddie Mac or other government
agencies or government-sponsored agencies. The characteristics of any other
mortgage pass-through certificates issued or guaranteed by Ginnie Mae, Fannie
Mae, Freddie Mac or other government agencies or government-sponsored agencies
will be described in that prospectus supplement. If so specified, a combination
of different types of Agency Securities may be held in a trust fund.
38
Collection and Distribution Accounts
A separate collection account will be established by the trustee, or by
the servicer in the name of the trustee, for each series of securities for
receipt of
o the amount of any cash specified in the related prospectus supplement
to be initially deposited by the depositor in the collection account,
o all amounts received with respect to the primary assets of the
related trust fund, and
o unless otherwise specified in the related prospectus supplement,
income earned on the foregoing amounts.
As provided in the related prospectus supplement, certain amounts on deposit in
the collection account and certain amounts available under any credit
enhancement for the securities of that series will be deposited into the
applicable distribution account for distribution to the holders of the related
securities. The trustee will establish a separate distribution account for each
series of securities. Unless otherwise specified in the related prospectus
supplement, the trustee will invest the funds in the collection account and the
distribution account in eligible investments including, among other investments,
obligations of the United States and certain of its agencies, federal funds,
certificates of deposit, commercial paper, demand and time deposits and banker's
acceptances, certain repurchase agreements of United States government
securities and certain guaranteed investment contracts, in each case acceptable
to the rating agencies named in the prospectus supplement. With certain
exceptions, all such eligible investments must mature, in the case of funds in
the collection account, not later than the day preceding the date when the funds
are due to be deposited into the distribution account or otherwise distributed
and, in the case of funds in the distribution account, not later than the day
preceding the next distribution date for the related series of securities.
Notwithstanding any of the foregoing, amounts may be deposited and
withdrawn pursuant to any deposit agreement or minimum principal payment
agreement that may be specified in the related prospectus supplement.
If specified in the related prospectus supplement, a trust fund will
include one or more pre-funding accounts that are segregated trust accounts
established and maintained with the trustee for the related series. If specified
in the prospectus supplement, a portion of the proceeds of the sale of the
securities equal to the pre-funded amount will be deposited into the pre-funding
account on the closing date and may be used to purchase additional primary
assets during the pre-funding period specified in the prospectus supplement. In
no case will the pre-funded amount exceed 50% of the total principal amount of
the related securities, and in no case will the pre-funding period exceed one
year. The primary assets to be purchased generally will be selected on the basis
of the same criteria as those used to select the initial primary assets of the
trust fund, and the same representations and warranties will be made with
respect to them. If any pre-funded amount remains on deposit in the pre-funding
account at the end of the pre-funding period, the remaining amount will be
applied in the manner specified in the related prospectus supplement to prepay
the notes and/or the certificates of that series.
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If a pre-funding account is established, one or more capitalized
interest accounts that are segregated trust accounts may be established and
maintained with the trustee for the related series. On the closing date for the
series, a portion of the proceeds of the sale of the related securities will be
deposited into the capitalized interest account and used to fund the excess, if
any, of
o the sum of
o the amount of interest accrued on the securities of the series,
and
o if specified in the related prospectus supplement, certain fees
or expenses during the pre-funding period,
over
o the amount of interest available from the primary assets in the trust
fund.
Any amounts on deposit in the capitalized interest account at the end
of the pre-funding period that are not necessary for these purposes will be
distributed to the person specified in the related prospectus supplement.
Credit Enhancement
If so provided in the prospectus supplement relating to a series of
securities, simultaneously with the depositor's assignment of the primary assets
to the trustee, the depositor will obtain from an institution or by other means
acceptable to the rating agencies named in the prospectus supplement one or more
types of credit enhancement in favor of the trustee on behalf of the holders of
the related series or designated classes of the series. The credit enhancement
will support the payment of principal of and interest on the securities, and may
be applied for certain other purposes to the extent and under the conditions set
forth in the prospectus supplement. Credit enhancement for a series may include
one or more of the forms described below or any other form as may be specified
in the related prospectus supplement. If so specified in the related prospectus
supplement, the credit enhancement may be structured so as to protect against
losses relating to more than one trust fund.
Subordinated Securities
If specified in the related prospectus supplement, credit enhancement
for a series may consist of one or more classes of subordinated securities. The
rights of the holders of subordinated securities to receive distributions on any
distribution date will be subordinate in right and priority to the rights of
holders of senior securities of the same series, but only to the extent
described in the related prospectus supplement.
Insurance Policies, Surety Bonds and Guaranties
If so provided in the prospectus supplement for a series of securities,
deficiencies in amounts otherwise payable on the securities or on specified
classes will be covered by insurance policies and/or surety bonds provided by
one or more insurance companies or sureties. Those instruments may cover, with
respect to one or more classes of securities of the related series, timely
distributions of interest and/or full distributions of principal on the basis of
a schedule of principal distributions set forth in or determined in the manner
specified in the related prospectus supplement. In addition, if specified in the
related prospectus supplement, a trust fund may also include bankruptcy bonds,
special hazard insurance policies, other insurance or guaranties for the purpose
of:
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o maintaining timely payments or providing additional protection
against losses on the trust fund assets;
o paying administrative expenses; or
o establishing a minimum reinvestment rate on the payments made in
respect of those assets or principal payment rate on those assets.
Arrangements may include agreements under which securityholders are entitled to
receive amounts deposited in various accounts held by the trustee upon the terms
specified in the related prospectus supplement. A copy of any arrangement
instrument for a series will be filed with the SEC as an exhibit to a Current
Report on Form 8-K to be filed with the SEC following issuance of the securities
of the related series.
Over-Collateralization
If so provided in the prospectus supplement for a series of securities,
a portion of the interest payment on each loan included in the trust fund may be
applied as an additional distribution in respect of principal to reduce the
principal balance of a class or classes of securities and, thus, accelerate the
rate of payment of principal on that class or those classes of securities.
Other Insurance Policies
If specified in the related prospectus supplement, credit enhancement
for a series may consist of pool insurance policies, special hazard insurance
policies, bankruptcy bonds and other types of insurance relating to the primary
assets, as described below and in the related prospectus supplement.
Pool Insurance Policy. If so specified in the related prospectus
supplement, the depositor will obtain a pool insurance policy for the loans in
the related trust fund. The pool insurance policy will cover any loss (subject
to the limitations described in the prospectus supplement) by reason of default,
but will not cover the portion of the principal balance of any loan that is
required to be covered by any primary mortgage insurance policy. The amount and
terms of any pool insurance coverage will be set forth in the related prospectus
supplement.
Special Hazard Insurance Policy. Although the terms of such policies
vary to some degree, a special hazard insurance policy typically provides that,
where there has been damage to property securing a defaulted or foreclosed loan
(title to which has been acquired by the insured) and to the extent the damage
is not covered by a standard hazard insurance policy (or any flood insurance
policy, if applicable) required to be maintained with respect to the property,
or in connection with partial loss resulting from the application of the
coinsurance clause in a standard hazard insurance policy, the special hazard
insurer will pay the lesser of
41
o the cost of repair or replacement of the property, and
o upon transfer of the property to the special hazard insurer, the
unpaid principal balance of the loan at the time of acquisition of
the property by foreclosure or deed in lieu of foreclosure, plus
accrued interest to the date of claim settlement and certain expenses
incurred by the servicer with respect to the property.
If the unpaid principal balance of the loan plus accrued interest and
certain expenses is paid by the special hazard insurer, the amount of further
coverage under the special hazard insurance policy will be reduced by that
amount less any net proceeds from the sale of the related property. Any amount
paid as the cost of repair of the property will reduce coverage by that amount.
Special hazard insurance policies typically do not cover losses occasioned by
war, civil insurrection, certain governmental actions, errors in design, faulty
workmanship or materials (except under certain circumstances), nuclear reaction,
flood (if the mortgaged property is in a federally designated flood area),
chemical contamination and certain other risks.
Restoration of the property with the proceeds described in the first
bullet of the second previous paragraph is expected to satisfy the condition
under any pool insurance policy that the property be restored before a claim
under the pool insurance policy may be validly presented with respect to the
defaulted loan secured by the property. The payment described in the second
bullet of the second previous paragraph will render unnecessary presentation of
a claim in respect of the loan under any pool insurance policy. Therefore, so
long as a pool insurance policy remains in effect, the payment by the special
hazard insurer of the cost of repair or of the unpaid principal balance of the
related loan plus accrued interest and certain expenses will not affect the
total amount in respect of insurance proceeds paid to holders of the securities,
but will affect the relative amounts of coverage remaining under the special
hazard insurance policy and pool insurance policy.
Bankruptcy Bond. In the event of a bankruptcy of a borrower, the
bankruptcy court may establish the value of the property securing the related
loan at an amount less than the then-outstanding principal balance of the loan.
The amount of the secured debt could be reduced to that value, and the holder of
the loan thus would become an unsecured creditor to the extent the principal
balance of the loan exceeds the value assigned to the property by the bankruptcy
court. In addition, certain other modifications of the terms of a loan can
result from a bankruptcy proceeding. See "Material Legal Aspects of the Loans"
in this prospectus. If the related prospectus supplement so provides, the
depositor or other entity specified in the prospectus supplement will obtain a
bankruptcy bond or similar insurance contract covering losses resulting from
proceedings with respect to borrowers under the Federal Bankruptcy Code. The
bankruptcy bond will cover certain losses resulting from a reduction by a
bankruptcy court of scheduled payments of principal of and interest on a loan or
a reduction by the court of the principal amount of a loan and will cover
certain unpaid interest on the amount of any principal reduction from the date
of the filing of a bankruptcy petition.
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The bankruptcy bond will provide coverage in the aggregate amount
specified in the prospectus supplement for all loans in the trust fund for the
related series. The amount will be reduced by payments made under the bankruptcy
bond in respect of the loans, unless otherwise specified in the related
prospectus supplement, and will not be restored.
Reserve Funds
If the prospectus supplement relating to a series of securities so
specifies, the depositor will deposit into one or more reserve funds cash, a
letter or letters of credit, cash collateral accounts, eligible investments, or
other instruments meeting the criteria of the rating agencies in the amount
specified in the prospectus supplement. Each reserve fund will be established by
the trustee as part of the trust fund for that series or for the benefit of the
credit enhancement provider for that series. In the alternative or in addition
to the initial deposit by the depositor, a reserve fund for a series may be
funded over time through application of all or a portion of the excess cash flow
from the primary assets for the series, to the extent described in the related
prospectus supplement. If applicable, the initial amount of the reserve fund and
the reserve fund maintenance requirements for a series of securities will be
described in the related prospectus supplement.
Amounts withdrawn from any reserve fund will be applied by the trustee
to make payments on the securities of the related series, to pay expenses, to
reimburse any credit enhancement provider for the series or for any other
purpose, in the manner and to the extent specified in the related prospectus
supplement.
Amounts deposited into a reserve fund will be invested by the trustee
in eligible investments maturing no later than the day specified in the related
prospectus supplement.
Cross-Collateralization
If specified in the related prospectus supplement, the beneficial
ownership of separate groups of assets included in a trust fund may be evidenced
by separate classes of the related series of securities. In that case, credit
support may be provided by a cross-collateralization feature which requires that
distributions be made with respect to securities evidencing a beneficial
ownership interest in, or secured by, one or more asset groups within the same
trust fund prior to distributions to subordinated securities evidencing a
beneficial ownership interest in, or secured by, one or more other asset groups
within that trust fund. Cross-collateralization may be provided by
o the allocation of a portion of excess amounts generated by one or
more asset groups within the same trust fund to one or more other
asset groups within the same trust fund, or
43
o the allocation of losses with respect to one or more asset groups to
one or more other asset groups within the same trust fund.
Excess amounts will be applied and/or losses will be allocated to the class or
classes of subordinated securities of the related series then outstanding having
the lowest rating assigned by any rating agency or the lowest payment priority,
in each case to the extent and in the manner more specifically described in the
related prospectus supplement. The prospectus supplement for a series which
includes a cross-collateralization feature will describe the manner and
conditions for applying the cross-collateralization feature.
If specified in the related prospectus supplement, the coverage
provided by one or more forms of credit support described in this prospectus may
apply concurrently to two or more related trust funds. If applicable, the
related prospectus supplement will identify the trust funds to which credit
support relates and the manner of determining the amount of coverage the credit
support provides to the identified trust funds.
Minimum Principal Payment Agreement
If provided in the prospectus supplement relating to a series of
securities, the depositor will enter into a minimum principal payment agreement
with an entity meeting the criteria of the rating agencies named in the
prospectus supplement under which the entity will provide certain payments on
the securities of the series in the event that aggregate scheduled principal
payments and/or prepayments on the primary assets for the series are not
sufficient to make payments on the securities of the series as provided in the
prospectus supplement.
Deposit Agreement
If specified in a prospectus supplement, the depositor and the trustee
for a series of securities will enter into a deposit agreement with the entity
specified in the prospectus supplement on or before the sale of the related
series of securities. The deposit agreement is intended to accumulate available
cash for investment so that the cash, together with income thereon, can be
applied to future distributions on one or more classes of securities. The
related prospectus supplement will describe the terms of any deposit agreement.
Financial Instruments
If provided in the related prospectus supplement, the trust fund may
include one or more financial instruments that are intended to meet the
following goals:
o to convert the payments on some or all of the loans and Private Label
Securities from fixed to floating payments, or from floating to
fixed, or from floating based on a particular index to floating based
on another index;
o to provide payments if any index rises above or falls below specified
levels; or
o to provide protection against interest rate changes, certain types of
losses or other payment shortfalls to one or more classes of the
related series.
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If a trust fund includes financial instruments of this type, the instruments may
be structured to be exempt from the registration requirements of the Securities
Act of 1933, as amended.
The related prospectus supplement will include, or incorporate by
reference, material financial and other information about the provider of the
financial instruments.
Servicing of Loans
General
Under the pooling and servicing agreement or the servicing agreement
for a series of securities, the servicer will provide customary servicing
functions with respect to the loans comprising the primary assets of the related
trust fund.
Collection Procedures; Escrow Accounts
The servicer will make reasonable efforts to collect all payments
required to be made under the loans and will, consistent with the terms of the
related governing agreement for a series and any applicable credit enhancement,
follow such collection procedures as it follows with respect to comparable loans
held in its own portfolio. Consistent with the above, the servicer has the
discretion to
o waive any assumption fee, late payment charge, or other charge in
connection with a loan, and
o to the extent provided in the related agreement, arrange with a
borrower a schedule for the liquidation of delinquencies by extending
the due dates for scheduled payments on the loan.
If the related prospectus supplement so provides, the servicer, to the
extent permitted by law, will establish and maintain escrow or impound accounts
with respect to loans in which borrower payments for taxes, assessments,
mortgage and hazard insurance policy premiums and other comparable items will be
deposited. In the case of loans that do not require such payments under the
related loan documents, the servicer will not be required to establish any
escrow or impound account for those loans. The servicer will make withdrawals
from the escrow accounts to effect timely payment of taxes, assessments and
mortgage and hazard insurance, to refund to borrowers amounts determined to be
overages, to pay interest to borrowers on balances in the escrow accounts to the
extent required by law, to repair or otherwise protect the related property and
to clear and terminate the escrow accounts. The servicer will be responsible for
the administration of the escrow accounts and generally will make advances to
the escrow accounts when a deficiency exists.
Deposits to and Withdrawals from the Collection Account
Unless the related prospectus supplement specifies otherwise, the
trustee or the servicer will establish a separate collection account in the name
of the trustee. Unless the related prospectus supplement provides otherwise, the
collection account will be
45
o an account maintained at a depository institution, the long-term
unsecured debt obligations of which at the time of any deposit are
rated by each rating agency named in the prospectus supplement at
levels satisfactory to the rating agency; or
o an account the deposits in which are insured to the maximum extent
available by the Federal Deposit Insurance Corporation or an account
secured in a manner meeting requirements established by each rating
agency named in the prospectus supplement.
Unless otherwise specified in the related prospectus supplement, the
funds held in the collection account may be invested in eligible investments. If
so specified in the related prospectus supplement, the servicer will be entitled
to receive as additional compensation any interest or other income earned on
funds in the collection account.
Unless otherwise specified in the related prospectus supplement, the
servicer, the depositor, the trustee or the seller, as appropriate, will deposit
into the collection account for each series, on the business day following the
closing date, all scheduled payments of principal and interest on the primary
assets due after the related cut-off date but received by the servicer on or
before the closing date, and thereafter, within two business days after the date
of receipt thereof, the following payments and collections received or made by
the servicer (other than, unless otherwise provided in the related prospectus
supplement, in respect of principal of and interest on the related primary
assets due on or before the cut-off date):
o all payments in respect of principal, including prepayments, on the
primary assets;
o all payments in respect of interest on the primary assets after
deducting, at the discretion of the servicer (but only to the extent
of the amount permitted to be withdrawn or withheld from the
collection account in accordance with the related agreement), related
servicing fees payable to the servicer;
o all Liquidation Proceeds after deducting, at the discretion of the
servicer (but only to the extent of the amount permitted to be
withdrawn from the collection account in accordance with the related
agreement), the servicing fee, if any, in respect of the related
primary asset;
o all Insurance Proceeds;
o all amounts required to be deposited into the collection account from
any reserve fund for the series pursuant to the related agreement;
o all advances of cash made by the servicer in respect of delinquent
scheduled payments on a loan and for any other purpose as required
pursuant to the related agreement; and
o all repurchase prices of any primary assets repurchased by the
depositor, the servicer or the seller pursuant to the related
agreement.
46
Unless otherwise specified in the related prospectus supplement, the
servicer is permitted, from time to time, to make withdrawals from the
collection account for each series for the following purposes:
o to reimburse itself for advances that it made in connection with that
series under the related agreement; provided that the servicer's
right to reimburse itself is limited to amounts received on or in
respect of particular loans (including, for this purpose, Liquidation
Proceeds and proceeds of insurance policies covering the related
loans and Mortgaged Properties ("Insurance Proceeds")) that represent
late recoveries of scheduled payments with respect to which the
Advance was made;
o to the extent provided in the related agreement, to reimburse itself
for any advances that it made in connection with the series which the
servicer determines in good faith to be nonrecoverable from amounts
representing late recoveries of scheduled payments respecting which
the advance was made or from Liquidation Proceeds or Insurance
Proceeds;
o to reimburse itself from Liquidation Proceeds for liquidation
expenses and for amounts expended by it in good faith in connection
with the restoration of damaged property and, in the event deposited
into the collection account and not previously withheld, and to the
extent that Liquidation Proceeds after such reimbursement exceed the
principal balance of the related loan, together with accrued and
unpaid interest thereon to the due date for the loan next succeeding
the date of its receipt of the Liquidation Proceeds, to pay to itself
out of the excess the amount of any unpaid servicing fee and any
assumption fees, late payment charges, or other charges on the
related loan;
o in the event the servicer has elected not to pay itself the servicing
fee out of the interest component of any scheduled payment, late
payment or other recovery with respect to a particular loan prior to
the deposit of the scheduled payment, late payment or recovery into
the collection account, to pay to itself the servicing fee, as
adjusted pursuant to the related agreement, from any scheduled
payment, late payment or other recovery to the extent permitted by
the related agreement;
o to reimburse itself for expenses incurred by and recoverable by or
reimbursable to it pursuant to the related agreement;
o to pay to the applicable person with respect to each primary asset or
related real property that has been repurchased or removed from the
trust fund by the depositor, the servicer or the seller pursuant to
the related agreement, all amounts received thereon and not
distributed as of the date on which the related repurchase price was
determined;
47
o to make payments to the trustee of the series for deposit into the
related distribution account or for remittance to the holders of the
series in the amounts and in the manner provided for in the related
agreement; and
o to clear and terminate the collection account pursuant to the related
agreement.
In addition, if the servicer deposits into the collection account for a
series any amount not required to be deposited therein, the servicer may, at any
time, withdraw the amount from the collection account.
Advances and Limitations on Advances
The related prospectus supplement will describe the circumstances, if
any, under which the servicer will make advances with respect to delinquent
payments on loans. If specified in the related prospectus supplement, the
servicer will be obligated to make advances. Its obligation to make advances may
be limited in amount, or may not be activated until a certain portion of a
specified reserve fund is depleted. Advances are intended to provide liquidity
and, except to the extent specified in the related prospectus supplement, not to
guarantee or insure against losses. Accordingly, any funds advanced are
recoverable by the servicer out of amounts received on particular loans that
represent late recoveries of scheduled payments, Insurance Proceeds or
Liquidation Proceeds respecting which an advance was made. If an advance is made
and subsequently determined to be nonrecoverable from late collections,
Insurance Proceeds or Liquidation Proceeds from the related loan, the servicer
may be entitled to reimbursement from other funds in the collection account or
distribution account(s), as the case may be, or from a specified reserve fund,
as applicable, to the extent specified in the related prospectus supplement.
Maintenance of Insurance Policies and Other Servicing Procedures
Standard Hazard Insurance; Flood Insurance. Except as otherwise
specified in the related prospectus supplement, the servicer will be required to
maintain (or to cause the borrower under each loan to maintain) a standard
hazard insurance policy providing the standard form of fire insurance coverage
with extended coverage for certain other hazards as is customary in the state in
which the related property is located. The standard hazard insurance policies
will provide for coverage at least equal to the applicable state standard form
of fire insurance policy with extended coverage for property of the type
securing the related loans. In general, the standard form of fire and extended
coverage policy will cover physical damage to, or destruction of, the related
property caused by fire, lightning, explosion, smoke, windstorm, hail, riot,
strike and civil commotion, subject to the conditions and exclusions in each
policy. Because the standard hazard insurance policies relating to the loans
will be underwritten by different hazard insurers and will cover properties
located in various states, the policies will not contain identical terms and
conditions. The basic terms, however, generally will be determined by state law
and generally will be similar. Most such policies typically will not cover any
physical damage resulting from war, revolution, governmental actions, floods and
other water-related causes, earth movement (including earthquakes, landslides
and mudflows), nuclear reaction, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases, vandalism. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all inclusive. Uninsured risks not covered by a special hazard insurance policy
or other form of credit enhancement will adversely affect distributions to
holders. When a property securing a loan is located in a flood area identified
by HUD pursuant to the Flood Disaster Protection Act of 1973, as amended, the
servicer will be required to cause flood insurance to be maintained with respect
to the property, to the extent available.
48
The standard hazard insurance policies covering properties typically
will contain a "coinsurance" clause, which in effect will require that the
insured at all times carry hazard insurance of a specified percentage (generally
80% to 90%) of the full replacement value of the property, including any
improvements on the property, in order to recover the full amount of any partial
loss. If the insured's coverage falls below this specified percentage, the
coinsurance clause will provide that the hazard insurer's liability in the event
of partial loss will not exceed the greater of
o the actual cash value (i.e., replacement cost less physical
depreciation) of the property, including the improvements, if any,
damaged or destroyed, and
o such proportion of the loss, without deduction for depreciation, as
the amount of insurance carried bears to the specified percentage of
the full replacement cost of the property and improvements.
Since the amount of hazard insurance to be maintained on the improvements
securing the loans declines as their principal balances decrease, and since the
value of the properties will fluctuate over time, the effect of this requirement
in the event of partial loss may be that hazard insurance proceeds will be
insufficient to restore fully the damage to the affected property.
Unless otherwise specified in the related prospectus supplement,
coverage will be in an amount at least equal to the greater of
o the amount necessary to avoid the enforcement of any co-insurance
clause contained in the policy, and
o the outstanding principal balance of the related loan.
Unless otherwise specified in the related prospectus supplement, the servicer
will also maintain on REO property a standard hazard insurance policy in an
amount that is at least equal to the maximum insurable value of the REO
property. No earthquake or other additional insurance will be required of any
borrower or will be maintained on REO property other than pursuant to such
applicable laws and regulations as shall at any time be in force and shall
require the additional insurance.
Any amounts collected by the servicer under insurance policies (other
than amounts to be applied to the restoration or repair of the property,
released to the borrower in accordance with normal servicing procedures or used
to reimburse the servicer for amounts to which it is entitled to reimbursement)
will be deposited into the collection account. In the event that the servicer
obtains and maintains a blanket policy insuring against hazard losses on all of
the loans, written by an insurer then acceptable to each rating agency named in
the prospectus supplement, it will conclusively be deemed to have satisfied its
obligations to cause to be maintained a standard hazard insurance policy for
each loan or related REO property. This blanket policy may contain a deductible
clause, in which case the servicer will be required, in the event that there has
been a loss that would have been covered by the policy absent the deductible
clause, to deposit into the collection account the amount not otherwise payable
under the blanket policy because of the application of the deductible clause.
49
Realization upon Defaulted Loans
The servicer will use its reasonable best efforts to foreclose upon,
repossess or otherwise comparably convert the ownership of the properties
securing the related loans that come into and continue in default and as to
which no satisfactory arrangements can be made for collection of delinquent
payments. In this connection, the servicer will follow such practices and
procedures as it deems necessary or advisable and as are normal and usual in its
servicing activities with respect to comparable loans that it services. However,
the servicer will not be required to expend its own funds in connection with any
foreclosure or towards the restoration of the property unless it determines that
o the restoration or foreclosure will increase the Liquidation Proceeds
of the related loan available to the holders after reimbursement to
itself for its expenses, and
o its expenses will be recoverable either through Liquidation Proceeds
or Insurance Proceeds.
However, in the case of a trust fund for which a REMIC election has been made,
the servicer will be required to liquidate any REO property by the end of the
third calendar year after the trust fund acquires beneficial ownership of the
REO property. While the holder of an REO property can often maximize its
recovery by providing financing to a new purchaser, the trust fund will have no
ability to do so and neither the servicer nor the depositor will be required to
do so.
The servicer may arrange with the borrower on a defaulted loan a change
in the terms of the loan to the extent provided in the related prospectus
supplement. This type of modification may only be entered into if it meets the
underwriting policies and procedures employed by the servicer in servicing
receivables for its own account and meets the other conditions set forth in the
related prospectus supplement.
Enforcement of Due-on-Sale Clauses
Unless otherwise specified in the related prospectus supplement for a
series, when any property is about to be conveyed by the borrower, the servicer
will, to the extent it has knowledge of the prospective conveyance and prior to
the time of the consummation of the conveyance, exercise its rights to
accelerate the maturity of the related loan under any applicable "due-on-sale"
clause, unless it reasonably believes that the clause is not enforceable under
applicable law or if enforcement of the clause would result in loss of coverage
under any primary mortgage insurance policy. In that event, the servicer is
authorized to accept from or enter into an assumption agreement with the person
to whom the property has been or is about to be conveyed. Under the assumption,
the transferee of the property becomes liable under the loan and the original
borrower is released from liability and the transferee is substituted as the
borrower and becomes liable under the loan. Any fee collected in connection with
an assumption will be retained by the servicer as additional servicing
compensation. The terms of a loan may not be changed in connection with an
assumption.
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Servicing Compensation and Payment of Expenses
Except as otherwise provided in the related prospectus supplement, the
servicer will be entitled to a periodic servicing fee in an amount to be
determined as specified in the related prospectus supplement. The servicing fee
may be fixed or variable, as specified in the related prospectus supplement. In
addition, unless otherwise specified in the related prospectus supplement, the
servicer will be entitled to additional servicing compensation in the form of
assumption fees, late payment charges and similar items, and excess proceeds
following disposition of property in connection with defaulted loans.
Unless otherwise specified in the related prospectus supplement, the
servicer will pay certain expenses incurred in connection with the servicing of
the loans, including, without limitation, the payment of the fees and expenses
of each trustee and independent accountants, payment of security policy and
insurance policy premiums, if applicable, and the cost of any credit
enhancement, and payment of expenses incurred in preparation of reports to
holders.
When a borrower makes a principal prepayment in full between due dates
on the related loan, the borrower generally will be required to pay interest on
the amount prepaid only to the date of prepayment. If and to the extent provided
in the related prospectus supplement, in order that one or more classes of the
securities of a series will not be adversely affected by any resulting shortfall
in interest, the amount of the servicing fee may be reduced to the extent
necessary to include in the servicer's remittance to the applicable trustee for
deposit into the related distribution account an amount equal to one month's
interest on the related loan (less the servicing fee). If the total amount of
these shortfalls in a month exceeds the servicing fee for that month, a
shortfall to holders may occur.
Unless otherwise specified in the related prospectus supplement, the
servicer will be entitled to reimbursement for certain expenses that it incurs
in connection with the liquidation of defaulted loans. The related holders will
suffer no loss by reason of the servicer's expenses to the extent the expenses
are covered under related insurance policies or from excess Liquidation
Proceeds. If claims are either not made or paid under the applicable insurance
policies or if coverage under the policies has been exhausted, the related
holders will suffer a loss to the extent that Liquidation Proceeds, after
reimbursement of the servicer's expenses, are less than the principal balance of
and unpaid interest on the related loan that would be distributable to holders.
In addition, the servicer will be entitled to reimbursement of its expenses in
connection with the restoration of REO property This right of reimbursement is
prior to the rights of the holders to receive any related Insurance Proceeds,
Liquidation Proceeds or amounts derived from other credit enhancement. The
servicer generally is also entitled to reimbursement from the collection account
for advances.
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Unless otherwise specified in the related prospectus supplement, the
rights of the servicer to receive funds from the collection account for a
series, whether as the servicing fee or other compensation, or for the
reimbursement of advances, expenses or otherwise, are not subordinate to the
rights of holders of securities of the series.
Evidence as to Compliance
If so specified in the related prospectus supplement, the applicable
governing agreement will provide that, each year, a firm of independent public
accountants will furnish a statement to the trustee to the effect that the firm
has examined certain documents and records relating to the servicing of the
loans by the servicer and that, on the basis of the examination, the firm is of
the opinion that the servicing has been conducted in compliance with the
agreement, except for such exceptions as the firm believes to be immaterial and
any other exceptions set forth in the statement.
If so specified in the related prospectus supplement, the applicable
agreement will also provide for delivery to the trustee of an annual statement
signed by an officer of the servicer to the effect that the servicer has
fulfilled its obligations under the agreement throughout the preceding calendar
year.
Certain Matters Regarding the Servicer
The servicer for each series will be identified in the related
prospectus supplement. The servicer may be an affiliate of the depositor and may
have other business relationships with the depositor and its affiliates.
If an event of default occurs under either a servicing agreement or a
pooling and servicing agreement, the servicer may be replaced by the trustee or
a successor servicer. Unless otherwise specified in the related prospectus
supplement, the events of default and the rights of a trustee upon a default
under the agreement for the related series will be substantially similar to
those described under "The Agreements--Events of Default; Rights upon Event of
Default--Pooling and Servicing Agreement; Servicing Agreement" in this
prospectus.
Unless otherwise specified in the prospectus supplement, the servicer
does not have the right to assign its rights and delegate its duties and
obligations under the related agreement unless the successor servicer accepting
such assignment or delegation
o services similar loans in the ordinary course of its business;
o is reasonably satisfactory to the trustee;
o has a net worth of not less than the amount specified in the
prospectus supplement;
o would not cause the rating of the related securities by a rating
agency named in the prospectus supplement, as such rating is in
effect immediately prior to the assignment, sale or transfer, to be
qualified, downgraded or withdrawn as a result of the assignment,
sale or transfer; and
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o executes and delivers to the trustee an agreement, in form and
substance reasonably satisfactory to the trustee, that contains an
assumption by the successor servicer of the due and punctual
performance and observance of each covenant and condition required to
be performed or observed by the servicer under the agreement from and
after the date of the agreement.
No assignment will become effective until the trustee or a successor
servicer has assumed the servicer's obligations and duties under the related
agreement. To the extent that the servicer transfers its obligations to a
wholly-owned subsidiary or affiliate, the subsidiary or affiliate need not
satisfy the criteria set forth above. In this instance, however, the assigning
servicer will remain liable for the servicing obligations under the agreement.
Any entity into which the servicer is merged or consolidated or any successor
corporation resulting from any merger, conversion or consolidation will succeed
to the servicer's obligations under the agreement provided that the successor or
surviving entity meets the requirements for a successor servicer set forth
above.
Except to the extent otherwise provided, each agreement will provide
that neither the servicer nor any director, officer, employee or agent of the
servicer will be under any liability to the related trust fund, the depositor or
the holders for any action taken or for failing to take any action in good faith
pursuant to the related agreement, or for errors in judgment. However, neither
the servicer nor any such person will be protected against any breach of
warranty or representations made under the agreement, or the failure to perform
its obligations in compliance with any standard of care set forth in the
agreement, or liability that would otherwise be imposed by reason of willful
misfeasance, bad faith or negligence in the performance of their duties or by
reason of reckless disregard of their obligations and duties under the
agreement. Each agreement will further provide that the servicer and any
director, officer, employee or agent of the servicer is entitled to
indemnification from the related trust fund and will be held harmless against
any loss, liability or expense incurred in connection with any legal action
relating to the agreement or the securities, other than any loss, liability or
expense incurred by reason of willful misfeasance, bad faith or negligence in
the performance of duties under the agreement or by reason of reckless disregard
of those obligations and duties. In addition, the agreement will provide that
the servicer is not under any obligation to appear in, prosecute or defend any
legal action that is not incidental to its servicing responsibilities under the
agreement that, in its opinion, may involve it in any expense or liability. The
servicer may, in its discretion, undertake any such action that it may deem
necessary or desirable with respect to the agreement and the rights and duties
of the parties thereto and the interests of the holders thereunder. In that
event, the legal expenses and costs of the action and any resulting liability
may be expenses, costs, and liabilities of the trust fund and the servicer may
be entitled to be reimbursed therefor out of the collection account.
The Agreements
The following summaries describe the material provisions of the pooling
and servicing agreement or trust agreement, in the case of a series of
certificates, and the indenture and servicing agreement, in the case of a series
of notes. The summaries do not purport to be complete and are subject to, and
qualified in their entirety by reference to, the provisions of the agreements
applicable to the particular series of securities. Where particular provisions
or terms used in the agreements are referred to, the provisions or terms are as
specified in the agreements.
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Assignment of Primary Assets
General. At the time of issuance of the securities of a series, the
depositor will transfer, convey and assign to the related trust fund all right,
title and interest of the depositor in the primary assets and other property to
be transferred to the trust fund. This assignment will include all principal and
interest due on or with respect to the primary assets after the cut-off date
(except for any retained interests). The trustee will, concurrently with the
assignment, execute and deliver the securities.
Assignment of Mortgage Loans. Unless otherwise specified in the related
prospectus supplement, the depositor will deliver to the trustee (or, if
specified in the prospectus supplement, a custodian on behalf of the trustee),
as to each Residential Loan and Home Equity Loan, the related note endorsed
without recourse to the order of the trustee or in blank, the original mortgage,
deed of trust or other security instrument with evidence of recording indicated
thereon (except for any mortgage not returned from the public recording office,
in which case a copy of the mortgage will be delivered, together with a
certificate that the original of the mortgage was delivered to such recording
office), and an assignment of the mortgage in recordable form. The trustee or,
if so specified in the related prospectus supplement, the custodian will hold
these documents in trust for the benefit of the holders.
If so specified in the related prospectus supplement, at the time of
issuance of the securities, the depositor will cause assignments to the trustee
of the mortgages relating to the loans to be recorded in the appropriate public
office for real property records, except in states where, in the opinion of
counsel acceptable to the trustee, recording is not required to protect the
trustee's interest in the related loans. If specified in the prospectus
supplement, the depositor will cause the assignments to be recorded within the
time after issuance of the securities as is specified in the related prospectus
supplement. In this event, the prospectus supplement will specify whether the
agreement requires the depositor to repurchase from the trustee any loan the
related mortgage of which is not recorded within that time, at the price
described below with respect to repurchases by reason of defective
documentation. Unless otherwise provided in the prospectus supplement, the
enforcement of the repurchase obligation would constitute the sole remedy
available to the holders or the trustee for the failure of a mortgage to be
recorded.
Assignment of Home Improvement Contracts. Unless otherwise specified in
the related prospectus supplement, the depositor will deliver to the trustee or
the custodian each original Home Improvement Contract and copies of related
documents and instruments and, except in the case of unsecured Home Improvement
Contracts, the security interest in the related home improvements. In order to
give notice of the right, title and interest of holders to the Home Improvement
Contracts, the depositor will cause a UCC-1 financing statement to be executed
by the depositor or the seller identifying the trustee as the secured party and
identifying all Home Improvement Contracts as collateral. Unless otherwise
specified in the related prospectus supplement, the Home Improvement Contracts
will not be stamped or otherwise marked to reflect their assignment to the trust
fund. Therefore, if, through negligence, fraud or otherwise, a subsequent
purchaser were able to take physical possession of the Home Improvement
Contracts without notice of the assignment, the interest of holders in the Home
Improvement Contracts could be defeated. See "Material Legal Aspects of the
Loans--The Home Improvement Contracts and the Manufactured Housing Contracts" in
this prospectus.
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Assignment of Manufactured Housing Contracts. If specified in the
related prospectus supplement, the depositor or the seller will deliver to the
trustee the original contract as to each Manufactured Housing Contract and
copies of documents and instruments related to each contract and, other than in
the case of unsecured contracts, the security interest in the property securing
that contract. In order to give notice of the right, title and interest of
securityholders to the contracts, if specified in the related prospectus
supplement, the depositor or the seller will cause a UCC-1 financing statement
to be executed by the depositor or the seller identifying the trustee as the
secured party and identifying all contracts as collateral. If so specified in
the related prospectus supplement, the contracts will not be stamped or
otherwise marked to reflect their assignment to the trustee. Therefore, if,
through negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the contracts without notice of the assignment, the
interest of securityholders in the contracts could be defeated. See "Material
Legal Aspects of the Loans -- The Home Improvement Contracts and the
Manufactured Housing Contracts."
Loan Schedule. Each loan will be identified in a schedule appearing as
an exhibit to the related agreement and will specify with respect to each loan:
o the original principal amount,
o its unpaid principal balance as of the cut-off date,
o the current interest rate,
o the current scheduled payment of principal and interest,
o the maturity date, if any, of the related note, and
o if the loan is an adjustable rate loan, the lifetime rate cap, if
any, and the current index.
Assignment of Agency and Private Label Securities. The depositor will
cause the Agency and Private Label Securities to be registered in the name of
the trustee (or its nominee or correspondent). The trustee (or its nominee or
correspondent) will take possession of any certificated Agency or Private Label
Securities. Unless otherwise specified in the related prospectus supplement, the
trustee will not be in possession of, or be assignee of record of, any loans
underlying the Agency or Private Label Securities. See "The Trust Funds--Private
Label Securities" in this prospectus. Each Agency and Private Label Security
will be identified in a schedule appearing as an exhibit to the related
agreement, which will specify the original principal amount, principal balance
as of the cut-off date, annual pass-through rate or interest rate and maturity
date for each Agency and Private Label Security conveyed to the related trust
fund. In the agreement, the depositor will represent and warrant to the trustee
that:
55
o the information contained in the Agency or Private Label Securities
schedule is true and correct in all material respects,
o immediately prior to the conveyance of the Agency or Private Label
Securities, the depositor had good title and was the sole owner of
the Agency or Private Label Securities (subject to any retained
interest),
o there has been no other sale of the Agency or Private Label
Securities, and
o there is no existing lien, charge, security interest or other
encumbrance on the Agency or Private Label Securities (other than any
retained interest).
Repurchase and Substitution of Non-Conforming Primary Assets. Unless
otherwise provided in the related prospectus supplement, if any document in the
file relating to the primary assets delivered by the depositor to the trustee
(or custodian) is found by the trustee, within 90 days of the execution of the
related agreement (or promptly after the trustee's receipt of any document
permitted to be delivered after the closing date), to be defective in any
material respect and the depositor or seller does not cure such defect within 90
days (or within any other period specified in the related prospectus supplement)
the depositor or seller will, not later than 90 days (or within such any period
specified in the related prospectus supplement), after the trustee's notice to
the depositor or the seller, as the case may be, of the defect, repurchase from
the trustee the related primary asset or any property acquired in respect of the
asset. Unless otherwise specified in the related prospectus supplement, the
repurchase shall be effected at a price equal to the sum of:
o the lesser of
o the principal balance of the primary asset, and
o the trust fund's federal income tax basis in the primary asset;
plus
o accrued and unpaid interest to the date of the next scheduled payment
on the primary asset at the rate set forth in the related agreement.
However, the purchase price shall not be limited to the trust fund's federal
income tax basis in the asset, if the repurchase at a price equal to the
principal balance of the repurchased primary asset will not result in any
prohibited transaction tax under Section 860F(a) of the Code.
If provided in the related prospectus supplement, the depositor or
seller, as the case may be, may, rather than repurchase the primary asset as
described above, remove the non-conforming primary asset from the trust fund and
substitute in its place one or more other qualifying substitute primary assets.
If no REMIC election is made with respect to the trust fund, the substitution
must be effected within 120 days of the date of initial issuance of the
securities. If a REMIC election is made with respect to the trust fund the
trustee must have received after a specified time period a satisfactory opinion
of counsel that the substitution will not cause the trust fund to lose its
status as a REMIC or otherwise subject the trust fund to a prohibited
transaction tax.
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Unless otherwise specified in the related prospectus supplement, any
qualifying substitute primary asset will, on the date of substitution, meet the
following criteria:
o it has a principal balance, after deduction of all scheduled payments
due in the month of substitution, not in excess of the principal
balance of the deleted primary asset (the amount of any shortfall to
be deposited to the collection account in the month of substitution
for distribution to holders),
o it has an interest rate not less than (and not more than 2% greater
than) the interest rate of the deleted primary asset,
o it has a remaining term-to-stated maturity not greater than (and not
more than two years less than) that of the deleted primary asset; and
o it complies with all of the representations and warranties set forth
in the applicable agreement as of the date of substitution.
Unless otherwise provided in the related prospectus supplement, the
above-described cure, repurchase or substitution obligations constitute the sole
remedies available to the holders or the trustee for a material defect in the
documentation for a primary asset.
The depositor or another entity will make representations and
warranties with respect to primary assets for each series. If the depositor or
the other entity cannot cure a breach of any such representations and warranties
in all material respects within the time period specified in the related
prospectus supplement after notification by the trustee of such breach, and if
the breach is of a nature that materially and adversely affects the value of the
primary asset, the depositor or the other entity will be obligated to repurchase
the affected primary asset or, if provided in the prospectus supplement, provide
a qualifying substitute primary asset, subject to the same conditions and
limitations on purchases and substitutions as described above.
The depositor's only source of funds to effect any cure, repurchase or
substitution will be through the enforcement of the corresponding obligations,
if any, of the responsible originator or seller of the non-conforming primary
assets. See "Risk Factors--Only the assets of the related trust fund are
available to pay your certificates" in this prospectus.
No holder of securities of a series, solely by virtue of the holder's
status as a holder, will have any right under the applicable agreement to
institute any proceeding with respect to agreement, unless holder previously has
given to the trustee for the series written notice of default and unless the
holders of securities evidencing not less than 51% of the aggregate voting
rights of the securities of the series have made written request upon the
trustee to institute the proceeding in its own name as trustee thereunder and
have offered to the trustee reasonable indemnity, and the trustee for 60 days
has neglected or refused to institute the proceeding.
57
Reports to Holders
The applicable trustee or other entity specified in the related
prospectus supplement will prepare and forward to each holder on each
distribution date, or as soon thereafter as is practicable, a statement setting
forth, to the extent applicable to any series, among other things:
o the amount of principal distributed to holders of the related
securities and the outstanding principal balance of the securities
following the distribution;
o the amount of interest distributed to holders of the related
securities and the current interest on the securities;
o the amount of any overdue accrued interest included in such
distribution, any remaining overdue accrued interest with respect to
the securities, or any current shortfall in amounts to be distributed
as accrued interest to holders of the securities;
o the amount of any overdue payments of scheduled principal included in
the distribution, any remaining overdue principal amounts with
respect to the securities, any current shortfall in receipt of
scheduled principal payments on the related primary assets, or any
realized losses or Liquidation Proceeds to be allocated as reductions
in the outstanding principal balances of the securities;
o the amount received under any related credit enhancement, and the
remaining amount available under the credit enhancement;
o the amount of any delinquencies with respect to payments on the
related primary assets;
o the book value of any REO property acquired by the related trust
fund; and
o other information specified in the related agreement.
In addition, within a reasonable period of time after the end of each
calendar year, the applicable trustee, unless otherwise specified in the related
prospectus supplement, will furnish to each holder of record at any time during
the calendar year:
o the total of the amounts reported pursuant to clauses under the first
and second bullets above and under the last clause of the fourth
bullet above for the calendar year, and
o the information specified in the related agreement to enable holders
to prepare their tax returns including, without limitation, the
amount of any original issue discount accrued on the securities.
58
Information in the distribution date statements and annual statements
provided to the holders will not have been examined and reported upon by an
independent public accountant. However, the servicer will provide to the trustee
a report by independent public accountants with respect to its servicing of the
loans. See "Servicing of Loans--Evidence as to Compliance" in this prospectus.
If so specified in the prospectus supplement, the related series of
securities (or one or more classes of the series) will be issued in book-entry
form. In that event, owners of beneficial interests in those securities will not
be considered holders and will not receive such reports directly from the
trustee. The trustee will forward reports only to the entity or its nominee that
is the registered holder of the global certificate that evidences the book-entry
securities. Beneficial owners will receive reports from the participants and
indirect participants of the applicable book-entry system in accordance with the
policies and procedures of the participants and indirect participants.
Events of Default; Rights upon Event of Default
Pooling and Servicing Agreement; Servicing Agreement. Unless otherwise
specified in the related prospectus supplement, "events of default under the
pooling and servicing agreement for each series of certificates include:
o any failure by the servicer to deposit amounts in the collection
account and distribution account(s) to enable the trustee to
distribute to holders of securities of the series any required
payment, provided that this failure continues unremedied for the
number of days specified in the related prospectus supplement after
the giving of written notice to the servicer by the trustee, or to
the servicer and the trustee by holders having not less than 25% of
the total voting rights of the series;
o any failure by the servicer duly to observe or perform in any
material respect any other of its covenants or agreements in the
agreement provided that this failure continues unremedied for the
number of days specified in the related prospectus supplement after
the giving of written to the servicer by the trustee, or to the
servicer and the trustee by the holders having not less than 25% of
the total voting rights of the of the series; and
o certain events of insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings and certain actions by
the servicer indicating its insolvency, reorganization or inability
to pay its obligations.
So long as an event of default remains unremedied under the applicable
agreement for a series of securities relating to the servicing of loans, unless
otherwise specified in the related prospectus supplement, the trustee or holders
of securities of the series having not less than 51% of the total voting rights
of the series may terminate all of the rights and obligations of the servicer as
servicer under the applicable agreement (other than its right to recovery of
other expenses and amounts advanced pursuant to the terms of the agreement,
which rights the servicer will retain under all circumstances), whereupon the
trustee will succeed to all the responsibilities, duties and liabilities of the
servicer under the agreement and will be entitled to reasonable servicing
compensation not to exceed the applicable servicing fee, together with other
servicing compensation in the form of assumption fees, late payment charges or
otherwise as provided in the agreement.
59
In the event that the trustee is unwilling or unable so to act, it may
select (or petition a court of competent jurisdiction to appoint) a finance
institution, bank or loan servicing institution with a net worth specified in
the related prospectus supplement to act as successor servicer under the
provisions of the agreement. The successor servicer would be entitled to
reasonable servicing compensation in an amount not to exceed the servicing fee
as set forth in the related prospectus supplement, together with other servicing
compensation in the form of assumption fees, late payment charges or otherwise,
as provided in the agreement.
During the continuance of any event of default of a servicer under an
agreement for a series of securities, the trustee will have the right to take
action to enforce its rights and remedies and to protect and enforce the rights
and remedies of the holders of securities of the series, and, unless otherwise
specified in the related prospectus supplement, holders of securities having not
less than 51% of the total voting rights of the series may direct the time,
method and place of conducting any proceeding for any remedy available to the
trustee or exercising any trust or power conferred upon the trustee. However,
the trustee will not be under any obligation to pursue any such remedy or to
exercise any of such trusts or powers unless the holders have offered the
trustee reasonable security or indemnity against the cost, expenses and
liabilities that may be incurred by the trustee as a result. The trustee may
decline to follow any such direction if it determines that the action or
proceeding so directed may not lawfully be taken or would involve it in personal
liability or be unjustly prejudicial to the non-assenting holders.
Indenture. Unless otherwise specified in the related prospectus
supplement, "events of default" under the indenture for each series of notes
include:
o a default for thirty (30) days or more in the payment of any
principal of or interest on any note of the series;
o failure to perform any other covenant of the depositor or the trust
fund in the indenture, provided that the failure continues for a
period of sixty (60) days after notice is given in accordance with
the procedures described in the related prospectus supplement;
o any representation or warranty made by the depositor or the trust
fund in the indenture or in any certificate or other writing
delivered pursuant to it or in connection with it with respect to or
affecting such series having been incorrect in a material respect as
of the time made, provided that the breach is not cured within sixty
(60) days after notice is given in accordance with the procedures
described in the related prospectus supplement;
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o certain events of bankruptcy, insolvency, receivership or liquidation
of the depositor or the trust fund; and
o any other event of default specified with respect to notes of that
series.
If an event of default with respect to the then-outstanding notes of
any series occurs and is continuing, either the indenture trustee or the holders
of a majority of the total amount of those notes may declare the principal
amount of all the notes of the series (or, if the notes of that series are zero
coupon securities, such portion of the principal amount as may be specified in
the related prospectus supplement) to be due and payable immediately. Under
certain circumstances of this type the declaration may be rescinded and annulled
by the holders of a majority of the total amount of those notes.
If, following an event of default with respect to any series of notes,
the related notes have been declared to be due and payable, the indenture
trustee may, in its discretion, and notwithstanding such acceleration, elect to
maintain possession of the collateral securing the notes and to continue to
apply distributions on the collateral as if there had been no declaration of
acceleration, provided that the collateral continues to provide sufficient funds
for the payment of principal of and interest on the notes as they would have
become due if there had not been a declaration. In addition, the indenture
trustee may not sell or otherwise liquidate the collateral securing the notes of
a series following an event of default (other than a default in the payment of
any principal of or interest on any note of the series for thirty (30) days or
more), unless:
o the holders of 100% of the total amount of the then-outstanding notes
of the series consent to the sale; or
o the proceeds of the sale or liquidation are sufficient to pay in full
the principal of and accrued interest due and unpaid on the
outstanding notes of the series at the date of sale; or
o the indenture trustee determines that the collateral would not be
sufficient on an ongoing basis to make all payments on the notes as
such payments would have become due if the notes had not been
declared due and payable, and the indenture trustee obtains the
consent of the holders of 66 2/3% of the total amount of the
then-outstanding notes of the series.
In the event that the indenture trustee liquidates the collateral in
connection with an event of default involving a default for thirty (30) days or
more in the payment of principal of or interest on the notes of a series, the
indenture provides that the indenture trustee will have a prior lien on the
proceeds of any liquidation for its unpaid fees and expenses. As a result, upon
the occurrence of an event of default of this type, the amount available for
distribution to the noteholders may be less than would otherwise be the case.
However, the indenture trustee may not institute a proceeding for the
enforcement of its lien except in connection with a proceeding for the
enforcement of the lien of the indenture for the benefit of the noteholders
after the occurrence of the event of default.
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Unless otherwise specified in the related prospectus supplement, in the
event that the principal of the notes of a series is declared due and payable as
described above, holders of the notes issued at a discount from par may be
entitled to receive no more than an amount equal to the unpaid principal amount
of those notes less the amount of the discount that remains unamortized.
Subject to the provisions of the indenture relating to the duties of
the indenture trustee, in case an event of default shall occur and be continuing
with respect to a series of notes, the indenture trustee will be under no
obligation to exercise any of its rights or powers under the indenture at the
request or direction of any of the holders of notes of the series, unless the
holders offer security or indemnity satisfactory to the indenture trustee
against the costs, expenses and liabilities it might incur in complying with
their request or direction. Subject to the provisions for indemnification and
certain limitations contained in the indenture, the holders of a majority of
amount of the then-outstanding notes of the series shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the indenture trustee or exercising any trust or power conferred on
the indenture trustee with respect to those notes, and the holders of a majority
of the amount of the amount of the then- outstanding notes of the series may, in
certain cases, waive any default with respect to the notes, except a default in
the payment of principal or interest or a default in respect of a covenant or
provision of the indenture that cannot be modified without the waiver or consent
of all affected holders of the outstanding notes.
The Trustees
The identity of the commercial bank, savings and loan association or
trust company named as the trustee or indenture trustee, as the case may be, for
each series of securities will be set forth in the related prospectus
supplement. Entities serving as trustee may have normal banking relationships
with the depositor or the servicer. In addition, for the purpose of meeting the
legal requirements of certain local jurisdictions, each trustee will have the
power to appoint co-trustees or separate trustees. In the event of an
appointment, all rights, powers, duties and obligations conferred or imposed
upon the trustee by the related agreement will be conferred or imposed upon that
trustee and each separate trustee or co-trustee jointly, or, in any jurisdiction
in which the trustee shall be incompetent or unqualified to perform certain
acts, singly upon the separate trustee or co-trustee who will exercise and
perform such rights, powers, duties and obligations solely at the direction of
the trustee. The trustee may also appoint agents to perform any of its
responsibilities, which agents will have any or all of the rights, powers,
duties and obligations of the trustee conferred on them by their appointment;
provided, however, that the trustee will continue to be responsible for its
duties and obligations under the agreement.
Duties of Trustees
No trustee will make any representations as to the validity or
sufficiency of the related agreement, the securities or of any primary asset or
related documents. If no event of default (as defined in the related agreement)
has occurred, the applicable trustee will be required to perform only those
duties specifically required of it under the agreement. Upon receipt of the
various certificates, statements, reports or other instruments required to be
furnished to it, the trustee will be required to examine them to determine
whether they are in the form required by the related agreement. However, the
trustee will not be responsible for the accuracy or content of any documents
furnished to it by the holders or the servicer under the agreement.
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Each trustee may be held liable for its own negligent action or failure
to act, or for its own misconduct; provided, however, that no trustee will be
personally liable with respect to any action taken, suffered or omitted to be
taken by it in good faith in accordance with the direction of the related
holders in an event of default. No trustee will be required to expend or risk
its own funds or otherwise incur any financial liability in the performance of
any of its duties under the related agreement, or in the exercise of any of its
rights or powers, if it has reasonable grounds for believing that repayment of
such funds or adequate indemnity against such risk or liability is not
reasonably assured to it.
Resignation of Trustees
Each trustee may, upon written notice to the depositor, resign at any
time, in which event the depositor will be obligated to use its best efforts to
appoint a successor trustee. If no successor trustee has been appointed and has
accepted such appointment within 30 days after the giving of such notice of
resignation, the resigning trustee may petition any court of competent
jurisdiction for appointment of a successor trustee. Each trustee may also be
removed at any time
o if the trustee ceases to be eligible to continue as such under the
related agreement, or
o if the trustee becomes insolvent, or
o the holders of securities having more than over 50% of the total
voting rights of the securities in the trust fund give written notice
to the trustee and to the depositor.
Any resignation or removal of a trustee and appointment of a successor trustee
will not become effective until the successor trustee accepts its appointment.
Amendment of Agreement
Unless otherwise specified in the prospectus supplement, the Agreement
for each series of securities may be amended by the depositor, the servicer
(with respect to a series relating to loans), and the trustee, without notice to
or consent of the holders, for the following purposes:
o to cure any ambiguity,
o to correct any defective provisions or to correct or supplement any
provision in the agreement,
o to add to the duties of the depositor, the applicable trustee or the
servicer,
o to add any other provisions with respect to matters or questions
arising under the agreement or related credit enhancement,
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o to add or amend any provisions of the agreement as required by any
rating agency named in the prospectus supplement in order to maintain
or improve the rating of the securities (it being understood that
none of the depositor, the seller, the servicer or any trustee is
obligated to maintain or improve the rating), or
o to comply with any requirements imposed by the Code.
In no event, however, shall any amendment (other than an amendment to comply
with Code requirements) adversely affect in any material respect the interests
of any holders of the series, as evidenced by an opinion of counsel delivered to
the trustee. Unless otherwise specified in the prospectus supplement, an
amendment shall be deemed not to adversely affect in any material respect the
interests of any holder if the trustee receives written confirmation from each
rating agency named in the prospectus supplement that the amendment will not
cause the rating agency to reduce its then-current rating.
Unless otherwise specified in the prospectus supplement, each agreement
for a series may also be amended by the applicable trustee, the servicer, if
applicable, and the depositor with the consent of the holders possessing not
less than 66 2/3% of the total outstanding principal amount of the securities of
the series (or, if only certain classes are affected by the amendment, 66 2/3%
of the total outstanding principal amount of each affected class), for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of the agreement, or modifying in any manner the rights of
holders of the series. In no event, however, shall any amendment
o reduce the amount or delay the timing of payments on any security
without the consent of the holder of the security, or
o reduce the percentage of the total outstanding principal amount of
securities of each class, the holders of which are required to
consent to any such amendment, without the consent of the holders of
100% of the total outstanding principal amount of each affected
class.
Voting Rights
The prospectus supplement will set forth the method of determining
allocation of voting rights with respect to the related series of securities.
List of Holders
Upon written request of three or more holders of record of a series for
purposes of communicating with other holders with respect to their rights under
the agreement (which request is accompanied by a copy of the communication such
holders propose to transmit), the trustee will afford them access during
business hours to the most recent list of holders of that series held by the
trustee.
No agreement will provide for the holding of any annual or other
meeting of holders.
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Book-Entry Securities
If specified in the related prospectus supplement for a series of
securities, the securities (or one or more of the securities) may be issued in
book-entry form. In that event, beneficial owners of those securities will not
be considered "Holders" under the agreements and may exercise the rights of
holders only indirectly through the participants in the applicable book-entry
system.
REMIC Administrator
For any series with respect to which a REMIC election is made,
preparation of certain reports and certain other administrative duties with
respect to the trust fund may be performed by a REMIC administrator, which may
be an affiliate of the depositor.
Termination
Pooling and Servicing Agreement; Trust Agreement. The obligations
created by the pooling and servicing agreement or trust agreement for a series
will terminate upon the distribution to holders of all amounts distributable to
them under the agreement in the circumstances described in the related
prospectus supplement. See "Description of the Securities--Optional Redemption,
Purchase or Termination" in this prospectus.
Indenture. The indenture will be discharged with respect to a series of
notes (except with respect to certain continuing rights specified in the
indenture) upon the delivery to the indenture trustee for cancellation of all
the notes of that series or, with certain limitations, upon deposit with the
indenture trustee of funds sufficient for the payment in full of all of the
notes of the series.
In addition to such discharge with certain limitations, if so specified
with respect to the notes of any series, the indenture will provide that the
related trust fund will be discharged from any and all obligations in respect of
the notes of that series (except for certain obligations relating to temporary
notes and exchange of notes, registration of the transfer or exchange of those
notes, replacing stolen, lost or mutilated notes, maintaining paying agencies
and holding monies for payment in trust) upon the deposit with the indenture
trustee, in trust, of money and/or direct obligations of or obligations
guaranteed by the United States of America that, through the payment of interest
and principal in accordance with their terms, will provide money in an amount
sufficient to pay the principal of and each installment of interest on the notes
on the final scheduled distribution date for the notes and any installment of
interest on the notes in accordance with the terms of the indenture and the
notes. In the event of any such defeasance and discharge of notes of a series,
holders of notes of that series would be able to look only to such money and/or
direct obligations for payment of principal of and interest on, if any, their
notes until maturity.
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Material Legal Aspects of the Loans
The following discussion contains general summaries of material legal
matters mortgage loans, home improvement installment sales contracts and home
improvement installment loan agreements that are general in nature. Because the
legal matters are determined primarily by applicable state law and because state
laws may differ substantially, the summaries do not purport to be complete, to
reflect the laws of any particular state, or to encompass the laws of all states
in which the properties securing the loans may be situated.
Mortgages
The Residential Loans and Home Equity Loans for a series will, and the
Home Improvement Contracts for a series may, be secured by mortgages or deeds of
trust or deeds to secure debt, depending upon the prevailing practice in the
state in which the property subject to a mortgage loan is located. We refer to
Residential Loans, Home Equity Loans and Home Improvement Contracts that are
secured by mortgages as "mortgage loans." The filing of a mortgage, deed of
trust or deed to secure debt creates a lien or title interest upon the real
property covered by that instrument and represents the security for the
repayment of an obligation that is customarily evidenced by a promissory note.
It is not prior to the lien for real estate taxes and assessments or other
charges imposed under governmental police powers and may also be subject to
other liens pursuant to the laws of the jurisdiction in which the mortgaged
property is located. Priority with respect to the instruments depends on their
terms, the knowledge of the parties to the mortgage and generally on the order
of recording with the applicable state, county or municipal office. There are
two parties to a mortgage: the mortgagor, who is the borrower/property owner or
the land trustee (as described below), and the mortgagee, who is the lender.
Under the mortgage instrument, the mortgagor delivers to the mortgagee a note or
bond and the mortgage. In the case of a land trust, there are three parties
because title to the property is held by a land trustee under a land trust
agreement of which the borrower/property owner is the beneficiary; at
origination of a mortgage loan, the borrower executes a separate undertaking to
make payments on the mortgage note. A deed of trust transaction normally has
three parties: the trustor, who is the borrower/property owner; the beneficiary,
who is the lender; and the trustee, a third-party grantee. Under a deed of
trust, the trustor grants the property, irrevocably until the debt is paid, in
trust, generally with a power of sale, to the trustee to secure payment of the
obligation. The mortgagee's authority under a mortgage and the trustee's
authority under a deed of trust are governed by the law of the state in which
the real property is located, the express provisions of the mortgage or deed of
trust, and, in some cases, in deed of trust transactions, the directions of the
beneficiary.
Foreclosure on Mortgages
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure occasionally may result from difficulties in locating
necessary parties defendant. When the mortgagee's right to foreclosure is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming and expensive. After the completion of a judicial foreclosure
proceeding, the court may issue a judgment of foreclosure and appoint a receiver
or other officer to conduct the sale of the property. In some states, mortgages
may also be foreclosed by advertisement, pursuant to a power of sale provided in
the mortgage. Foreclosure of a mortgage by advertisement is essentially similar
to foreclosure of a deed of trust by nonjudicial power of sale.
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Foreclosure of a deed of trust generally is accomplished by a
nonjudicial trustee's sale under a specific provision in the deed of trust that
authorizes the trustee to sell the property upon any default by the borrower
under the terms of the note or deed of trust. In certain states, foreclosure
also may be accomplished by judicial action in the manner provided for
foreclosure of mortgages. In some states, the trustee must record a notice of
default and send a copy to the borrower-trustor and to any person who has
recorded a request for a copy of a notice of default and notice of sale. In
addition, the trustee in some states must provide notice to any other individual
having an interest in the real property, including any junior lienholders. If
the deed of trust is not reinstated within any applicable cure period, a notice
of sale must be posted in a public place and, in most states, published for a
specified period of time in one or more newspapers. In addition, some state laws
require that a copy of the notice of sale be posted on the property and sent to
all parties having an interest of record in the property. The trustor, borrower
or any person having a junior encumbrance on the real estate may, during a
reinstatement period, cure the default by paying the entire amount in arrears
plus the costs and expenses incurred in enforcing the obligation. Generally,
state law controls the amount of foreclosure expenses and costs, including
attorney's fees, which may be recovered by a lender.
An action to foreclose a mortgage is an action to recover the mortgage
debt by enforcing the mortgagee's rights under the mortgage. It is regulated by
statutes and rules and subject throughout to the court's equitable powers.
Generally, a mortgagor is bound by the terms of the related mortgage note and
the mortgage as made and cannot be relieved from his default if the mortgagee
has exercised its rights in a commercially reasonable manner. However, since a
foreclosure action historically was equitable in nature, the court may exercise
equitable powers to relieve a mortgagor of a default and deny the mortgagee
foreclosure on proof that either the mortgagor's default was neither willful nor
in bad faith or the mortgagee's action established a waiver, fraud, bad faith,
or oppressive or unconscionable conduct such as to warrant a court of equity to
refuse affirmative relief to the mortgagee. Under certain circumstances, a court
of equity may relieve the mortgagor from an entirely technical default where the
default was not willful.
A foreclosure action is subject to most of the delays and expenses of
other lawsuits if defenses or counterclaims are interposed, and sometimes
requires up to several years to complete. Moreover, a non-collusive, regularly
conducted foreclosure sale may be challenged as a fraudulent conveyance,
regardless of the parties' intent, if a court determines that the sale was for
less than fair consideration and the sale occurred while the mortgagor was
insolvent and within one year (or within the state statute of limitations if the
trustee in bankruptcy elects to proceed under state fraudulent conveyance law)
of the filing of bankruptcy. Similarly, a suit against the debtor on the related
mortgage note may take several years and, generally, is a remedy alternative to
foreclosure, the mortgagee being precluded from pursuing both at the same time.
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In the case of foreclosure under either a mortgage or a deed of trust,
a public sale is conducted by the referee or other designated officer or by the
trustee. However, because of the difficulty potential third party purchasers at
the sale have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at a
foreclosure sale. Rather, it is common for the lender to purchase the property
from the trustee or referee for an amount that may be equal to the unpaid
principal amount of the mortgage note secured by the mortgage or deed of trust
plus accrued and unpaid interest and the expenses of foreclosure, in which event
the mortgagor's debt will be extinguished. The lender may purchase the property
for a lesser amount in order to preserve its right against the borrower to seek
a deficiency judgment in states where such a judgment is available. Thereafter,
subject to the right of the borrower in some states to remain in possession
during the redemption period, the lender will assume the burdens of ownership,
including obtaining hazard insurance, paying taxes and making such repairs at
its own expense as are necessary to render the property suitable for sale. The
lender will commonly obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the property. Depending upon
market conditions, the ultimate proceeds of the sale of the property may not
equal the lender's investment in the property. Any loss may be reduced by the
receipt of any mortgage guaranty insurance proceeds.
Environmental Risks
Federal, state and local laws and regulations impose a wide range of
requirements on activities that may affect the environment, health and safety.
These include laws and regulations governing air pollutant emissions, hazardous
and toxic substances, impacts to wetlands, leaks from underground storage tanks
and the management, removal and disposal of lead- and asbestos-containing
materials. In certain circumstances, these laws and regulations impose
obligations on the owners or operators of residential properties such as those
subject to the loans. The failure to comply with these laws and regulations may
result in fines and penalties.
Moreover, under various federal, state and local laws and regulations,
an owner or operator of real estate may be liable for the costs of addressing
hazardous substances on, in or beneath such property and related costs.
Liability may be imposed without regard to whether the owner or operator knew
of, or was responsible for, the presence of hazardous substances, and could
exceed the value of the property and the aggregate assets of the owner or
operator. In addition, persons who transport or dispose of hazardous substances,
or arrange for the transportation, disposal or treatment of hazardous
substances, at off-site locations may also be held liable if there are releases
or threatened releases of hazardous substances at such off-site locations.
In addition, under the laws of some states and under the Federal
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA),
contamination of property may give rise to a lien on the property to assure the
payment of the costs of clean-up. In several states, such a lien has priority
over the lien of an existing mortgage against the property. Under CERCLA, the
clean-up lien is subordinate to pre-existing, perfected security interests.
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Under the laws of some states, and under CERCLA, there is a possibility
that a lender may be held liable as an "owner or operator" for costs of
addressing releases or threatened releases of hazardous substances at a
property, regardless of whether or not the environmental damage or threat was
caused by the current or prior owner or operator. CERCLA and some state laws
provide an exemption from the definition of "owner or operator" for a secured
creditor who, without "participating in the management" of a facility, holds
indicia of ownership primarily to protect its security interest in the facility.
The Solid Waste Disposal Act (SWDA) provides similar protection to secured
creditors in connection with liability for releases of petroleum from certain
underground storage tanks. However, if a lender "participates in the management"
of the facility in question or is found not to have held its interest primarily
to protect a security interest, the lender may forfeit its secured creditor
exemption status.
A regulation promulgated by the U.S. Environmental Protection Agency
(EPA) in April 1992 attempted to clarify the activities in which lenders could
engage both prior to and subsequent to foreclosure of a security interest
without forfeiting the secured creditor exemption under CERCLA. The rule was
struck down in 1994 by the United States Court of Appeals for the District of
Columbia Circuit in Kelley ex rel State of Michigan v. Environmental Protection
Agency, 15 F.3d 1100 (D.C. Cir. 1994), reh'g denied, 25 F.3d 1088, cert. denied
sub nom. Am. Bankers Ass'n v. Kelley, 115 S.Ct. 900 (1995). Another EPA
regulation promulgated in 1995 clarifies the activities in which lenders may
engage without forfeiting the secured creditor exemption under the underground
storage tank provisions of SWDA. That regulation has not been struck down.
On September 30, 1996, Congress enacted the Asset Conservation, Limited
Liability and Deposit Insurance Protection Act (ACA) which amended both CERCLA
and SWDA to provide additional clarification regarding the scope of the lender
liability exemptions under the two statutes. Among other things, ACA specifies
the circumstances under which a lender will be protected by the CERCLA and SWDA
exemptions, both while the borrower is still in possession of the secured
property and following foreclosure on the secured property.
Generally, ACA states that a lender who holds indicia of ownership
primarily to protect a security interest in a facility will be considered to
participate in management only if, while the borrower is still in possession of
the facility encumbered by the security interest, the lender
o exercises decision-making control over environmental compliance
related to the facility such that the lender has undertaken
responsibility for hazardous substance handling or disposal practices
related to the facility or
o exercises control at a level comparable to that of a manager of the
facility such that the lender has assumed or manifested
responsibility for (a) overall management of the facility
encompassing daily decision-making with respect to environmental
compliance or (b) overall or substantially all of the operational
functions (as distinguished from financial or administrative
functions) of the facility other than the function of environmental
compliance.
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ACA also specifies certain activities that are not considered to be
"participation in management," including monitoring or enforcing the terms of
the extension of credit or security interest, inspecting the facility, and
requiring a lawful means of addressing the release or threatened release of a
hazardous substance.
ACA also specifies that a lender who did not participate in management
of a facility prior to foreclosure will not be considered an "owner or
operator," even if the lender forecloses on the facility and after foreclosure
sells or liquidates the facility, maintains business activities, winds up
operations, undertakes an appropriate response action, or takes any other
measure to preserve, protect, or prepare the facility prior to sale or
disposition, if the lender seeks to sell or otherwise divest the facility at the
earliest practicable, commercially reasonable time, on commercially reasonable
terms, taking into account market conditions and legal and regulatory
requirements.
ACA specifically addresses the potential liability of lenders who hold
mortgages or similar conventional security interests in real property, such as
the trust fund does in connection with the mortgage loans and the Home
Improvement Contracts.
If a lender is or becomes liable under CERCLA, it may be authorized to
bring a statutory action for contribution against any other "responsible
parties," including a previous owner or operator. However, these persons or
entities may be bankrupt or otherwise judgment proof, and the costs associated
with environmental cleanup and related actions may be substantial. Moreover,
some state laws imposing liability for addressing hazardous substances do not
contain exemptions from liability for lenders. Whether the costs of addressing a
release or threatened release at a property pledged as collateral for one of the
loans would be imposed on the related trust fund, and thus occasion a loss to
the holders, therefore depends on the specific factual and legal circumstances
at issue.
Rights of Redemption
In some states, after sale pursuant to a deed of trust or foreclosure
of a mortgage, the trustor or mortgagor and foreclosed junior lienors are given
a statutory period in which to redeem the property from the foreclosure sale.
The right of redemption should be distinguished from the equity of redemption,
which is a non-statutory right that must be exercised prior to the foreclosure
sale. In some states, redemption may occur only upon payment of the entire
principal balance of the loan, accrued interest and expenses of foreclosure. In
other states, redemption may be authorized if the former borrower pays only a
portion of the sums due. The effect of a statutory right of redemption is to
diminish the ability of the lender to sell the foreclosed property. The exercise
of a right of redemption would defeat the title of any purchaser at a
foreclosure sale, or of any purchaser from the lender subsequent to foreclosure
or sale under a deed of trust. Consequently, the practical effect of a right of
redemption is to force the lender to retain the property and pay the expenses of
ownership until the redemption period has run. In some states, there is no right
to redeem property after a trustee's sale under a deed of trust.
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Junior Mortgages; Rights of Senior Mortgages
The mortgage loans comprising or underlying the primary assets included
in the trust fund for a series will be secured by mortgages or deeds of trust,
which may be second or more junior mortgages to other mortgages held by other
lenders or institutional investors. The rights of the related trust fund (and
therefore of the security holders), as mortgagee under a junior mortgage, are
subordinate to those of the mortgagee under the senior mortgage, including the
prior rights of the senior mortgagee to receive hazard insurance and
condemnation proceeds and to cause the property securing the mortgage loan to be
sold upon default of the mortgagor, thereby extinguishing the junior mortgagee's
lien unless the junior mortgagee asserts its subordinate interest in the
property in foreclosure litigation and, possibly, satisfies the defaulted senior
mortgage. A junior mortgagee may satisfy a defaulted senior loan in full and, in
some states, may cure the default and bring the senior loan current, in either
event adding the amounts expended to the balance due on the junior loan. In most
states, absent a provision in the mortgage or deed of trust, no notice of
default is required to be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected under
any hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply the proceeds and awards to any indebtedness secured by
the mortgage, in such order as the mortgagee may determine. Thus, in the event
improvements on the property are damaged or destroyed by fire or other casualty,
or in the event the property is taken by condemnation, the mortgagee or
beneficiary under underlying senior mortgages will have the prior right to
collect any insurance proceeds payable under a hazard insurance policy and any
award of damages in connection with the condemnation and to apply the same to
the indebtedness secured by the senior mortgages. Proceeds in excess of the
amount of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed
of trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property that appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee under the mortgage. Upon a
failure of the mortgagor to perform any of these obligations, the mortgagee is
given the right under certain mortgages to perform the obligation itself, at its
election, with the mortgagor agreeing to reimburse the mortgagee for any sums
expended by the mortgagee on behalf of the mortgagor. All sums so expended by
the mortgagee become part of the indebtedness secured by the mortgage.
Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory prohibitions that limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a mortgage.
In some states, statutes limit the right of the beneficiary or mortgagee to
obtain a deficiency judgment against the borrower following foreclosure or sale
under a deed of trust. A deficiency judgment is a personal judgment against the
former borrower equal in most cases to the difference between the net amount
realized upon the public sale of the real property and the amount due to the
lender. Other statutes require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
In other states, the lender has the option of bringing a personal action against
the borrower on the debt without first exhausting the security. However, in some
of these states, the lender, following judgment on the personal action, may be
deemed to have elected a remedy and may be precluded from exercising remedies
with respect to the security. Consequently, the practical effect of the election
requirement, when applicable, is that lenders will usually proceed first against
the security rather than bringing a personal action against the borrower.
Finally, other statutory provisions limit any deficiency judgment against the
former borrower following a foreclosure sale to the excess of the outstanding
debt over the fair market value of the property at the time of the public sale.
The purpose of these statutes is generally to prevent a beneficiary or a
mortgagee from obtaining a large deficiency judgment against the former borrower
as a result of low or no bids at the foreclosure sale.
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In addition to laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including the Federal Bankruptcy Code, the
Soldiers' and Sailors' Relief Act of 1940 and state laws affording relief to
debtors, may interfere with or affect the ability of the secured lender to
realize upon collateral and/or enforce a deficiency judgment. For example, with
respect to Federal Bankruptcy Code, the filing of a petition acts as a stay
against the enforcement of remedies for collection of a debt. Moreover, a court
with federal bankruptcy jurisdiction may permit a debtor through a
rehabilitation plan under chapter 13 of the Federal Bankruptcy Code to cure a
monetary default with respect to a loan on his residence by paying arrearages
within a reasonable time period and reinstating the original loan payment
schedule even though the lender accelerated the loan and the lender has taken
all steps to realize upon its security (provided no sale of the property has yet
occurred) prior to the filing of the debtor's chapter 13 petition. Some courts
with federal bankruptcy jurisdiction have approved plans, based on the
particular facts of the reorganization case, that effected the curing of a loan
default by permitting the obligor to pay arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that
the terms of a mortgage loan may be modified if the borrower has filed a
petition under chapter 13. These courts have suggested that such modifications
may include reducing the amount of each monthly payment, changing the rate of
interest, altering the repayment schedule and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan. Federal bankruptcy law and limited case law
indicate that the foregoing modifications could not be applied to the terms of a
loan secured by property that is the principal residence of the debtor. In all
cases, the secured creditor is entitled to the value of its security plus
post-petition interest, attorney's fees and costs to the extent the value of the
security exceeds the debt.
In a chapter 11 case under the Federal Bankruptcy Code, the lender is
precluded from foreclosing without authorization from the bankruptcy court. The
lender's lien may be transferred to other collateral and/or be limited in amount
to the value of the lender's interest in the collateral as of the date of the
bankruptcy. The loan term may be extended, the interest rate may be adjusted to
market rates and the priority of the loan may be subordinated to bankruptcy
court-approved financing. The bankruptcy court can, in effect, invalidate
due-on-sale clauses through confirmed Chapter 11 plans of reorganization.
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The Federal Bankruptcy Code provides priority to certain tax liens over
the lender's security. This may delay or interfere with the enforcement of
rights in respect of a defaulted mortgage loan. In addition, substantive
requirements are imposed upon lenders in connection with the origination and the
servicing of mortgage loans by numerous federal and some state consumer
protection laws. The laws include the federal Truth in Lending Act, Real Estate
Settlement Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing
Act, Fair Credit Reporting Act and related statutes and regulations. These
federal laws impose specific statutory liabilities upon lenders that originate
loans and that fail to comply with the provisions of the law. In some cases,
this liability may affect assignees of the loans.
Due-on-Sale Clauses in Mortgage Loans
Due-on-sale clauses permit the lender to accelerate the maturity of the
loan if the borrower sells or transfers, whether voluntarily or involuntarily,
all or part of the real property securing the loan without the lender's prior
written consent. The enforceability of these clauses has been the subject of
legislation or litigation in many states, and in some cases, typically involving
single family residential mortgage transactions, their enforceability has been
limited or denied. In any event, the Garn-St. Germain Depository Institutions
Act of 1982 preempts state constitutional, statutory and case law that prohibits
the enforcement of due-on-sale clauses and permits lenders to enforce these
clauses in accordance with their terms, subject to certain exceptions. As a
result, due-on-sale clauses have become generally enforceable except in those
states whose legislatures exercised their authority to regulate the
enforceability of such clauses with respect to mortgage loans that were (i)
originated or assumed during the "window period" under the Garn-St. Germain Act,
which ended in all cases not later than October 15, 1982, and (ii) originated by
lenders other than national banks, federal savings institutions and federal
credit unions. Freddie Mac has taken the position in its published mortgage
servicing standards that, out of a total of eleven "window period states," five
states (Arizona, Michigan, Minnesota, New Mexico and Utah) have enacted statutes
extending, on various terms and for varying periods, the prohibition on
enforcement of due-on-sale clauses with respect to certain categories of window
period loans. Also, the Garn-St. Germain Act does "encourage" lenders to permit
assumption of loans at the original rate of interest or at some other rate less
than the average of the original rate and the market rate.
In addition, under the Federal Bankruptcy Code, due-on-sale clauses may
not be enforceable in bankruptcy proceedings and may, under certain
circumstances, be eliminated in any modified mortgage resulting from bankruptcy
proceedings.
Enforceability of Prepayment and Late Payment Fees
Forms of notes, mortgages and deeds of trust used by lenders may
contain provisions obligating the borrower to pay a late charge if payments are
not timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon the late charges a lender may collect
from a borrower for delinquent payments. Certain states also limit the amounts
that a lender may collect from a borrower as an additional charge if the loan is
prepaid. Late charges and prepayment fees are typically retained by servicers as
additional servicing compensation.
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Some state laws restrict the imposition of prepayment charges and late
fees even when the loans expressly provide for the collection of those charges.
Certain types of loans that were closed before July 1, 2003 can provide for such
charges because of the effect of the Alternative Mortgage Transaction Parity Act
of 1982, (the "Parity Act") and its Office of Thrift Supervision implementing
regulations, which permit the collection of prepayment charges and late charges
in connection with those types of loans, preempting any contrary state law
restrictions. However, some states may not recognize the preemptive authority of
the Parity Act. As a result, it is possible that prepayment charges and late
fees may not be collected even on loans that provide for the payment of these
charges based on the Parity Act. The Office of Thrift Supervision withdrew its
favorable regulations and opinions that previously authorized lenders to charge
prepayment charges and late fees on Parity Act loans notwithstanding contrary
state law, effective with respect to Parity Act loans originated on or after
July 1, 2003.
Equitable Limitations on Remedies
In connection with lenders' attempts to realize upon their security,
courts have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of his default
under the loan documents. Examples of judicial remedies that have been fashioned
include judicial requirements that the lender undertake affirmative and
expensive actions to determine the causes of the borrower's default and the
likelihood that the borrower will be able to reinstate the loan. In some cases,
courts have substituted their judgment for the lender's judgment and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disability. In
other cases, courts have limited the right of a lender to realize upon its
security if the default under the security agreement is not monetary, such as
the borrower's failure to adequately maintain the property or the borrower's
execution of secondary financing affecting the property. Finally, some courts
have been faced with the issue of whether or not federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under security agreements receive notices in addition to the
statutorily-prescribed minimums. For the most part, these cases have upheld the
notice provisions as being reasonable or have found that, in cases involving the
sale by a trustee under a deed of trust or by a mortgagee under a mortgage
having a power of sale, there is insufficient state action to afford
constitutional protections to the borrower.
Most conventional single-family mortgage loans may be prepaid in full
or in part without penalty. The regulations of the Office of Thrift Supervision
prohibit the imposition of a prepayment penalty or equivalent fee for or in
connection with the acceleration of a loan by exercise of a due-on-sale clause.
A mortgagee to whom a prepayment in full has been tendered may be compelled to
give either a release of the mortgage or an instrument assigning the existing
mortgage. The absence of a restraint on prepayment, particularly with respect to
mortgage loans having higher mortgage rates, may increase the likelihood of
refinancing or other early retirements of such mortgage loans.
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Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980 provides that state usury limitations shall not apply to
certain types of residential first mortgage loans originated by certain lenders
after March 31, 1980. Similar federal statutes were in effect with respect to
mortgage loans made during the first three months of 1980. The Office of Thrift
Supervision, as successor to the Federal Home Loan Bank Board, is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V.
Title V authorizes any state to reimpose interest rate limits by
adopting a state law before April 1, 1983 or by certifying that the voters of
such state have voted in favor of any provision, constitutional or otherwise,
which expressly rejects an application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V is not rejected, any state is authorized by the law to adopt a provision
limiting discount points or other charges on mortgage loans covered by Title V.
The Home Improvement Contracts and the Manufactured Housing Contracts
General
The Home Improvement Contracts and Manufactured Housing Contracts,
other than those that are unsecured or secured by mortgages on real estate,
generally are "chattel paper" or constitute "purchase money security interests,"
each as defined in the Uniform Commercial Code (UCC) in effect in the applicable
jurisdiction. Pursuant to the UCC, the sale of chattel paper is treated in a
manner similar to perfection of a security interest in chattel paper. Under the
related agreement, the depositor will transfer physical possession of the
contracts to the trustee or a custodian or may retain possession of the
contracts as custodian for the trustee. In addition, the depositor will make an
appropriate filing of a UCC-1 financing statement in the appropriate states to
give notice of the trustee's ownership of the contracts. Unless otherwise
specified in the related prospectus supplement, the contracts will not be
stamped or otherwise marked to reflect their assignment from the depositor to
the trustee. Therefore, if through negligence, fraud or otherwise, a subsequent
purchaser were able to take physical possession of the contracts without notice
of such assignment, the trustee's interest in the contracts could be defeated.
Security Interests in Home Improvements
A Home Improvement Contract that is secured by the related home
improvements grants to the originator of the contract a purchase money security
interest in the related home improvements to secure all or part of the purchase
price of the home improvements and related services. A financing statement
generally is not required to be filed to perfect a purchase money security
interest in consumer goods. Purchase money security interests of this type are
assignable. In general, a purchase money security interest grants to the holder
a security interest that has priority over a conflicting security interest in
the same collateral and the proceeds of the collateral. However, to the extent
that the collateral subject to a purchase money security interest becomes a
fixture, in order for the related purchase money security interest to take
priority over a conflicting interest in the fixture, the holder's interest in
the home improvement must generally be perfected by a timely fixture filing. In
general, under the UCC, a security interest does not exist under the UCC in
ordinary building material incorporated into an improvement on land. Home
Improvement Contracts that finance lumber, bricks, other types of ordinary
building material or other goods that are deemed to lose their characterization,
upon incorporation of the materials into the related property, will not be
secured by a purchase money security interest in the home improvement being
financed.
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Enforcement of Security Interest in Home Improvements
So long as the home improvement has not become subject to real estate
law, a creditor can repossess a home improvement securing a Home Improvement
Contract by voluntary surrender, by "self-help" repossession that is "peaceful"
(i.e., without breach of the peace) or, in the absence of voluntary surrender
and the ability to repossess without breach of the peace, by judicial process.
The holder of a Home Improvement Contract must give the debtor a number of days'
notice, which varies from ten to 30 days depending on the state, prior to
commencement of any repossession. The UCC and consumer protection laws in most
states place restrictions on repossession sales, including requiring prior
notice to the debtor and commercial reasonableness in effecting the sale. The
law in most states also requires that the debtor be given notice of any sale
prior to resale of the unit that the debtor may redeem it at or before resale.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the property securing the debtor's loan. However, some states
impose prohibitions or limitations on deficiency judgments, and in many cases
the defaulting borrower will have no assets from which to pay a judgment.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit or
delay the ability of a lender to repossess and resell collateral or enforce a
deficiency judgment.
Security Interests in the Manufactured Homes
The manufactured homes securing the Manufactured Housing Contracts may
be located in all 50 states and the District of Columbia. Security interests in
manufactured homes may be perfected either by notation of the secured party's
lien on the certificate of title or by delivery of the required documents and
payment of a fee to the state motor vehicle authority, depending on state law.
The security interests of the trustee in the manufactured homes will not be
noted on the certificates of title or by delivery of the required documents and
payment of fees to the applicable state motor vehicle authorities unless the
related prospectus supplement so requires. With respect to each transaction, a
decision will be made as to whether or not the security interests of the trustee
in the manufactured homes will be noted on the certificates of title and the
required documents and fees will be delivered to the applicable state motor
vehicle authorities based upon, among other things, the practices and procedures
of the related originator and servicer and after consultation with the
applicable rating agency or rating agencies. In some nontitle states, perfection
pursuant to the provisions of the UCC is required. As manufactured homes have
become large and often have been attached to their sites without any apparent
intention to move them, courts in many states have held that manufactured homes,
under particular circumstances, may become governed by real estate title and
recording laws. As a result, a security interest in a manufactured home could be
rendered subordinate to the interests of other parties claiming an interest in
the manufactured home under applicable state real estate law. In order to
perfect a security interest in a manufactured home under real estate laws, the
secured party must file either a "fixture filing" under the provisions of the
UCC or a real estate mortgage under the real estate laws of the state where the
home is located. These filings must be made in the real estate records office of
the county where the manufactured home is located. If so specified in the
related prospectus supplement, the Manufactured Housing Contracts may contain
provisions prohibiting the borrower from permanently attaching the manufactured
home to its site. So long as the borrower does not violate this agreement, a
security interest in the manufactured home will be governed by the certificate
of title laws or the UCC, and the notation of the security interest on the
certificate of title or the filing of a UCC financing statement will be
effective to maintain the priority of the security interest in the manufactured
home. If, however, a manufactured home is permanently attached to its site, the
related lender may be required to perfect a security interest in the
manufactured home under applicable real estate laws.
76
In the event that the owner of a manufactured home moves it to a state
other than the state in which the manufactured home initially is registered,
under the laws of most states the perfected security interest in the
manufactured home would continue for four months after relocation and, after
expiration of the four months, only if and after the owner re-registers the
manufactured home in the new state. If the owner were to relocate a manufactured
home to another state and not re-register a security interest in that state, the
security interest in the manufactured home would cease to be perfected. A
majority of states generally require surrender of a certificate of title to
re-register a manufactured home. Accordingly, the secured party must surrender
possession if it holds the certificate of title to the manufactured home or, in
the case of manufactured homes registered in states which provide for notation
of lien on the certificate of title, notice of surrender would be given to the
secured party noted on the certificate of title. In states which do not require
a certificate of title for registration of a manufactured home, re-registration
could defeat perfection.
Under the laws of most states, liens for repairs performed on a
manufactured home and liens for personal property taxes take priority over a
perfected security interest in the manufactured home.
Consumer Protection Laws
The so-called "Holder-in-Due-Course" rule of the Federal Trade
Commission is intended to defeat the ability of the transferor of a consumer
credit contract that is the seller of goods that gave rise to the transaction
(and certain related lenders and assignees) to transfer the contract free of
notice of claims by the related debtor. The effect of this rule is to subject
the assignee of the contract to all claims and defenses the debtor could assert
against the seller of goods. Liability under this rule is limited to amounts
paid under a contract; however, the obligor also may be able to assert the rule
to set off remaining amounts due as a defense against a claim brought by the
trustee against such obligor. Numerous other federal and state consumer
protection laws impose requirements applicable to the origination and lending
pursuant to the contracts, including the Truth in Lending Act, the Federal Trade
Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the
Equal Credit Opportunity Act, the Fair Debt Collection Practices Act and the
Uniform Consumer Credit Code. In the case of some of these laws, the failure to
comply with their provisions may affect the enforceability of the related
contract.
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Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980 provides that, subject to the following conditions, state
usury limitations shall not apply to any contract that is secured by a first
lien on certain kinds of consumer goods. The Home Improvement Contracts or
Manufactured Housing Contracts would be covered if they satisfy certain
conditions, among other things, governing the terms of any prepayments, late
charges and deferral fees and requiring a 30-day notice period prior to
instituting any action leading to repossession of the related unit.
Title V authorized any state to reimpose limitations on interest rates
and finance charges by adopting before April 1, 1983 a law or constitutional
provision that expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
Installment Sales Contracts
The loans may also consist of installment sales contracts. Under an
installment sales contract the seller/lender retains legal title to the property
and enters into an agreement with the purchaser/borrower for the payment of the
purchase price, plus interest, over the term of the contract. Only after full
performance by the purchaser/borrower of the contract is the seller/lender
obligated to convey title to the property to the borrower. As with mortgage or
deed of trust financing, during the effective period of the installment sales
contract, the borrower is generally responsible for maintaining the property in
good condition and for paying real estate taxes, assessments and hazard
insurance policy premiums associated with the property.
The method of enforcing the rights of the seller/lender under an
installment sales contract varies on a state-by-state basis depending upon the
extent to which state courts are willing, or able pursuant to state statute, to
enforce the contract strictly according to the terms. The terms of installment
sales contracts generally provide that upon a default by the borrower, the
borrower loses his right to occupy the property, the entire indebtedness is
accelerated, and the borrower's equitable interest in the property is forfeited.
The seller/lender in such a situation does not have to foreclose in order to
obtain title to the property, although in some cases a quiet title action is in
order if the borrower has filed the installment sales contract in local land
records and an ejectment action may be necessary to recover possession. In a few
states, particularly in cases of borrower default during the early years of an
installment sales contract, the courts will permit ejectment of the buyer and a
forfeiture of his interest in the property. However, most state legislatures
have enacted provisions by analogy to mortgage law protecting borrowers under
installment sales contracts from the harsh consequences of forfeiture. Under
these statutes, a judicial or nonjudicial foreclosure may be required, the
lender may be required to give notice of default and the borrower may be granted
some grace period during which the installment sales contract may be reinstated
upon full payment of the default amount and the borrower may have a
post-foreclosure statutory redemption right. In other states, courts in equity
may permit a borrower with significant investment in the property under an
installment sales contract for the sale of real estate to share in the proceeds
of sale of the property after the indebtedness is repaid or may otherwise refuse
to enforce the forfeiture clause. Nevertheless, generally speaking, the lender's
procedures for obtaining possession and clear title under an installment sales
contract in a given state are simpler and less time-consuming and costly than
are the procedures for foreclosing and obtaining clear title to a property
subject to one or more liens.
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Soldiers' and Sailors' Civil Relief Act of 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of
all branches of the military on active duty, including draftees and reservists
in military service,
o are entitled to have their interest rates reduced and capped at 6%
per year, on obligations (including loans) incurred prior to the
commencement of military service for the duration of military
service, and
o may be entitled to a stay of proceedings on any kind of foreclosure
or repossession action in the case of defaults on such obligations
entered into prior to military service for the duration of military
service, and
o may have the maturity of their obligations incurred prior to military
service extended, the payments lowered and the payment schedule
readjusted for a period of time after the completion of military
service.
However, these benefits are subject to challenge by creditors and if, in the
opinion of the court, the ability of a person to comply with his obligations is
not materially impaired by military service, the court may apply equitable
principles accordingly.
If a borrower's obligation to repay amounts otherwise due on a loan included in
a trust fund for a series is relieved pursuant to the Relief Act, none of the
trust fund, the servicer, the depositor or the trustee will be required to
advance such amounts, and any related loss may reduce the amounts available to
be paid to the holders of the related securities. Unless otherwise specified in
the related prospectus supplement, any shortfalls in interest collections on
loans (or underlying loans), included in a trust fund for a series resulting
from application of the Relief Act will be allocated to each class of securities
of the series that is entitled to receive interest in respect of the loans (or
underlying loans) in proportion to the interest that each class of securities
would have otherwise been entitled to receive in respect of the loans (or
underlying loans) had the interest shortfall not occurred.
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The Depositor
The depositor, Bear Stearns Asset Backed Securities, Inc., was
incorporated in the state of Delaware in June 1995, and is a wholly-owned
subsidiary of The Bear Stearns Companies Inc. The depositor's principal
executive offices are located at 383 Madison Avenue, New York, New York 10179.
Its telephone number is (212) 272-2000.
The depositor will not engage in any activities other than to
authorize, issue, sell, deliver, purchase and invest in (and enter into
agreements in connection with), and/or to engage in the establishment of one or
more trusts, which will issue and sell, bonds, notes, debt or equity securities,
obligations and other securities and instruments. The depositor securities must
be collateralized or otherwise secured or backed by, or otherwise represent an
interest in, among other things, receivables or pass-through certificates or
participations or certificates of participation or beneficial ownership in one
or more pools of receivables, and the proceeds of the foregoing, that arise in
connection with loans secured by senior or junior mortgages on real estate or
manufactured housing and any and all other commercial transactions and
commercial, sovereign, student or consumer loans or indebtedness. The depositor
may purchase, acquire, own, hold, transfer, convey, service, sell, pledge,
assign, finance and otherwise deal with such receivables, pass-through
certificates, or participations or certificates of participation or beneficial
ownership. Article Third of the depositor's Certificate of Incorporation limits
the depositor's activities to the above activities and certain related
activities, such as credit enhancement with respect to depositor securities, and
to any activities incidental to and necessary or convenient for the
accomplishment of those purposes.
Use of Proceeds
The depositor will apply all or substantially all of the net proceeds
from the sale of each of the related trust fund series of securities for one or
more of the following purposes:
o to purchase the primary assets of the related trust fund,
o to repay indebtedness incurred to obtain funds to acquire the primary
assets of the related trust fund,
o to establish any reserve funds described in the related prospectus
supplement, and
o to pay costs of structuring and issuing the securities, including the
costs of obtaining any credit enhancement.
If specified in the related prospectus supplement, the purchase of the
primary assets for a series may be effected by delivering the securities to the
seller in exchange for the primary assets.
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Material Federal Income Tax Considerations
General
The following summary of the material federal income tax consequences
of the purchase, ownership, and disposition of the securities is based on the
opinion of Sidley Austin Brown & Wood LLP, Stroock & Stroock & Lavan LLP,
Thacher Proffitt & Wood LLP or other tax counsel designated in the prospectus
supplement, as special counsel to the depositor. This summary is based upon the
provisions of the Internal Revenue Code, the regulations promulgated thereunder,
including, where applicable, proposed regulations, and the judicial and
administrative rulings and decisions now in effect, all of which are subject to
change or possible differing interpretations. The statutory provisions,
regulations, and interpretations on which this interpretation is based are
subject to change either prospectively or retroactively.
The summary does not purport to deal with all aspects of federal income
taxation that may affect particular investors in light of their individual
circumstances. This summary focuses primarily upon investors who will hold
securities as "capital assets" (generally, property held for investment) within
the meaning of section 1221 of the Code. Prospective investors may wish to
consult their own tax advisers concerning the federal, state, local and any
other tax consequences as relates specifically to such investors in connection
with the purchase, ownership and disposition of the securities.
The federal income tax consequences to security holders will vary
depending on whether
o the securities of a series are classified as indebtedness;
o an election is made to treat the trust fund relating to a particular
series of securities as a real estate mortgage investment conduit or
REMIC under the Code;
o the securities represent an ownership interest in some or all of the
assets included in the trust fund for a series;
o an election is made to treat the trust fund relating to a particular
series of certificates as a partnership; or
o an election is made to treat the trust fund relating to a particular
series of securities as a financial asset securitization investment
trust or FASIT under the Code.
The prospectus supplement for each series of securities will specify
how the securities will be treated for federal income tax purposes and will
discuss whether a REMIC election, if any, will be made with respect to the
series.
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Taxation of Debt Securities
Status as Real Property Loans. Except to the extent otherwise provided
in the related prospectus supplement, if the securities are regular interests in
a REMIC or represent interests in a grantor trust, in the opinion of tax
counsel:
o securities held by a domestic building and loan association will
constitute "loans... secured by an interest in real property" within
the meaning of section 7701(a)(19)(C)(v) of the Code; and
o securities held by a real estate investment trust will constitute
"real estate assets" within the meaning of section 856(c)(4)(A) of
the Code and interest on securities will be considered "interest on
obligations secured by mortgages on real property or on interests in
real property" within the meaning of section 856(c)(3)(B) of the
Code.
Interest and Acquisition Discount. In the opinion of tax counsel,
securities that are REMIC regular interests are generally taxable to holders in
the same manner as evidences of indebtedness issued by the REMIC. Stated
interest on the securities that are REMIC regular interests will be taxable as
ordinary income and taken into account using the accrual method of accounting,
regardless of the holder's normal accounting method. Interest (other than
original issue discount) on securities (other than securities that are REMIC
regular interests) which are characterized as indebtedness for federal income
tax purposes will be includible in income by holders thereof in accordance with
their usual methods of accounting. When we refer to "debt securities" in this
section, we mean securities characterized as debt for federal income tax
purposes and securities that are REMIC regular interests.
In the opinion of tax counsel, "compound interest securities" (i.e.,
debt securities that permit all interest to accrue for more than one year before
payments of interest are scheduled to begin) will, and certain of the other debt
securities issued at a discount may, be issued with "original issue discount" or
OID. The following discussion is based in part on the OID Regulations. A holder
should be aware, however, that the OID Regulations do not adequately address
certain issues relevant to prepayable securities, such as the debt securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a debt security and its issue price. In the
opinion of tax counsel, a holder of a debt security must include OID in gross
income as ordinary interest income as it accrues under a method taking into
account an economic accrual of the discount. In general, OID must be included in
income in advance of the receipt of the cash representing that income. The
amount of OID on a debt security will be considered to be zero if it is less
than a de minimis amount determined under the Code.
The issue price of a debt security is the first price at which a
substantial amount of debt securities of that class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular class of debt securities is sold for cash on
or prior to the closing date, the issue price for that class will be treated as
the fair market value of that class on the closing date. The issue price of a
debt security also includes the amount paid by an initial debt security holder
for accrued interest that relates to a period prior to the issue date of the
debt security. The stated redemption price at maturity of a debt security
includes the original principal amount of the debt security, but generally will
not include distributions of interest if the distributions constitute "qualified
stated interest."
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Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate (as described
below), provided that the interest payments are unconditionally payable at
intervals of one year or less during the entire term of the debt security. The
OID Regulations state that interest payments are unconditionally payable only if
a late payment or nonpayment is expected to be penalized or reasonable remedies
exist to compel payment. Debt securities may provide for default remedies in the
event of late payment or nonpayment of interest. Although the matter is not free
from doubt, the trustee intends to treat interest on such debt securities as
unconditionally payable and as constituting qualified stated interest, not OID.
However, absent clarification of the OID Regulations, where debt securities do
not provide for default remedies, the interest payments will be included in the
debt security's stated redemption price at maturity and taxed as OID. Interest
is payable at a single fixed rate only if the rate appropriately takes into
account the length of the interval between payments. Distributions of interest
on debt securities with respect to which deferred interest will accrue, will not
constitute qualified stated interest payments, in which case the stated
redemption price at maturity of such debt securities includes all distributions
of interest as well as principal thereon. Where the interval between the issue
date and the first distribution date on a debt security is longer than the
interval between subsequent distribution dates, the greater of (i) the interest
foregone and (ii) the excess of the stated principal amount over the issue price
will be included in the stated redemption price at maturity and tested under the
de minimis rule described below. Where the interval between the issue date and
the first distribution date on a debt security is shorter than the interval
between subsequent distribution dates, all of the additional interest will be
included in the stated redemption price at maturity and tested under the de
minimis rule described below. In the case of a debt security with a long first
period that has non-de minimis OID, all stated interest in excess of interest
payable at the effective interest rate for the long first period will be
included in the stated redemption price at maturity and the debt security will
generally have OID. Holders of debt securities should consult their own tax
advisors to determine the issue price and stated redemption price at maturity of
a debt security.
Under the de minimis rule, OID on a debt security will be considered to
be zero if the OID is less than 0.25% of the stated redemption price at maturity
of the debt security multiplied by the weighted average maturity of the debt
security. For this purpose, the weighted average maturity of the debt security
is computed as the sum of the amounts determined by multiplying the number of
full years (i.e., rounding down partial years) from the issue date until each
distribution in reduction of stated redemption price at maturity is scheduled to
be made by a fraction, the numerator of which is the amount of each distribution
included in the stated redemption price at maturity of the debt security and the
denominator of which is the stated redemption price at maturity of the debt
security. Holders generally must report de minimis OID pro rata as principal
payments are received, and such income will be capital gain if the debt security
is held as a capital asset. However, holders may elect to accrue all de minimis
OID as well as market discount under a constant yield method. See "--Election to
Treat All Interest as Original Issue Discount" below.
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Debt securities may provide for interest based on a qualified variable
rate. Under the OID Regulations, interest is generally treated as payable at a
qualified variable rate and not as contingent interest if
o the interest is unconditionally payable at least annually,
o the issue price of the debt instrument does not exceed the total
noncontingent principal payments, and
o interest is based on a "qualified floating rate," an "objective
rate," or a combination of "qualified floating rates" that do not
operate in a manner that significantly accelerates or defers interest
payments on the debt security.
In the case of compound interest securities, certain interest weighted
securities, and certain of the other debt securities, none of the payments under
the instrument will be considered qualified stated interest, and thus the
aggregate amount of all payments will be included in the stated redemption price
at maturity.
The Internal Revenue Service issued contingent payment regulations
governing the calculation of OID on instruments having contingent interest
payments. These contingent payment regulations represent the only guidance
regarding the views of the IRS with respect to contingent interest instruments
and specifically do not apply for purposes of calculating OID on debt
instruments subject to section 1272(a)(6) of the Code, such as the debt
securities. Additionally, the OID Regulations do not contain provisions
specifically interpreting section 1272(a)(6) of the Code. Until the Treasury
issues guidance to the contrary, trustee intends to base its computation on
section 1272(a)(6) of the Code and the OID Regulations as described in this
prospectus. However, because no regulatory guidance currently exists under
section 1272(a)(6) of the Code, there can be no assurance that such methodology
represents the correct manner of calculating OID.
The holder of a debt security issued with OID must include in gross
income, for all days during its taxable year on which it holds the debt
security, the sum of the "daily portions" of OID. The amount of OID includible
in income by a holder will be computed by allocating to each day during an
accrual period a pro rata portion of the original issue discount that accrued
during the accrual period. In the case of a debt security that is not a REMIC
regular interest security and the principal payments on which are not subject to
acceleration resulting from prepayments on the loans, the amount of OID
includible in income of a holder for an accrual period (generally the period
over which interest accrues on the debt instrument) will equal the product of
the yield to maturity of the debt security and the adjusted issue price of the
debt security, reduced by any payments of qualified stated interest. The
adjusted issue price is the sum of the debt security's issue price plus prior
accruals of OID, reduced by the total payments made with respect to the debt
security in all prior periods, other than qualified stated interest payments.
Certain classes of the debt securities may be "pay-through securities,"
which are debt instruments that are subject to acceleration due to prepayments
on other debt obligations securing those instruments. The amount of OID to be
included in the income of a holder of a pay-through security is computed by
taking into account the prepayment rate assumed in pricing the debt instrument.
The amount of OID that will accrue during an accrual period on a pay-through
security is the excess, if any, of the
84
o sum of
(a) the present value of all payments remaining to be made on the
pay-through security as of the close of the accrual period and
(b) the payments during the accrual period of amounts included in
the stated redemption price of the pay-through security,
over
o the adjusted issue price of the pay-through security at the beginning
of the accrual period.
The present value of the remaining payments is to be determined on the basis of
three factors:
o the original yield to maturity of the pay-through security
(determined on the basis of compounding at the end of each accrual
period and properly adjusted for the length of the accrual period),
o events that have occurred before the end of the accrual period and
o the assumption that the remaining payments will be made in accordance
with the original prepayment assumption.
The effect of this method is to increase the portions of OID required to be
included in income by a holder of a pay-through security to take into account
prepayments with respect to the loans at a rate that exceeds the prepayment
assumption, and to decrease (but not below zero for any period) the portions of
OID required to be included in income by a holder of a pay-through security to
take into account prepayments with respect to the loans at a rate that is slower
than the prepayment assumption. Although OID will be reported to holders of
pay-through securities based on the prepayment assumption, no representation is
made to holders that loans will be prepaid at that rate or at any other rate.
The depositor may adjust the accrual of OID on a class of securities
that are REMIC regular interests in a manner that it believes to be appropriate,
to take account of realized losses on the loans, although the OID Regulations do
not provide for such adjustments. If the IRS were to require that OID be accrued
without such adjustments, the rate of accrual of OID for a class of securities
that are REMIC regular interests could increase.
Certain classes of securities may represent more than one class of
REMIC regular interests. Unless otherwise provided in the related prospectus
supplement, the applicable trustee intends, based on the OID Regulations, to
calculate OID on such securities as if, solely for the purposes of computing
OID, the separate regular interests were a single debt instrument.
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A subsequent holder of a debt security will also be required to include
OID in gross income, but a holder who purchases the debt security for an amount
that exceeds its adjusted issue price will be entitled (as will an initial
holder who pays more than a debt security's issue price) to offset such OID by
comparable economic accruals of portions of the excess.
Effects of Defaults and Delinquencies. In the opinion of tax counsel,
holders will be required to report income with respect to the related securities
under an accrual method without giving effect to delays and reductions in
distributions attributable to a default or delinquency on the loans, except
possibly to the extent that it can be established that such amounts are
uncollectible. As a result, the amount of income (including OID) reported by a
holder of a security in any period could significantly exceed the amount of cash
distributed to the holder in that period. The holder will eventually be allowed
a loss (or will be allowed to report a lesser amount of income) to the extent
that the aggregate amount of distributions on the securities is reduced as a
result of a loan default. However, the timing and character of losses or
reductions in income are uncertain and, accordingly, holders of securities
should consult their own tax advisors on this point.
Interest Weighted Securities. An "interest weighted security" is a
security that is a REMIC regular interest or a "stripped" security (as discussed
under "--Tax Status as a Grantor Trust; General" below) the payments on which
consist solely or primarily of a specified portion of the interest payments on
qualified mortgages held by the REMIC or on loans underlying pass-through
securities. It is not clear how income should be accrued with respect to
interest weighted securities. The trustee intends to take the position that all
of the income derived from an interest weighted security should be treated as
OID and that the amount and rate of accrual of such OID should be calculated by
treating the interest weighted security as a compound interest security.
However, in the case of interest weighted securities that are entitled to some
payments of principal and are REMIC regular interests, the IRS could assert that
income derived from the interest weighted security should be calculated as if
the security were a security purchased at a premium equal to the excess of the
price paid by the holder for the security over its stated principal amount, if
any. Under this approach, a holder would be entitled to amortize such premium
only if it has in effect an election under section 171 of the Code with respect
to all taxable debt instruments held by such holder, as described below.
Alternatively, the IRS could assert that an interest weighted security should be
taxable under the rules governing bonds issued with contingent payments. This
treatment may be more likely in the case of interest weighted securities that
are stripped securities as described below. See "--Tax Status as a Grantor
Trust--Discount or Premium on Pass-Through Securities" below.
Variable Rate Debt Securities. In the opinion of tax counsel, in the
case of debt securities bearing interest at a rate that varies directly,
according to a fixed formula, with an objective index, it appears that the yield
to maturity of the debt securities and, in the case of pay-through securities,
the present value of all payments remaining to be made on the debt securities,
should be calculated as if the interest index remained at its value as of the
issue date of the securities. Because the proper method of adjusting accruals of
OID on a variable rate debt security is uncertain, holders of variable rate debt
securities should consult their own tax advisers regarding the appropriate
treatment of such securities for federal income tax purposes.
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Market Discount. In the opinion of tax counsel, a purchaser of a
security may be subject to the market discount rules of sections 1276 through
1278 of the Code. A holder that acquires a debt security with more than a
prescribed de minimis amount of "market discount" (generally, the excess of the
principal amount of the debt security over the purchaser's purchase price) will
be required to include accrued market discount in income as ordinary income in
each month, but limited to an amount not exceeding the principal payments on the
debt security received in that month and, if the securities are sold, the gain
realized. This market discount would accrue in a manner to be provided in
Treasury regulations but, until such regulations are issued, market discount
would in general accrue either
o on the basis of a constant yield (in the case of a pay-through
security, taking into account a prepayment assumption) or
o in the ratio of (a) in the case of securities (or, in the case of a
pass-through security, as set forth below, the loans underlying the
security) not originally issued with OID, stated interest payable in
the relevant period to total stated interest remaining to be paid at
the beginning of the period or (b) in the case of securities (or, in
the case of a pass-through security, as described below, the loans
underlying the security) originally issued at a discount, OID in the
relevant period to total OID remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination
date of the debt security (or, in the case of a pass-through security, the
loans), the excess of interest paid or accrued to purchase or carry the security
(or, in the case of a pass-through security, as described below, the underlying
loans) with market discount over interest received on the security is allowed as
a current deduction only to the extent such excess is greater than the market
discount that accrued during the taxable year in which such interest expense was
incurred. In general, the deferred portion of any interest expense will be
deductible when such market discount is included in income, including upon the
sale, disposition, or repayment of the security (or, in the case of a
pass-through security, an underlying loan). A holder may elect to include market
discount in income currently as it accrues, on all market discount obligations
acquired by such holder during the taxable year such election is made and
thereafter, in which case the interest deferral rule will not apply.
Premium. In the opinion of tax counsel, a holder who purchases a debt
security (other than an interest weighted security to the extent described
above) at a cost greater than its stated redemption price at maturity, generally
will be considered to have purchased the security at a premium, which it may
elect to amortize as an offset to interest income on the security (and not as a
separate deduction item) on a constant yield method. Although no regulations
addressing the computation of premium accrual on comparable securities have been
issued, the legislative history of The Tax Reform Act of 1986 indicates that
premium is to be accrued in the same manner as market discount. Accordingly, it
appears that the accrual of premium on a class of pay-through securities will be
calculated using the prepayment assumption used in pricing the class. If a
holder makes an election to amortize premium on a debt security, the election
will apply to all taxable debt instruments (including all REMIC regular
interests and all pass-through certificates representing ownership interests in
a trust holding debt obligations) held by the holder at the beginning of the
taxable year in which the election is made, and to all taxable debt instruments
acquired thereafter by the holder, and will be irrevocable without the consent
of the IRS. Purchasers who pay a premium for the securities should consult their
tax advisers regarding the election to amortize premium and the method to be
employed.
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On December 30, 1997, the IRS issued final amortizable bond premium
regulations dealing with amortizable bond premium. The regulations specifically
do not apply to prepayable debt instruments subject to section 1272(a)(6) of the
Code. Absent further guidance from the IRS, the trustee intends to account for
amortizable bond premium in the manner described above. Prospective purchasers
of the debt securities should consult their tax advisors regarding the possible
application of the amortizable bond premium regulations.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit the holder of a debt security to elect to accrue all
interest, discount (including de minimis market discount or OID) and premium as
interest, based on a constant yield method for debt securities acquired on or
after April 4, 1994. If such an election were to be made with respect to a debt
security with market discount, the holder of the debt security would be deemed
to have made an election to include in income currently market discount with
respect to all other debt instruments having market discount that such holder of
the debt security acquires during the year of the election or thereafter.
Similarly, the holder of a debt security that makes this election for a debt
security that is acquired at a premium will be deemed to have made an election
to amortize bond premium with respect to all debt instruments having amortizable
bond premium that the holder owns or acquires. The election to accrue interest,
discount and premium on a constant yield method with respect to a debt security
is irrevocable.
Taxation of the REMIC and its Holders
General. In the opinion of tax counsel, if a REMIC election is made
with respect to a series of securities, then the arrangement by which the
securities of that series are issued will be treated as a REMIC as long as all
of the provisions of the applicable governing agreement are complied with and
the statutory and regulatory requirements are satisfied. Securities will be
designated as "regular interests" or "residual interests" in a REMIC, as
specified in the related prospectus supplement.
Except to the extent specified otherwise in a prospectus supplement, if
a REMIC election is made with respect to a series of securities, in the opinion
of tax counsel:
o securities held by a domestic building and loan association will
constitute "a regular or a residual interest in a REMIC" within the
meaning of Section 7701(a)(19)(C)(xi) of the Code (assuming that at
least 95% of the REMIC's assets consist of cash, government
securities, "loans secured by an interest in real property," and
other types of assets described in Code Section 7701(a)(19)(C)); and
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o securities held by a real estate investment trust will constitute
"real estate assets" within the meaning of Section 856(c)(4)(A) of
the Code, and income with respect to the securities will be
considered "interest on obligations secured by mortgages on real
property or on interests in real property" within the meaning of
Section 856(c)(3)(B) of the Code (assuming, for both purposes, that
at least 95% of the REMIC's assets are qualifying assets).
If less than 95% of the REMIC's assets consist of assets described in the
immediately preceding bullets, then a security will qualify for the tax
treatment described in the previous sentence in the proportion that such REMIC's
assets are qualifying assets.
REMIC Expenses; Single Class REMICs
As a general rule, in the opinion of tax counsel, all of the expenses
of a REMIC will be taken into account by holders of the residual interest
securities. In the case of a "single class REMIC," however, the expenses will be
allocated under Treasury regulations among the holders of the REMIC regular
interest securities and the holders of the REMIC residual interest securities on
a daily basis in proportion to the relative amounts of income accruing to each
holder on that day. In the case of a holder of a REMIC regular interest security
who is an individual or a "pass-through interest holder" (including certain
pass-through entities but not including real estate investment trusts), the
expenses will be deductible only to the extent that the expenses, plus other
"miscellaneous itemized deductions" of the holder, exceed 2% of the holder's
adjusted gross income. In addition, for taxable years beginning after December
31, 1990, the amount of itemized deductions otherwise allowable for the taxable
year for an individual whose adjusted gross income exceeds the applicable amount
(which amount will be adjusted for inflation for taxable years beginning after
1990) will be reduced by the lesser of
o 3% of the excess of adjusted gross income over the applicable amount,
or
o 80% of the amount of itemized deductions otherwise allowable for the
taxable year.
This reduction is scheduled to be phased-out over a five-year period beginning
in 2006. The reduction or disallowance of this deduction may have a significant
impact on the yield of the REMIC regular interest security to the holder. In
general terms, a single class REMIC is one that either
o would qualify, under existing Treasury regulations, as a grantor
trust if it were not a REMIC (treating all interests as ownership
interests, even if they would be classified as debt for federal
income tax purposes), or
o is similar to such a trust and is structured with the principal
purpose of avoiding the single class REMIC rules.
Unless otherwise specified in the related prospectus supplement, the expenses of
the REMIC will be allocated to holders of the related REMIC residual interest
securities.
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Taxation of the REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, in the opinion of tax counsel, a REMIC is not generally subject to
entity-level tax. Rather, the taxable income or net loss of a REMIC is taken
into account by the holders of the REMIC residual interests. As described above,
the REMIC regular interests are generally taxable as debt of the REMIC.
Qualification as a REMIC requires ongoing compliance with certain conditions.
Although a REMIC is not generally subject to federal income tax, the Code
provides that failure to comply with one or more of the ongoing requirements of
the Code for REMIC status during any taxable year, including the implementation
of restrictions on the purchase and transfer of the residual interests in a
REMIC as described below under "--Taxation of Owners of Residual Interest
Securities", would cause the trust not to be treated as a REMIC for that year
and thereafter. In this event, the entity may be taxable as a separate
corporation and the related certificates may not be accorded the status or given
the tax treatment described below.
Calculation of REMIC Income. In the opinion of tax counsel, the taxable
income or net loss of a REMIC is determined under an accrual method of
accounting and in the same manner as in the case of an individual, with certain
adjustments. In general, the taxable income or net loss will be the difference
between
o the gross income produced by the REMIC's assets, including stated
interest and any OID or market discount on loans and other assets,
and
o deductions, including stated interest and original issue discount
accrued on the REMIC regular interest securities, amortization of any
premium with respect to loans, and servicing fees and other expenses
of the REMIC.
A holder of a REMIC residual interest security that is an individual or a
"pass-through interest holder" (including certain pass-through entities, but not
including real estate investment trusts) will be unable to deduct servicing fees
payable on the loans or other administrative expenses of the REMIC for a given
taxable year, to the extent that these expenses, when aggregated with the
holder's other miscellaneous itemized deductions for that year, do not exceed 2%
of the holder's adjusted gross income.
For purposes of computing its taxable income or net loss, the REMIC
should have an initial aggregate tax basis in its assets equal to the aggregate
fair market value of the regular interests and the residual interests on the
startup day (generally, the day that the interests are issued). That aggregate
basis will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The OID provisions of the Code apply to loans of individuals originated
on or after March 2, 1984, and the market discount provisions apply to loans
originated after July 18, 1984. Subject to possible application of the de
minimis rules, the method of accrual by the REMIC of OID income on such loans
will be equivalent to the method under which holders of pay-through securities
accrue OID (i.e., under the constant yield method taking into account the
prepayment assumption). The REMIC will deduct OID on the regular interest
securities in the same manner that the holders of the regular interest
securities include such discount in income, but without regard to the de minimis
rules. See "--Taxation of Debt Securities" above. However, a REMIC that acquires
loans at a market discount must include such market discount in income
currently, as it accrues, on a constant interest basis.
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To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (taking into account the prepayment assumption) on a constant yield
method. Although the law is somewhat unclear regarding recovery of premium
attributable to loans originated on or before that date, it is possible that the
premium may be recovered in proportion to payments of loan principal.
Prohibited Transactions and Contributions Tax. The REMIC will be
subject to a 100% tax on any net income derived from a "prohibited transaction."
For this purpose, net income will be calculated without taking into account any
losses from prohibited transactions or any deductions attributable to any
prohibited transaction that resulted in a loss. In general, prohibited
transactions include:
o subject to limited exceptions, the sale or other disposition of any
qualified mortgage transferred to the REMIC;
o subject to a limited exception, the sale or other disposition of a
cash flow investment;
o the receipt of any income from assets not permitted to be held by the
REMIC pursuant to the Code; or
o the receipt of any fees or other compensation for services rendered
by the REMIC.
It is anticipated that a REMIC will not engage in any prohibited transactions in
which it would recognize a material amount of net income. In addition, subject
to a number of exceptions, a tax is imposed at the rate of 100% on amounts
contributed to a REMIC after the close of the three-month period beginning on
the startup day. The holders of REMIC residual interest securities will
generally be responsible for the payment of any taxes imposed on the REMIC.
However, to the extent not paid by the holders of the REMIC residual interest
securities or otherwise, taxes will be paid out of the trust fund and will be
allocated pro rata to all outstanding classes of securities of the REMIC.
Taxation of Holders of Residual Interest Securities
In the opinion of tax counsel, the holder of a certificate representing
a REMIC residual interest will take into account the "daily portion" of the
taxable income or net loss of the REMIC for each day during the taxable year on
which the holder held the residual interest security. The daily portion is
determined by allocating to each day in any calendar quarter its ratable portion
of the taxable income or net loss of the REMIC for that quarter, and by
allocating that amount among the holders (on that day) of the residual interest
securities in proportion to their respective holdings on that day.
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In the opinion of tax counsel, the holder of a residual interest
security must report its proportionate share of the taxable income of the REMIC
whether or not it receives cash distributions from the REMIC attributable to
income or loss. The reporting of taxable income without corresponding
distributions could occur, for example, if the loans held by the REMIC were
issued or acquired at a discount, since mortgage prepayments cause recognition
of discount income, while the corresponding portion of the prepayment could be
used in whole or in part to make principal payments on REMIC regular interests
securities issued without any discount or at an insubstantial discount. (If this
occurs, it is likely that cash distributions will exceed taxable income in later
years.) The taxable income of a REMIC may also be greater in earlier years as a
result of the fact that interest expense deductions, as a percentage of
outstanding principal on the REMIC regular interest securities, will typically
increase over time as lower yielding securities are paid, whereas interest
income with respect to loans will generally remain constant over time as a
percentage of loan principal.
In any event, because the holder of a REMIC residual interest security
is taxed on the net income of the REMIC, the taxable income derived from the
residual interest security in a given taxable year will not be equal to the
taxable income associated with investment in a corporate bond or stripped
instrument having similar cash flow characteristics and pretax yield. Therefore,
the after-tax yield on a residual interest security may be less than that of a
corporate bond or stripped instrument.
Limitation on Losses. In the opinion of tax counsel, the amount of the
REMIC's net loss that a holder may take into account currently is limited to the
holder's adjusted basis at the end of the calendar quarter in which the loss
arises. A holder's basis in a REMIC residual interest security will initially
equal the holder's purchase price, and will subsequently be increased by the
amount of the REMIC's taxable income allocated to the holder, and decreased (but
not below zero) by the amount of distributions made and the amount of the
REMIC's net loss allocated to the holder. Any disallowed loss may be carried
forward indefinitely, but may be used only to offset income generated by the
same REMIC. The ability of holders of residual interest securities to deduct net
losses may be subject to additional limitations under the Code. Holders should
consult their tax advisers with respect to such additional limitations.
Distributions. In the opinion of tax counsel, distributions on a REMIC
residual interest security (whether at their scheduled times or as a result of
prepayments) will generally not result in any additional taxable income or loss
to a holder of the residual interest security. If the amount of the payment
exceeds the holder's adjusted basis in the residual interest security, however,
the holder will recognize gain (treated as gain from the sale of the residual
interest security) to the extent of the excess.
Sale or Exchange. In the opinion of tax counsel, the holder of a
residual interest security will recognize gain or loss on the sale or exchange
of the residual interest security equal to the difference, if any, between the
amount realized and the holder's adjusted basis in the residual interest
security at the time of sale or exchange. A holder's adjusted basis in a
residual interest security generally equals the cost of the residual interest
security increased by the taxable income of the REMIC that was included in the
income of the holder and decreased by distributions received thereon by the
holder and amounts of the REMIC net loss allocated to the holder. Except to the
extent provided in regulations which have not yet been issued, any loss upon
disposition of a residual interest security will be disallowed if the selling
holder acquires any residual interest in a REMIC or similar mortgage pool within
six months before or after disposition. In that event, the loss will be used to
increase the residual interest security holder's adjusted basis in the newly
acquired asset.
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Excess Inclusions. In the opinion of tax counsel, the portion of the
REMIC taxable income of a holder of a residual interest security consisting of
"excess inclusion" income may not be offset by other deductions or losses,
including net operating losses, on the holder's federal income tax return.
Further, if the holder of a residual interest security is an organization
subject to the tax on unrelated business income imposed by Section 511 of the
Code, the holder's excess inclusion income will be treated as unrelated business
taxable income of the holder. In addition, under Treasury regulations yet to be
issued, if a real estate investment trust, a regulated investment company, a
common trust fund, or certain cooperatives were to own a residual interest
security, a portion of dividends (or other distributions) paid by the real
estate investment trust (or other entity) would be treated as excess inclusion
income. If a residual interest security is owned by a foreign person, excess
inclusion income is subject to tax at a rate of 30%, which may not be reduced by
treaty, is not eligible for treatment as "portfolio interest" and is subject to
certain additional limitations. See "--Tax Treatment of Foreign Investors"
below. The Small Business Job Protection Act of 1996 has eliminated the special
rule permitting Section 593 thrift institutions to use net operating losses and
other allowable deductions to offset their excess inclusion income from residual
interest securities that have "significant value" within the meaning of the
REMIC Regulations, effective for taxable years beginning after December 31,
1995, except with respect to residual interest securities continuously held by a
thrift institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides
three rules for determining the effect of excess inclusions on the alternative
minimum taxable income of a residual holder.
o First, alternative minimum taxable income for the residual holder is
determined without regard to the special rule that taxable income
cannot be less than excess inclusions.
o Second, the residual holder's alternative minimum taxable income for
a tax year cannot be less than excess inclusions for the year.
o Third, the amount of any alternative minimum tax net operating loss
deductions must be computed without regard to any excess inclusions.
These rules are effective for tax years beginning after December 31, 1986,
unless a residual holder elects to have such rules apply only to tax years
beginning after August 20, 1996.
The excess inclusion portion of a REMIC's income is generally equal to
the excess, if any, of
93
o REMIC taxable income for the quarterly period allocable to a residual
interest security,
over
o the daily accruals for such quarterly period of (i) 120% of the long
term applicable federal rate on the startup day multiplied by (ii)
the adjusted issue price of the residual interest security at the
beginning of the quarterly period.
The adjusted issue price of a residual interest security at the beginning of
each calendar quarter will equal its issue price (calculated in a manner
analogous to the determination of the issue price of a regular interest
security), increased by the aggregate of the daily accruals for prior calendar
quarters, and decreased (but not below zero) by the amount of loss allocated to
a holder and the amount of distributions made on the residual interest security
before the beginning of the quarter. The long-term federal rate, which is
announced monthly by the Treasury Department, is an interest rate that is based
on the average market yield of outstanding marketable obligations of the United
States government having remaining maturities in excess of nine years.
Under the REMIC Regulations, transfers of residual interest securities
may be disregarded in certain circumstances. See "--Restrictions on Ownership
and Transfer of Residual Interest Securities" and "--Tax Treatment of Foreign
Investors" below.
Restrictions on Ownership and Transfer of Residual Interest Securities.
As a condition to qualification as a REMIC, reasonable arrangements must be made
to prevent the ownership of a REMIC residual interest by any "disqualified
organization" including the United States, any State or political subdivision
thereof, any foreign government, any international organization, or any agency
or instrumentality of any of the foregoing, a rural electric or telephone
cooperative described in Section 1381(a)(2)(C) of the Code, or any entity exempt
from the tax imposed by sections 1 through 1399 of the Code, if the entity is
not subject to tax on its unrelated business income. Accordingly, the applicable
pooling and servicing agreement will prohibit disqualified organizations from
owning a residual interest security. In addition, no transfer of a residual
interest security will be permitted unless the proposed transferee shall have
furnished to the trustee an affidavit representing and warranting that it is
neither a disqualified organization nor an agent or nominee acting on behalf of
a disqualified organization.
If a residual interest security is transferred to a disqualified
organization after March 31, 1988 (in violation of the restrictions set forth
above), a substantial tax will be imposed on the transferor of the residual
interest security at the time of the transfer. In addition, if a disqualified
organization holds an interest in a pass-through entity after March 31, 1988
(including, among others, a partnership, trust, real estate investment trust,
regulated investment company, or any person holding as nominee an interest in a
pass-through entity), that owns a residual interest security, the pass-through
entity will be required to pay an annual tax on its allocable share of the
excess inclusion income of the REMIC.
The REMIC Regulations disregard certain transfers of Residual
Certificates, in which case the transferor continues to be treated as the owner
of the Residual Certificates and thus continues to be subject to tax on its
allocable portion of the net income of the REMIC Pool. Under the REMIC
Regulations, a transfer of a "noneconomic residual interest" (as defined below)
to a Residual Holder (other than a Residual Holder who is not a U.S. Person, as
defined in "Tax Treatment of Foreign Investors") is disregarded for all federal
income tax purposes if a significant purpose of the transferor is to impede the
assessment or collection of tax. A residual interest in a REMIC (including a
residual interest with a positive value at issuance) is a "noneconomic residual
interest" unless, at the time of the transfer, (i) the present value of the
expected future distributions on the residual interest at least equals the
product of the present value of the anticipated excess inclusions and the
highest corporate income tax rate in effect for the year in which the transfer
occurs, and (ii) the transferor reasonably expects that the transferee will
receive distributions from the REMIC at or after the time at which taxes accrue
on the anticipated excess inclusions in an amount sufficient to satisfy the
accrued taxes on each excess inclusion. The present value of the anticipated
excess inclusions and the present value of the expected futures distributions
are determined in the manner set forth in Regulation 1.860E-2(a)(4). The REMIC
Regulations explain that a significant purpose to impede the assessment or
collection of tax exists if the transferor, at the time of the transfer, either
knew or should have known that the transferee would be unwilling or unable to
pay taxes due on its share of the taxable income of the REMIC. A safe harbor is
provided if (i) the transferor conducted, at the time of the transfer, a
reasonable investigation of the financial condition of the transferee and found
that the transferee historically had paid its debts as they came due and found
no significant evidence to indicate that the transferee would not continue to
pay its debts as they came due in the future, (ii) the transferee represents to
the transferor that it understands that, as the holder of the non-economic
residual interest, the transferee may incur tax liabilities in excess of any
cash flows generated by the interest and that the transferee intends to pay
taxes associated with holding the residual interest as they become due, (iii)
the transferee represents to the transferor that it will not cause income from
the Residual Certificate to be attributable to a foreign permanent establishment
or fixed base (within the meaning of an applicable income tax treaty) of the
transferee or any other person, and (iv) one of the two following tests is
satisfied: either
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(a) the present value of the anticipated tax liabilities associated
with the holding the noneconomic residual interest will not exceed the sum of:
(1) the present value of any consideration given to the transferee
to acquire the residual interest;
(2) the present value of the expected future distributions on the
residual; and
(3) the present value of the anticipated tax savings associated
with holding the residual interest as the REMIC generates
losses; or
(b) (1) the transferee must be a domestic "C" corporation (other than a
corporation exempt from taxation or a regulated investment
company or real estate investment trust);
95
(2) the transferee must agree in writing that any subsequent
transfer of the residual interest would be to an eligible "C"
corporation and would meet the requirements for a safe harbor
transfer; and
(3) the facts and circumstances known to the transferor on or
before the date of the transfer must not reasonably indicate
that the taxes associated with ownership of the residual
interest will not be paid by the transferee.
For purposes of the computation in clause (a), the transferee is
assumed to pay tax at the highest corporate rate of tax specified in the Code
or, in certain circumstances, the alternative minimum tax rate. Further, present
values generally are computed using a discount rate equal to the short-term
Federal rate set forth in Section 1274(d) of the Code for the month of the
transfer and the compounding period used by the transferee.
Mark-to-Market Rules. A REMIC residual interest security acquired after
January 3, 1995 cannot be marked-to-market.
Administrative Matters
The REMIC's books must be maintained on a calendar year basis and the
REMIC must file an annual federal income tax return. The REMIC will also be
subject to the procedural and administrative rules of the Code applicable to
partnerships, including the determination of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit, by the IRS in a
unified administrative proceeding.
Tax Status as a Grantor Trust
General. As further specified in the related prospectus supplement, if
a REMIC election is not made and the trust fund is not structured as a
partnership, then, in the opinion of tax counsel, the trust fund relating to a
series of securities will be classified for federal income tax purposes as a
grantor trust under Subpart E, Part 1 of Subchapter J of the Code and not as an
association taxable as a corporation. We refer to the securities of a series of
this type as "pass-through securities". In some series there will be no
separation of the principal and interest payments on the loans. In these
circumstances, a holder will be considered to have purchased a pro rata
undivided interest in each of the loans. In the case of "stripped securities",
sale of the securities will produce a separation in the ownership of all or a
portion of the principal payments from all or a portion of the interest payments
on the loans.
In the opinion of tax counsel, each holder must report on its federal
income tax return its share of the gross income derived from the loans (not
reduced by the amount payable as trust expense fees to the applicable trustee
and the servicer and similar fees), at the same time and in the same manner as
the items would have been reported under the holder's tax accounting method had
it held its interest in the loans directly, received directly its share of the
amounts received with respect to the loans, and paid directly its share of the
trust expense fees. In the case of pass-through securities other than stripped
securities, income will consist of a pro rata share of all of the income derived
from all of the loans and, in the case of stripped securities, income will
consist of a pro rata share of the income derived from each stripped bond or
stripped coupon in which the holder owns an interest. The holder of a security
will generally be entitled to deduct trust expense fees under section 162 or
section 212 of the Code to the extent that such fees represent "reasonable"
compensation for the services rendered by the applicable trustee and the
servicer (or third parties that are compensated for the performance of
services). In the case of a noncorporate holder, however, trust expense fees (to
the extent not otherwise disallowed, e.g., because they exceed reasonable
compensation) will be deductible in computing the holder's regular tax liability
only to the extent that the fees, when added to other miscellaneous itemized
deductions, exceed 2% of adjusted gross income and may not be deductible to any
extent in computing the holder's alternative minimum tax liability. In addition,
for taxable years beginning after December 31, 1990, the amount of itemized
deductions otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds the applicable amount (which amount will be
adjusted for inflation in taxable years beginning after 1990) will be reduced by
the lesser of:
96
o 3% of the excess of adjusted gross income over the applicable amount, or
o 80% of the amount of itemized deductions otherwise allowable for that taxable
year.
This reduction is scheduled to be phased-out over a five-year period
beginning in 2006.
Discount or Premium on Pass-Through Securities. In the opinion of tax
counsel, the holder's purchase price of a pass-through security is to be
allocated among the loans in proportion to their fair market values, determined
as of the time of purchase of the securities. In the typical case, the trustee
(to the extent necessary to fulfill its reporting obligations) will treat each
loan as having a fair market value proportional to the share of the aggregate
principal balances of all of the loans that it represents, since the securities,
unless otherwise specified in the related prospectus supplement, will have a
relatively uniform interest rate and other common characteristics. To the extent
that the portion of the purchase price of a pass-through security allocated to a
loan (other than to a right to receive any accrued interest thereon and any
undistributed principal payments) is less than or greater than the portion of
the principal balance of the loan allocable to the security, the interest in the
loan allocable to the pass-through security will be deemed to have been acquired
at a discount or premium, respectively.
The treatment of any discount will depend on whether the discount
represents OID or market discount. In the case of a loan with OID in excess of a
prescribed de minimis amount or a stripped security, a holder of the security
will be required to report as interest income in each taxable year its share of
the amount of OID that accrues during that year in the manner described above.
OID with respect to a loan could arise, for example, by virtue of the financing
of points by the originator of the loan, or by virtue of the charging of points
by the originator of the loan in an amount greater than a statutory de minimis
exception, in circumstances under which the points are not currently deductible
pursuant to applicable Code provisions. Any market discount or premium on a loan
will be includible in income, generally in the manner described above, except
that in the case of pass-through securities, market discount is calculated with
respect to the loans underlying the security, rather than with respect to the
security itself. A holder that acquires an interest in a loan originated after
July 18, 1984 with more than a de minimis amount of market discount (generally,
the excess of the principal amount of the loan over the purchaser's allocable
purchase price) will be required to include accrued market discount in income in
the manner set forth above. See "--Taxation of Debt Securities --Market
Discount" and "--Premium" above.
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In the case of market discount on a pass-through security attributable
to loans originated on or before July 18, 1984, the holder generally will be
required to allocate the portion of the discount that is allocable to a loan
among the principal payments on the loan and to include the discount allocable
to each principal payment in ordinary income at the time the principal payment
is made. This treatment would generally result in discount being included in
income at a slower rate than discount would be required to be included in income
using the method described in the preceding paragraph.
Stripped Securities. A stripped security may represent a right to
receive only a portion of the interest payments on the loans, a right to receive
only principal payments on the loans, or a right to receive certain payments of
both interest and principal. Ratio stripped securities may represent a right to
receive differing percentages of both the interest and principal on each loan.
Pursuant to section 1286 of the Code, the separation of ownership of the right
to receive some or all of the interest payments on an obligation from ownership
of the right to receive some or all of the principal payments results in the
creation of "stripped bonds" with respect to principal payments and "stripped
coupons" with respect to interest payments. Section 1286 of the Code applies the
OID rules to stripped bonds and stripped coupons. For purposes of computing OID,
a stripped bond or a stripped coupon is treated as a debt instrument issued on
the date that such stripped interest is purchased with an issue price equal to
its purchase price or, if more than one stripped interest is purchased, the
ratable share of the purchase price allocable to the stripped interest.
Servicing fees in excess of reasonable servicing fees will be treated
under the stripped bond rules. If the excess servicing fee is less than 100
basis points (i.e., 1% interest on the loan's principal balance) or the
securities are initially sold with a de minimis discount (assuming no prepayment
assumption is required), any non-de minimis discount arising from a subsequent
transfer of the securities should be treated as market discount. The IRS appears
to require that reasonable servicing fees be calculated on a loan by loan basis,
which could result in some loans being treated as having more than 100 basis
points of interest stripped off.
The Code, OID Regulations and judicial decisions provide no direct
guidance as to how the interest and OID rules are to apply to stripped
securities and other pass-through securities. Under the cash flow bond method
described above for pay-through securities, a prepayment assumption is used and
periodic recalculations are made that take into account with respect to each
accrual period the effect of prepayments during such period. However, the Tax
Reform Act of 1986 does not, absent Treasury regulations, appear specifically to
cover instruments such as stripped securities, which technically represent
ownership interests in the underlying loans, rather than being debt instruments
"secured by" those loans. Nevertheless, it is believed that the cash flow bond
method is a reasonable method of reporting income for such securities, and it is
expected that OID will be reported on that basis unless otherwise specified in
the related prospectus supplement. In applying the calculation to pass-through
securities, the trustee will treat all payments to be received by a holder with
respect to the underlying loans as payments on a single installment obligation.
The IRS could, however, assert that OID must be calculated separately for each
loan underlying a security.
98
Under certain circumstances, if the loans prepay at a rate faster than
the prepayment assumption, the use of the cash flow bond method may accelerate
the holder's recognition of income. If, however, the loans prepay at a rate
slower than the Prepayment Assumption, in some circumstances the use of this
method may decelerate the holder's recognition of income.
In the case of a stripped security that is an interest weighted
security, the applicable trustee intends, absent contrary authority, to report
income to holders as OID, in the manner described above for interest weighted
securities.
Possible Alternative Characterizations. The characterizations of the
stripped securities described above are not the only possible interpretations of
the applicable Code provisions. Among other possibilities, the IRS could contend
that:
o in certain series, each non-interest weighted security is composed of
an unstripped undivided ownership interest in loans and an
installment obligation consisting of stripped principal payments;
o the non-interest weighted securities are subject to the contingent
payment provisions of the regulations; or
o each interest weighted stripped security is composed of an unstripped
undivided ownership interest in loans and an installment obligation
consisting of stripped interest payments.
Given the variety of alternatives for treatment of the stripped
securities and the different federal income tax consequences that result from
each alternative, potential purchasers are urged to consult their own tax
advisers regarding the proper treatment of the securities for federal income tax
purposes.
Character as Qualifying Loans. In the case of stripped securities,
there is no specific legal authority existing regarding whether the character of
the securities, for federal income tax purposes, will be the same as the loans.
The IRS could take the position that the loans' character is not carried over to
the securities in such circumstances. Pass-through securities will be, and,
although the matter is not free from doubt, stripped securities should be
considered to represent:
o "real estate assets" within the meaning of section 856(c)(4)(A) of
the Code; and
o "loans secured by an interest in real property" within the meaning of
section 7701(a)(19)(C)(v) of the Code.
Interest income attributable to pass-through securities and stripped securities
should be considered to represent "interest on obligations secured by mortgages
on real property or on interests in real property" within the meaning of section
856(c)(3)(B) of the Code. Reserves or funds underlying the securities may cause
a proportionate reduction in the above-described qualifying status categories of
securities.
99
Sale or Exchange
Subject to the discussion below with respect to any trust fund as to
which a partnership election is made, in the opinion of tax counsel, a holder's
tax basis in a security is the price the holder pays for the security, increased
by amounts of OID or market discount included in income, and reduced by any
payments received (other than qualified stated interest payments) and any
amortized premium. Gain or loss recognized on a sale, exchange, or redemption of
a security, measured by the difference between the amount realized and the
security's basis as so adjusted, will generally be capital gain or loss,
assuming that the security is held as a capital asset and will generally be
long-term capital gain or loss if the holding period of the security is more
than one year and short-term capital gain or loss if the holding period of the
Security is one year or less. Non-corporate taxpayers are subject to reduced
maximum rates on long-term capital gains and are generally subject to tax at
ordinary income rates on short-term capital gains. The deductibility of capital
losses is subject to certain limitations. Prospective investors should consult
their own tax advisors concerning these tax law provisions.
In the case of a security held by a bank, thrift, or similar
institution described in section 582 of the Code, however, gain or loss realized
on the sale or exchange of a REMIC regular interest security will be taxable as
ordinary income or loss. In addition, gain from the disposition of a regular
interest security that might otherwise be capital gain will be treated as
ordinary income to the extent of the excess, if any, of:
o the amount that would have been includible in the holder's income if
the yield on the regular interest security had equaled 110% of the
applicable federal rate as of the beginning of such holder's holding
period,
over
o the amount of ordinary income actually recognized by the holder with
respect to the regular interest security.
Miscellaneous Tax Aspects
Backup Withholding. Subject to the discussion below with respect to any
trust fund as to which a partnership election is made, a holder, other than a
holder of a REMIC residual interest security, may, under certain circumstances,
be subject to "backup withholding" with respect to distributions or the proceeds
of a sale of certificates to or through brokers that represent interest or
original issue discount on the securities. The current backup withholding rate
is 30%. This rate is scheduled to adjust in future periods. This withholding
generally applies if the holder of a security:
o fails to furnish the applicable trustee with its taxpayer
identification number;
100
o furnishes the applicable trustee an incorrect taxpayer identification
number;
o fails to report properly interest, dividends or other "reportable
payments" as defined in the Code; or
o under certain circumstances, fails to provide the applicable trustee
or such holder's securities broker with a certified statement, signed
under penalty of perjury, that the taxpayer identification number
provided is its correct number and that the holder is not subject to
backup withholding.
Backup withholding will not apply, however, with respect to certain
payments made to holders, including payments to certain exempt recipients (such
as exempt organizations) and to certain nonresident alien individuals, foreign
partnerships or foreign corporations. Holders should consult their tax advisers
as to their qualification for exemption from backup withholding and the
procedure for obtaining the exemption.
The applicable trustee will report to the holders and to the servicer
for each calendar year the amount of any "reportable payments" during such year
and the amount of tax withheld, if any, with respect to payments on the
securities.
Tax Treatment of Foreign Investors
Subject to the discussion below with respect to any trust fund as to
which a partnership election is made, under the Code, unless interest (including
OID) paid on a security (other than a residual interest security) is considered
to be "effectively connected" with a trade or business conducted in the United
States by a nonresident alien individual, foreign partnership or foreign
corporation, in the opinion of tax counsel, interest will normally qualify as
portfolio interest, and will be exempt from federal income tax. However,
interest will not qualify as portfolio interest where:
o the recipient is a holder, directly or by attribution, of 10% or more
of the capital or profits interest in the issuer, or
o the recipient is a controlled foreign corporation to which the issuer
is a related person.
For interest to qualify for the portfolio interest exemption from U.S.
withholding tax, the holder must generally complete a Form W-8BEN indicating
that the holder is a non-U.S. Person. The Form W-8BEN, or in certain
circumstances other documentation, must be provided to the person otherwise
required to withhold U.S. tax. If a foreign holder is a partnership or other
type of pass-through entity that is not treated for U.S. withholding tax
purposes as the beneficial owner of the income with respect to the security, the
holder generally must receive the Form W-8BEN as described in the previous
sentence from the holder's partners or other beneficial owners of the income
with respect to the security and may be required to provide the forms, and
certain additional information, to the person through whom the holder holds the
security. The forms provided by the holder or its interestholders regarding
status as a non-U.S. Person must generally be passed through the ownership chain
to the person otherwise required to withhold tax in order for the exemption to
apply. These provisions supersede the generally applicable provisions of United
States law that would otherwise require the issuer to withhold at a 30% rate
(unless such rate were reduced or eliminated by an applicable tax treaty) on,
among other things, interest and other fixed or determinable, annual or periodic
income paid to nonresident alien individuals, foreign partnerships or foreign
corporations. Holders of pass-through securities and stripped securities,
including ratio strip securities, however, may be subject to withholding to the
extent that the loans were originated on or before July 18, 1984.
101
Interest and OID of holders who are foreign persons are not subject to
withholding if they are effectively connected with a United States business
conducted by the holder and appropriate documentation is provided to the person
otherwise required to withhold. They will, however, generally be subject to the
regular United States income tax.
Payments to holders of REMIC residual interest securities who are
foreign persons will generally be treated as interest for purposes of the 30%
(or lower treaty rate) United States withholding tax. Holders should assume that
such income does not qualify for exemption from United States withholding tax as
"portfolio interest." It is clear that, to the extent that a payment represents
a portion of REMIC taxable income that constitutes excess inclusion income, the
holder of a residual interest security will not be entitled to an exemption from
or reduction of the 30% (or lower treaty rate) withholding tax rule. If the
payments are subject to United States withholding tax, they generally will be
taken into account for withholding tax purposes only when paid or distributed
(or when the residual interest security is disposed of). The Treasury has
statutory authority, however, to promulgate regulations that would require such
amounts to be taken into account at an earlier time in order to prevent the
avoidance of tax. Regulations could, for example, require withholding prior to
the distribution of cash in the case of residual interest securities that do not
have significant value. Under the REMIC Regulations, if a residual interest
security has tax avoidance potential, a transfer of a residual interest security
to a nonresident alien individual, foreign partnership or foreign corporation
will be disregarded for all federal tax purposes. A residual interest security
has tax avoidance potential unless, at the time of the transfer the transferor
reasonably expects that the REMIC will distribute to the transferee residual
interest holder amounts that will equal at least 30% of each excess inclusion,
and that such amounts will be distributed at or after the time at which the
excess inclusions accrue and not later than the calendar year following the
calendar year of accrual. If a nonresident alien individual, foreign partnership
or foreign corporation transfers a residual interest security to a U.S. Person,
and if the transfer has the effect of allowing the transferor to avoid tax on
accrued excess inclusions, then the transfer is disregarded and the transferor
continues to be treated as the owner of the residual interest security for
purposes of the withholding tax provisions of the Code. See "--Excess
Inclusions" above.
Tax Characterization of the Trust Fund as a Partnership
Tax counsel is of the opinion that a trust fund structured as a
partnership will not be an association (or publicly traded partnership) taxable
as a corporation for federal income tax purposes. This opinion is based on the
assumption that the terms of the trust agreement and related documents will be
complied with, and on counsel's conclusions that the nature of the income of the
trust fund will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations or the issuance of the certificates has
been structured as a private placement under an IRS safe harbor, so that the
trust fund will not be characterized as a publicly traded partnership taxable as
a corporation.
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If the trust fund were taxable as a corporation for federal income tax
purposes, in the opinion of tax counsel, the trust fund would be subject to
corporate income tax on its taxable income. The trust fund's taxable income
would include all its income, possibly reduced by its interest expense on the
notes. Any such corporate income tax could materially reduce cash available to
make payments on the notes and distributions on the certificates, and holders of
certificates could be liable for any such tax that is unpaid by the trust fund.
Tax Consequences to Holders of the Notes
Treatment of the Notes as Indebtedness. The trust fund will agree, and
the noteholders will agree by their purchase of notes, to treat the notes as
debt for federal income tax purposes. As a result, tax counsel is, (except as
otherwise provided in the related prospectus supplement,) of the opinion that
the notes will be classified as debt for federal income tax purposes. The
discussion below assumes this characterization of the notes is correct.
OID, Indexed Securities, etc. The discussion below assumes that all
payments on the notes are denominated in U.S. dollars, and that the notes are
not "indexed securities" or "strip notes." Moreover, the discussion assumes that
the interest formula for the notes meets the requirements for "qualified stated
interest" under the OID Regulations, and that any OID on the notes (i.e., any
excess of the principal amount of the notes over their issue price) does not
exceed a de minimis amount (i.e., 0.25% of their principal amount multiplied by
the number of full years included in their term), all within the meaning of the
OID Regulations. If these conditions are not satisfied with respect to any given
series of notes, additional tax considerations with respect to the notes will be
disclosed in the applicable prospectus supplement.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, in the opinion of tax counsel, the notes
will not be considered issued with OID. The stated interest on the notes will be
taxable to a noteholder as ordinary interest income when received or accrued in
accordance with the noteholder's method of tax accounting. Under the OID
Regulations, a holder of a note issued with a de minimis amount of OID must
include the OID in income, on a pro rata basis, as principal payments are made
on the note. It is believed that any prepayment premium paid as a result of a
mandatory redemption will be taxable as contingent interest when it becomes
fixed and unconditionally payable. A purchaser who buys a note for more or less
than its principal amount will generally be subject, respectively, to the
premium amortization or market discount rules of the Code.
A holder of a note that is a "short-term note" (i.e., it has a fixed
maturity date of not more than one year from the issue date) may be subject to
special rules. An accrual basis holder of a short-term note (and certain cash
method holders, including regulated investment companies, as set forth in
section 1281 of the Code) generally would be required to report interest income
as interest accrues on a straight-line basis over the term of each interest
period. Other cash basis holders of a short-term note would, in general, be
required to report interest income as interest is paid (or, if earlier, upon the
taxable disposition of the short-term note). However, a cash basis holder of a
short-term note reporting interest income as it is paid may be required to defer
a portion of any interest expense otherwise deductible on indebtedness incurred
to purchase or carry the short-term note until the taxable disposition of the
short-term note. A cash basis taxpayer may elect under section 1281 of the Code
to accrue interest income on all nongovernment debt obligations with a term of
one year or less, in which case the taxpayer would include interest on the
short-term note in income as it accrues, but would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a short-term note is purchased for more or less than its
principal amount.
103
Sale or Other Disposition. In the opinion of tax counsel, if a
noteholder sells a note, the holder will recognize gain or loss in an amount
equal to the difference between the amount realized on the sale and the holder's
adjusted tax basis in the note. The adjusted tax basis of a note to a particular
noteholder will equal the holder's cost for the note, increased by any market
discount, acquisition discount, OID and gain previously included by the
noteholder in income with respect to the note and decreased by the amount of
bond premium (if any) previously amortized and by the amount of principal
payments previously received by the noteholder with respect to the note. Any
such gain or loss will be capital gain or loss if the note was held as a capital
asset, except for gain representing accrued interest and accrued market discount
not previously included in income. Capital losses generally may be used only to
offset capital gains.
Foreign Holders. In the opinion of tax counsel, interest payments made
(or accrued) to a noteholder who is a "foreign person" (i.e., nonresident alien,
foreign corporation or other non-U.S. Person) generally will be considered
"portfolio interest," and generally will not be subject to United States federal
income tax and withholding tax, if the interest is not effectively connected
with the conduct of a trade or business within the United States by the foreign
person and the foreign person:
o is not actually or constructively a "10 percent shareholder" of the
trust fund or the seller (including a holder of 10% of the
outstanding certificates) or a "controlled foreign corporation" with
respect to which the trust fund or the seller is a "related person"
within the meaning of the Code; and
o provides the trustee or other person who is otherwise required to
withhold U.S. tax with respect to the notes with an appropriate
statement (on Form W-8BEN), signed under penalties of perjury,
certifying that the beneficial owner of the note is a foreign person
and providing the foreign person's name and address.
If a foreign holder is a partnership or other type of pass-through entity that
is not treated for U.S. withholding tax purposes as the beneficial owner of the
income with respect to the certificate, the holder generally must receive the
Form W-8BEN as described in the previous sentence from the holder's partners or
other beneficial owners of the income with respect to the certificate and may be
required to provide the forms, and certain additional information, to the person
through whom the holder holds the certificates. The forms provided by the holder
or its interestholders regarding status as a non-U.S. Person must generally be
passed through the ownership chain to the person otherwise required to withhold
tax in order for the exemption to apply. If a note is held through a securities
clearing organization or certain other financial institutions, the foreign
person that owns the note should furnish such organization or institution with a
Form W-8BEN or a similar form. The organization or institution may then be
required to forward the Form W-8BEN to the withholding agent. If interest is not
portfolio interest and is not effectively connected with the conduct of a U.S.
trade or business, then it will be subject to United States federal income and
withholding tax at a rate of 30%, unless reduced or eliminated pursuant to an
applicable tax treaty.
104
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax; provided, that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
Backup Withholding. Each holder of a note (other than an exempt holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalties of perjury, a certificate containing the holder's name,
address, correct federal taxpayer identification number and a statement that the
holder is not subject to backup withholding. Should a nonexempt noteholder fail
to provide the required certification, the trust fund will be required to backup
withhold from the amount otherwise payable to the holder, and remit the withheld
amount to the IRS as a credit against the holder's federal income tax liability.
The current backup withholding rate is 30%. This rate is scheduled to adjust in
future periods.
Possible Alternative Treatments of the Notes. If, contrary to the
opinion of tax counsel, the IRS successfully asserted that one or more of the
notes did not represent debt for federal income tax purposes, the notes might be
treated as equity interests in the trust fund. If so treated, the trust fund
might be taxable as a corporation with the adverse consequences described above
(and the taxable corporation would not be able to reduce its taxable income by
deductions for interest expense on notes recharacterized as equity).
Alternatively, and most likely in the view of tax counsel, the trust fund might
be treated as a publicly traded partnership that would not be taxable as a
corporation because it would meet certain qualifying income tests. Nonetheless,
treatment of the notes as equity interests in such a publicly traded partnership
could have adverse tax consequences to certain holders. For example, income to
certain tax-exempt entities (including pension funds) may be "unrelated business
taxable income," income to foreign holders generally would be subject to U.S.
tax and U.S. tax return filing and withholding requirements, and individual
holders might be subject to certain limitations on their ability to deduct their
share of the trust fund's expenses.
Tax Consequences to Holders of the Certificates
Treatment of the Trust Fund as a Partnership. The trust fund and the
servicer will agree, and the certificateholders will agree by their purchase of
certificates, to treat the trust fund as a partnership for purposes of federal
and state income tax, franchise tax and any other tax measured in whole or in
part by income, with the assets of the partnership being the assets held by the
trust fund, the partners of the partnership being the certificateholders, and
the notes being debt of the partnership. However, the proper characterization of
the arrangement involving the trust fund, the certificates, the notes, the trust
fund and the servicer is not clear because there is no authority on transactions
closely comparable to that contemplated herein.
105
A variety of alternative characterizations are possible. For example,
because the certificates have certain features characteristic of debt, the
certificates might be considered debt of the trust fund. Any such
characterization would not result in materially adverse tax consequences to
certificateholders as compared to the consequences from treatment of the
certificates as equity in a partnership, described below. The following
discussion assumes that the certificates represent equity interests in a
partnership.
Indexed Securities, etc. The following discussion assumes that all
payments on the certificates are denominated in U.S. dollars, none of the
certificates is an indexed security or a stripped certificate, and that a series
of securities includes a single class of certificates. If these conditions are
not satisfied with respect to any given series of certificates, additional tax
considerations with respect to such certificates will be disclosed in the
applicable prospectus supplement.
Partnership Taxation. If the trust fund is a partnership, in the
opinion of tax counsel, the trust fund will not be subject to federal income
tax. Rather, in the opinion of tax counsel, each certificateholder will be
required to separately take into account the holder's allocated share of income,
gains, losses, deductions and credits of the trust fund. The trust fund's income
will consist primarily of interest and finance charges earned on the loans
(including appropriate adjustments for market discount, OID and bond premium)
and any gain upon collection or disposition of loans. The trust fund's
deductions will consist primarily of interest accruing with respect to the
notes, servicing and other fees, and losses or deductions upon collection or
disposition of loans.
In the opinion of tax counsel, the tax items of a partnership are
allocable to the partners in accordance with the Code, Treasury regulations and
the partnership agreement (here, the trust agreement and related documents). The
trust agreement will provide, in general, that the certificateholders will be
allocated taxable income of the trust fund for each month equal to the sum of:
o the interest that accrues on the certificates in accordance with
their terms for such month, including interest accruing at the
pass-through rate for that month and interest on amounts previously
due on the certificates but not yet distributed;
o any trust fund income attributable to discount on the loans that
corresponds to any excess of the principal amount of the certificates
over their initial issue price;
o prepayment premium payable to the certificateholders for that month;
and
o any other amounts of income payable to the certificateholders for
that month.
106
This allocation will be reduced by any amortization by the trust fund
of premium on loans that corresponds to any excess of the issue price of
certificates over their principal amount. All remaining taxable income of the
trust fund will be allocated to the depositor. Based on the economic arrangement
of the parties, in the opinion of tax counsel, this approach for allocating
trust fund income should be permissible under applicable Treasury regulations,
although no assurance can be given that the IRS would not require a greater
amount of income to be allocated to certificateholders. Moreover, in the opinion
of tax counsel, even under the foregoing method of allocation,
certificateholders may be allocated income equal to the entire pass-through rate
plus the other items described above even though the trust fund might not have
sufficient cash to make current cash distributions of that amount. Thus, cash
basis holders will in effect be required to report income from the certificates
on the accrual basis and certificateholders may become liable for taxes on trust
fund income even if they have not received cash from the trust fund to pay
taxes. In addition, because tax allocations and tax reporting will be done on a
uniform basis for all certificateholders but certificateholders may be
purchasing certificates at different times and at different prices,
certificateholders may be required to report on their tax returns taxable income
that is greater or less than the amount reported to them by the trust fund.
In the opinion of tax counsel, all of the taxable income allocated to a
certificateholder that is a pension, profit sharing or employee benefit plan or
other tax-exempt entity (including an individual retirement account) may
constitute "unrelated business taxable income" generally taxable to the holder
under the Code.
In the opinion of tax counsel, an individual taxpayer's share of
expenses of the trust fund (including fees to the servicer but not interest
expense) would be miscellaneous itemized deductions. Such deductions might be
disallowed to the individual in whole or in part and might result in such holder
being taxed on an amount of income that exceeds the amount of cash actually
distributed to the holder over the life of the trust fund.
The trust fund intends to make all tax calculations relating to income
and allocations to certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each loan, the trust fund
might be required to incur additional expense but it is believed that there
would not be a material adverse effect on certificateholders.
Discount and Premium. It is believed that the loans were not issued
with OID, and, therefore, the trust fund should not have OID income. However,
the purchase price paid by the trust fund for the loans may be greater or less
than the remaining principal balance of the loans at the time of purchase. If
so, in the opinion of tax counsel, the loan will have been acquired at a premium
or discount, as the case may be. (As indicated above, the trust fund will make
this calculation on an aggregate basis, but might be required to recompute it on
a loan-by-loan basis.)
If the trust fund acquires the loans at a market discount or premium,
the trust fund will elect to include any discount in income currently as it
accrues over the life of the loans or to offset any premium against interest
income on the loans. As indicated above, a portion of market discount income or
premium deduction may be allocated to certificateholders.
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Section 708 Termination. In the opinion of tax counsel, under section
708 of the Code, the trust fund will be deemed to terminate for federal income
tax purposes if 50% or more of the capital and profits interests in the trust
fund are sold or exchanged within a 12-month period. Pursuant to final Treasury
regulations issued May 9, 1997 under section 708 of the Code, if such a
termination occurs, the trust fund would be deemed to contribute its assets to a
new partnership in exchange for interests in the new partnership. Such interests
would be deemed distributed to the partners of the original trust fund in
liquidation thereof, which would not constitute a sale or exchange.
Disposition of Certificates. Generally, in the opinion of tax counsel,
capital gain or loss will be recognized on a sale of certificates in an amount
equal to the difference between the amount realized and the seller's tax basis
in the certificates sold. A certificateholder's tax basis in a certificate will
generally equal the holder's cost increased by the holder's share of trust fund
income (includible in income) and decreased by any distributions received with
respect to the certificate. In addition, both the tax basis in the certificates
and the amount realized on a sale of a certificate would include the holder's
share of the notes and other liabilities of the trust fund. A holder acquiring
certificates at different prices may be required to maintain a single aggregate
adjusted tax basis in the certificates, and, upon sale or other disposition of
some of the certificates, allocate a portion of the aggregate tax basis to the
certificates sold (rather than maintaining a separate tax basis in each
certificate for purposes of computing gain or loss on a sale of that
certificate).
Any gain on the sale of a certificate attributable to the holder's
share of unrecognized accrued market discount on the loans would generally be
treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The trust fund does not expect to have any other assets
that would give rise to such special reporting requirements. Thus, to avoid
those special reporting requirements, the trust fund will elect to include
market discount in income as it accrues.
If a certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the certificates that exceeds the aggregate
cash distributions with respect thereto, this excess will generally give rise to
a capital loss upon the retirement of the certificates.
Allocations Between Transferors and Transferees. In general, the trust
fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the certificateholders
in proportion to the principal amount of certificates owned by them as of the
close of the last day of such month. As a result, a holder purchasing
certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the trust fund might be reallocated among the certificateholders. The trust
fund's method of allocation between transferors and transferees may be revised
to conform to a method permitted by future regulations.
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Section 754 Election. In the event that a certificateholder sells its
certificates at a profit (loss), the purchasing certificateholder will have a
higher (lower) basis in the certificates than the selling certificateholder had.
The tax basis of the trust fund's assets will not be adjusted to reflect that
higher (or lower) basis unless the trust fund were to file an election under
section 754 of the Code. In order to avoid the administrative complexities that
would be involved in keeping accurate accounting records, as well as potentially
onerous information reporting requirements, the trust fund will not make such
election. As a result, certificateholders might be allocated a greater or lesser
amount of trust fund income than would be appropriate based on their own
purchase price for certificates.
Administrative Matters. The trustee is required to keep or have kept
complete and accurate books of the trust fund. Books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the trust fund will be the calendar year. The trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
trust fund and will report each certificateholder's allocable share of items of
trust fund income and expense to holders and the IRS on Schedule K-1. The trust
fund will provide the Schedule K-l information to nominees that fail to provide
the trust fund with the information statement described below and such nominees
will be required to forward such information to the beneficial owners of the
certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the trust fund or be subject to penalties unless
the holder notifies the IRS of all such inconsistencies.
Under section 6031 of the Code, any person that holds certificates as a
nominee at any time during a calendar year is required to furnish the trust fund
with a statement containing certain information on the nominee, the beneficial
owners and the certificates so held. Such information includes:
o the name, address and taxpayer identification number of the nominee;
and
o as to each beneficial owner (a) the name, address and identification
number of such person, (b) whether such person is a U.S. Person, a
tax-exempt entity or a foreign government, an international
organization or any wholly owned agency or instrumentality of either
of the foregoing, and (c) certain information on certificates that
were held, bought or sold on behalf of such person throughout the
year.
In addition, brokers and financial institutions that hold certificates
through a nominee are required to furnish directly to the trust fund information
as to themselves and their ownership of certificates. A clearing agency
registered under section 17A of the Securities Exchange Act of 1934 is not
required to furnish any such information statement to the trust fund. The
information referred to above for any calendar year must be furnished to the
trust fund on or before the following January 31. Nominees, brokers and
financial institutions that fail to provide the trust fund with the information
described above may be subject to penalties.
The depositor will be designated as the tax matters partner in the
related trust agreement and, as such, will be responsible for representing the
certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the trust fund by the appropriate taxing authorities
could result in an adjustment of the returns of the certificateholders, and,
under certain circumstances, a certificateholder may be precluded from
separately litigating a proposed adjustment to the items of the trust fund. An
adjustment could also result in an audit of a certificateholder's returns and
adjustments of items not related to the income and losses of the trust fund.
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Tax Consequences to Foreign Certificateholders. It is not clear whether
the trust fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to non-U.S.
Persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the trust fund would be engaged in a trade or business in the United States
for such purposes, the trust fund will withhold as if it were so engaged in
order to protect the trust fund from possible adverse consequences of a failure
to withhold. The trust fund expects to withhold on the portion of its taxable
income that is allocable to foreign certificateholders pursuant to section 1446
of the Code, as if such income were effectively connected to a U.S. trade or
business, at a rate of 35% for foreign holders that are taxable as corporations
and 38.6% (subject to adjustment in future periods) for all other foreign
holders. Subsequent adoption of Treasury regulations or the issuance of other
administrative pronouncements may require the trust fund to change its
withholding procedures. In determining a holder's withholding status, the trust
fund may rely on IRS Form W-8BEN or a similar form, IRS Form W-9 or the holder's
certification of nonforeign status signed under penalties of perjury.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the branch
profits tax) on its share of the trust fund's income. Each foreign holder must
obtain a taxpayer identification number from the IRS and submit that number to
the trust fund on Form W-8BEN in order to assure appropriate crediting of the
taxes withheld. A foreign holder generally would be entitled to file with the
IRS a claim for refund with respect to taxes withheld by the trust fund taking
the position that no taxes were due because the trust fund was not engaged in a
U.S. trade or business. However, interest payments made (or accrued) to a
certificateholder who is a foreign person generally will be considered
guaranteed payments to the extent such payments are determined without regard to
the income of the trust fund. If these interest payments are properly
characterized as guaranteed payments, then the interest will not be considered
"portfolio interest." As a result, certificateholders will be subject to United
States federal income tax and withholding tax at a rate of 30%, unless reduced
or eliminated pursuant to an applicable treaty. In such case, a foreign holder
would only be entitled to claim a refund for that portion of the taxes in excess
of the taxes that should be withheld with respect to the guaranteed payments.
Backup Withholding. Distributions made on the certificates and proceeds
from the sale of the certificates will be subject to "backup" withholding tax
if, in general, the certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code. The current backup withholding rate is 30%.
This rate is scheduled to adjust in future periods.
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Reportable Transactions
As currently written, recent Temporary and Proposed Treasury
Regulations (the "New Regulations") meant to require the reporting of abusive
tax shelters ("Reportable Transactions") could be read to cover transactions
generally not regarded as tax shelters, including certain securitizations of
financial assets. Under the New Regulations, transactions may be characterized
as Reportable Transactions for a variety of reasons, one or more of which may
apply to an investment in the Securities. You should be aware that Bear Stearns
and others may be required to disclose information with respect to your
securities. Investors should consult their own tax advisers to determine their
tax return disclosure obligations, if any, with respect to their investment in
the Securities, including any requirement to file IRS Form 8886 (Reportable
Transaction Disclosure Statement). The New Regulations regarding tax return
disclosure generally are effective for transactions occurring on or after
January 1, 2003.
State Tax Considerations
In addition to the federal income tax considerations described in this
prospectus under "Material Federal Income Tax Considerations," potential
investors should consider the state and local income tax consequences of the
acquisition, ownership, and disposition of the securities. State and local
income tax law may differ substantially from the corresponding federal law, and
this discussion does not purport to describe any aspect of the income tax laws
of any state or locality. Therefore, potential investors should consult their
own tax advisors with respect to the various state and local tax consequences of
an investment in the securities.
FASIT Securities
General. The FASIT provisions of the Code were enacted by the Small
Business Job Protection Act of 1996 and create a new elective statutory vehicle
for the issuance of mortgage-backed and asset-backed securities effective on
September 1, 1997. On February 4, 2000, the IRS and Treasury issued proposed
Treasury regulations for FASITs. The regulations generally would not be
effective until final regulations are filed with the federal register. However,
it appears that certain anti-abuse rules would apply as of February 4, 2000.
Investors also should note that the FASIT discussions contained herein
constitutes only a summary of the federal income tax consequences to holders of
FASIT securities. With respect to each series of FASIT securities, the related
prospectus supplement will provide a detailed discussion regarding the federal
income tax consequences associated with the particular transaction.
FASIT securities will be classified as either FASIT "regular
securities," which generally will be treated as debt for federal income tax
purposes, or FASIT "ownership securities," which generally are not treated as
debt for such purposes, but rather as representing rights and responsibilities
with respect to the taxable income or loss of the related series. The prospectus
supplement for each series of securities will indicate whether one or more FASIT
elections will be made for the series, and which securities of the series will
be designated as regular securities, and which, if any, will be designated as
ownership securities.
111
Qualification as a FASIT. The trust fund underlying a series (or one or
more designated pools of assets held in the trust fund) will qualify under the
Code as a FASIT in which the FASIT regular securities and the FASIT ownership
securities will constitute the "regular interests" and the "ownership
interests," respectively, if
o a FASIT election is in effect,
o certain tests concerning the composition of the FASIT's assets and
the nature of the holders' interests in the FASIT are met on a
continuing basis, and
o the trust fund is not a regulated investment company or RIC as
defined in section 851(a) of the Code.
However, the qualification as a FASIT of any trust fund for which a
FASIT election is made depends on the trust's ability to satisfy the
requirements of the FASIT provisions on an ongoing basis, including, without
limitation, the requirements of any final Treasury regulations that may be
promulgated in the future under the FASIT provisions or as a result of any
change in applicable law. Thus, no assurances can be made regarding the
qualification as a FASIT of any trust for which a FASIT election is made at any
particular time after the issuance of securities by the trust.
Asset Composition. In order for a trust fund (on one or more designated
pools of assets held by a trust fund) to be eligible for FASIT status,
substantially all of the assets of the trust fund (or the designated pool) must
consist of "permitted assets" as of the close of the third month beginning after
the closing date and at all times thereafter. Permitted assets include
o cash or cash equivalents,
o debt instruments with fixed terms that would qualify as REMIC regular
interests if issued by a REMIC (generally, instruments that provide
for interest at a fixed rate, a qualifying variable rate, or a
qualifying interest-only type rate,
o foreclosure property,
o certain hedging instruments (generally, interest and currency rate
swaps and credit enhancement contracts) that are reasonably required
to guarantee or hedge against the FASIT's risks associated with being
the obligor on FASIT interests,
o contract rights to acquire qualifying debt instruments or qualifying
hedging instruments,
o FASIT regular interests, and
112
o REMIC regular interests.
o Permitted assets do not include any debt instruments issued by the
holder of the FASIT's ownership interest or by any person related to
the holder.
Interests in a FASIT. In addition to the foregoing asset qualification
requirements, the interests in a FASIT must meet certain requirements. All of
the interests in a FASIT must belong to either
o one or more classes of regular interests or
o a single class of ownership interest that is held by a fully taxable
domestic corporation. In the case of series that include FASIT
ownership securities, the ownership interest will be represented by
the FASIT ownership securities.
A FASIT interest generally qualifies as a regular interest if
o it is designated as a regular interest,
o it has a stated maturity no greater than thirty years,
o it entitles its holder to a specified principal amount,
o the issue price of the interest does not exceed 125% of its stated
principal amount,
o the yield to maturity of the interest is less than the applicable
Treasury rate published by the IRS plus 5%, and
o if it pays interest, such interest is payable either at a fixed rate
with respect to the principal amount of the regular interest or at a
permissible variable rate with respect to the principal amount.
Permissible variable rates for FASIT regular interests are the same as those for
REMIC regular interest (i.e., certain qualified floating rates and weighted
average rates). See "Material Federal Income Tax Considerations--Taxation of
Debt Securities--Variable Rate Debt Securities" in this prospectus.
If a FASIT security fails to meet one or more of the requirements set
out in the third, fourth or fifth bullet in the preceding paragraph, but
otherwise meets the above requirements, it may still qualify as a type of
regular interest known as a "high-yield interest." In addition, if a FASIT
security fails to meet the requirements of the final bullet in the preceding
paragraph, but the interest payable on the security consists of a specified
portion of the interest payments on permitted assets and that portion does not
vary over the life of the security, the security also will qualify as a
high-yield interest. A high-yield interest may be held only by domestic
corporations that are fully subject to corporate income tax, other FASITs and
dealers in securities who acquire such interests as inventory, rather than for
investment. In addition, holders of high-yield interests are subject to
limitations on offset of income derived from such interest. See "--Tax Treatment
of FASIT Regular Securities" and "--Treatment of High-Yield Interests" below.
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Anti-Abuse Rule. Under proposed Treasury regulations, the IRS
Commissioner may make appropriate adjustments with regard to the FASIT and any
arrangement or transaction involving the FASIT if a principal purpose of forming
or using the FASIT is to achieve results inconsistent with the intent of the
FASIT provisions and the FASIT regulations. This determination would be based on
all of the facts and circumstances, including a comparison of the purported
business purpose for a transaction and the claimed tax benefits resulting from
the transaction.
Consequences of the Failure of the FASIT Trust to Qualify as a FASIT.
If a FASIT trust fails to comply with one or more of the Code's ongoing
requirements for FASIT status during any taxable year, proposed Treasury
regulations provide that its FASIT status would be lost for that year and the
FASIT trust would be unable to elect FASIT status without the Commissioner's
approval. If FASIT status is lost, under proposed Treasury regulations the
entity classification of the former FASIT would be determined under general
federal income tax principles. The holder of the FASIT ownership security would
be treated as exchanging the assets of the former FASIT for an amount equal to
their value and gain recognized would be treated as gain from a prohibited
transaction that is subject to the 100% tax, without exception. Loss, if any,
would be disallowed. In addition, the holder of the FASIT ownership security
must recognize cancellation of indebtedness income, on a regular interest by
regular interest basis, in an amount equal to the adjusted issue price of each
FASIT regular security outstanding immediately before the loss of FASIT status
over its fair market value. If the holder of the FASIT ownership security has a
continuing economic interest in the former FASIT, the characterization of this
interest is determined under general federal income tax principles. Holders of
FASIT regular securities are treated as exchanging their securities for
interests in the new entity classification of the former FASIT, which
classification is determined under general federal income tax principles. Gain
is recognized to the extent the new interest either does not qualify as debt or
differs either in kind or extent. The basis of the interest in the new entity
classification of the former FASIT equals the basis in the FASIT regular
security increased by any gain recognized on the exchange.
Tax Treatment of FASIT Regular Securities. Payments received by holders
of FASIT regular securities generally should be accorded the same tax treatment
under the Code as payments received on other taxable corporate debt instruments
and on REMIC regular securities. As in the case of holders of REMIC regular
securities, holders of FASIT regular securities must report income from such
securities under an accrual method of accounting, even if they otherwise would
have used the cash receipts and disbursements method. Except in the case of
FASIT regular securities issued with original issue discount or acquired with
market discount or premium, interest paid or accrued on a FASIT regular security
generally will be treated as ordinary income to the holder and a principal
payment on the security will be treated as a return of capital to the extent
that the holder's basis is allocable to that payment. Holders of FASIT regular
securities issued with original issue discount or acquired with market discount
or premium generally will be required to treat interest and principal payments
on the securities in the same manner described for REMIC regular securities. See
"Material Federal Income Tax Considerations--Taxation of Debt Securities,"
"--Market Discount," and "--Premium" in this prospectus. High-yield interests
may be held only by fully taxable domestic corporations, other FASITs, and
certain securities dealers. Holders of high-yield interests are subject to
limitations on their ability to use current losses or net operating loss
carryforwards or carrybacks to offset any income derived from those securities.
114
If a FASIT regular security is sold or exchanged, the holder generally
will recognize gain or loss upon the sale in the manner described above for
securities other than REMIC regular interest securities. See "Material Federal
Income Tax Considerations--Sale or Exchange" in this prospectus. In addition, if
a FASIT regular security becomes wholly or partially worthless as a result of
default and delinquencies of the underlying assets, the holder of the security
should be allowed to deduct the loss sustained (or alternatively be able to
report a lesser amount of income). See "Material Federal Income Tax
Considerations--Taxation of Debt Securities--Effects of Default and
Delinquencies" in this prospectus.
FASIT regular securities held by a real estate investment trust or REIT
will qualify as "real estate assets" within the meaning of section 856(c) (4)(A)
of the Code, and interest on such securities will be considered "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of section 856(c)(3)(B) of the Code to the same
extent that REMIC securities would be so considered. FASIT regular securities
held by a thrift institution taxed as a "domestic building and loan association"
will represent qualifying assets for purposes of the qualification requirements
set forth in section 7701(a)(19) of the Code to the same extent that REMIC
securities would be so considered. See "Material Federal Income Tax
Considerations--Taxation of Debt Securities--Status as Real Property Loans" in
this prospectus. In addition, FASIT regular securities held by a financial
institution to which section 585 of the Code applies will be treated as
evidences of indebtedness for purposes of section 582(c)(1) of the Code. FASIT
securities will not qualify as "government securities" for either REIT - or RIC
- - qualification purposes.
Treatment of High-Yield Interests. High-yield interests are subject to
special rules regarding the eligibility of holders of such interests, and the
ability of such holders to offset income derived from their FASIT security with
losses. High-yield interests may be held only by eligible corporations other
FASITs, and dealers in securities who acquire such interests as inventory. If a
securities dealer (other than an eligible corporation) initially acquires a
high-yield interest as inventory, but later begins to hold it for investment,
the dealer will be subject to an excise tax equal to the income from the
high-yield interest multiplied by the highest corporate income tax rate. In
addition, transfers of high-yield interests to disqualified holders will be
disregarded for federal income tax purposes, and the transferor still will be
treated as the holder of the high-yield interest.
The holder of a high-yield interest may not use non-FASIT current
losses or net operating loss carryforwards or carrybacks to offset any income
derived from the high-yield interest, for either regular federal income tax
purposes or for alternative minimum tax purposes. In addition, the FASIT
provisions contain an anti-abuse rule that imposes corporate income tax on
income derived from a FASIT regular security that is held by a pass-through
entity (other than another FASIT) that issues debt or equity securities backed
by the FASIT regular security and that have the same features as high-yield
interests.
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Tax Treatment of FASIT Ownership Securities. A FASIT ownership security
represents the residual equity interest in a FASIT. As such, the holder of a
FASIT ownership security determines its taxable income by taking into account
all assets, liabilities and items of income, gain, deduction, loss and credit of
a FASIT. In general, the character of the income to the holder of a FASIT
ownership interest will be the same as the character of such income of the
FASIT, except that any tax-exempt interest income taken into account by the
holder of a FASIT ownership interest is treated as ordinary income. In
determining that taxable income, the holder of a FASIT ownership security must
determine the amount of interest, original issue discount, market discount and
premium recognized with respect to the FASIT's assets and the FASIT regular
securities issued by the FASIT according to a constant yield methodology and
under an accrual method of accounting. In addition, holders of FASIT ownership
securities are subject to the same limitations on their ability to use losses to
offset income from their FASIT security as are the holders of high-yield
interests. See "FASIT Securities--Treatment of High-Yield Interests."
Rules similar to the wash sale rules applicable to REMIC residual
securities also will apply to FASIT ownership securities. Accordingly, losses on
dispositions of a FASIT ownership security generally will be disallowed where,
within six months before or after the disposition, the seller of such security
acquires any other FASIT ownership security or, in the case of a FASIT holding
mortgage assets, any interest in a taxable mortgage pool described in section
7701 of the Code that is economically comparable to a FASIT Ownership Security.
In addition, if any security that is sold or contributed to a FASIT by the
holder of the related FASIT ownership security was required to be
marked-to-market under section 475 of the Code by such holder, then section 475
will continue to apply to such securities, except that the amount realized under
the mark-to-market rules will be a greater of the securities' value under
present law or the securities' value after applying special valuation rules
contained in the FASIT provisions. Those special valuation rules generally
require that the value of debt instruments that are not traded on an established
securities market be determined by calculating the present value of the
reasonably expected payments under the instrument using a discount rate of 120%
of the applicable federal rate, compounded semiannually.
The holder of a FASIT ownership security will be subject to a tax equal
to 100% of the net income derived by the FASIT from any "prohibited
transactions." Prohibited transactions include (i) the receipt of income derived
from assets that are not permitted assets, (ii) certain dispositions of
permitted assets, (iii) the receipt of any income derived from any loan
originated by a FASIT and (iv) in certain cases, the receipt of income
representing a servicing fee or other compensation. Any series for which a FASIT
election is made generally will be structured in order to avoid application of
the prohibited transaction tax.
Backup Withholding, Reporting and Tax Administration. Holders of FASIT
securities will be subject to backup withholding to the same extent holders of
REMIC securities would be subject. See "Certain Federal Income Tax
Considerations--Miscellaneous Tax Aspects--Backup Withholding." For purposes of
reporting and tax administration, holders of record of FASIT securities
generally will be treated in the same manner as holders of REMIC securities.
116
Under proposed Treasury regulations, if a non-U.S. Person holds (either
directly or through a vehicle which itself is not subject to U.S. federal income
tax, such as a partnership or a trust) a FASIT regular security and a "conduit
debtor" pays or accrues interest on a debt instrument held by such FASIT, any
interest received or accrued by the non-U.S. Person FASIT regular security
holder is treated as received or accrued from the conduit debtor. The proposed
Treasury regulations state that a debtor is a conduit debtor if the debtor is a
U.S. Person or the United States branch of a non-U.S. Person and the non-U.S.
Person FASIT regular security holder is (1) a "10 percent shareholder" of the
debtor, (2) a "controlled foreign corporation" and the debtor is a related
person with respect to the controlled foreign corporation or (3) related to the
debtor. As set forth above, the proposed Treasury regulations would not be
effective until final regulations are filed with the federal register.
Due to the complexity of the federal income tax rules applicable to
holders and the considerable uncertainty that exists with respect to many
aspects of those rules, potential investors should consult their own tax
advisors regarding the tax treatment of the acquisition, ownership, and
disposition of the securities.
ERISA Considerations
The following describes certain considerations under the Employee
Retirement Income Security Act of 1974, as amended and the Code, which apply
only to securities of a series that are not divided into subclasses. If
securities are divided into subclasses, the related prospectus supplement will
contain information concerning considerations relating to ERISA and the Code
that are applicable to the related subclasses.
ERISA and section 4975 of the Code impose requirements on employee
benefit plans - and on certain other retirement plans and arrangements,
including individual retirement accounts and annuities, Keogh plans and
collective investment funds and separate accounts in which plans, accounts or
arrangements are invested - and on persons who are fiduciaries with respect to
these types of plans and arrangements. In this prospectus we refer to these
types of plans and arrangements as "Plans." Generally, ERISA applies to
investments made by Plans. Among other things, ERISA requires that the assets of
Plans be held in trust and that the trustee, or other duly authorized fiduciary,
have exclusive authority and discretion to manage and control the assets of such
Plans. ERISA also imposes certain duties on persons who are fiduciaries of
Plans, such as the duty to invest prudently, to diversify investments unless it
is prudent not to do so, and to invest in accordance with the documents
governing the Plan. Under ERISA, any person who exercises any authority or
control respecting the management or disposition of the assets of a Plan, or who
renders investment advice for a fee, is considered to be a fiduciary of such
Plan (subject to certain exceptions not here relevant). Certain employee benefit
plans, such as governmental plans (as defined in section 3(32) of ERISA) and, if
no election has been made under section 410(d) of the Code, church plans (as
defined in section 3(33) of ERISA), are not subject to ERISA's requirements.
Accordingly, assets of such plans may be invested in securities without regard
to the ERISA considerations described above and below, subject to the provisions
of applicable federal or state law. Any such plan that is qualified and exempt
from taxation under sections 401(a) and 501(a) of the Code, however, is subject
to the prohibited transaction rules set forth in section 503 of the Code.
117
The United States Department of Labor (DOL) has issued final
regulations under section 401(c) of ERISA describing a safe harbor for insurers
that issued certain nonguaranteed policies supported by their general accounts
to Plans, and under which an insurer would not be considered an ERISA fiduciary
with respect to its general account by virtue of a Plan's investment in such a
policy. In general, to meet the safe harbor, an insurer must
o disclose certain specified information to investing Plan fiduciaries
initially and on an annual basis;
o allow Plans to terminate or discontinue a policy on 90 days' notice
to the insurer, and to elect, without penalty, either a lump-sum
payment or annual installment payments over a ten-year period, with
interest; and
o give Plans written notice of "insurer-initiated amendments" 60 days
before the amendments take effect.
In addition to the imposition of general fiduciary standards of
investment prudence and diversification, ERISA and section 4975 of the Code
prohibit a broad range of transactions involving Plan assets and persons having
certain specified relationships to a Plan ("parties in interest"), and impose
additional prohibitions where parties in interest are fiduciaries with respect
to a Plan. Certain parties in interest that participate in a prohibited
transaction may be subject to excise taxes imposed pursuant to section 4975 of
the Code, or penalties imposed pursuant to section 502(i) of ERISA, unless a
statutory, regulatory or administrative exemption is available.
The DOL has issued plan asset regulations defining what constitutes the
assets of a Plan (Department of Labor Reg. Section 2510.3-101). Under these
regulations, the underlying assets and properties of corporations, partnerships,
trusts and certain other entities in which a Plan makes an "equity" investment
could be deemed for purposes of ERISA to be assets of the investing Plan in
certain circumstances.
Under the plan asset regulations, the term "equity" interest is defined
as any interest in an entity other than an instrument that is treated as
indebtedness under "applicable local law" and which has no "substantial equity
features." If the trust fund issues notes that are not treated as equity
interests in the trust fund for purposes of the plan asset regulations, a Plan's
investment in such notes would not cause the assets of the trust to be deemed
Plan assets. However, the seller, the servicer, the backup servicer, the
indenture trustee, the owner trustee, the underwriter and the depositor may be
the sponsor of or investment advisor with respect to one or more Plans. Because
such parties may receive certain benefits in connection with the sale of the
notes, the purchase of notes using Plan assets over which any of these parties
(or their affiliates) has investment authority might be deemed to be a violation
of the prohibited transaction rules of ERISA and the Code for which no exemption
may be available. Accordingly, a prospective purchaser should consult with
counsel before purchasing a note using the assets of any Plan if the seller, the
servicer, the backup servicer, the indenture trustee, the owner trustee, the
underwriter, the depositor or any of their affiliates
118
o has investment or administrative discretion with respect to such Plan
assets;
o has authority or responsibility to give, or regularly gives,
investment advice with respect to such Plan assets for a fee and
pursuant to an agreement or understanding that the advice will serve
as a primary basis for investment decisions with respect to the Plan
assets and will be based on the particular investment needs for the
Plan; or
o is an employer maintaining or contributing to such Plan.
In addition, the trust fund, any underwriter, the trustee or their
affiliates might be considered or might become "parties in interest" with
respect to a Plan. Also, any holder of certificates of the trust fund, because
of its activities or the activities of its respective affiliates, may be deemed
to be a "party in interest" with respect to certain Plans, including but not
limited to Plans sponsored by the holder. In either case, whether nor not the
assets of the trust are considered to be Plan assets, the acquisition or holding
of notes by or on behalf of a Plan could give rise to a prohibited transaction
within the meaning of ERISA and the Code, unless it is subject to one or more
exemptions such as:
o Prohibited Transaction Class Exemption (PTCE) 84-14, which exempts
certain transactions effected on behalf of a Plan by a "qualified
professional asset manager;"
o PTCE 90-1, which exempts certain transactions involving insurance
company pooled separate accounts;
o PTCE 91-38, which exempts certain transactions involving bank
collective investment funds;
o PTCE 95-60, which exempts certain transactions involving insurance
company general accounts; or
o PTCE 96-23, which exempts certain transactions effected on behalf of
a Plan by certain "in-house asset managers."
There can be no assurance that any of these class exemptions will apply with
respect to any particular Plan's investment in notes, or, even if it did apply,
that any exemption would apply to all prohibited transactions that may occur in
connection with such an investment. Unless a different requirement is imposed in
the prospectus supplement, each prospective purchaser or transferee of a note
that is a Plan or a person acting on behalf or investing the assets of a Plan
shall be required to represent (or, with respect to any transfer of a beneficial
interest in a global note, shall be deemed to represent) to the indenture
trustee and the note registrar that the relevant conditions for exemptive relief
under at least one of the foregoing exemptions have been satisfied.
119
The plan asset regulations provide that, generally, the assets of an
entity in which a Plan invests will not be deemed to be assets of the Plan for
purposes of ERISA if the equity interest acquired by the investing Plan is a
publicly-offered security, or if equity participation by benefit plan investors
is not significant. In general, a publicly-offered security, as defined in the
plan asset regulations, is a security that is widely held, freely transferable
and registered under the Securities Exchange Act of 1934, as amended. Equity
participation in an entity by benefit plan investors is not significant if,
after the most recent acquisition of an equity interest in the entity, less than
25% of the value of each class of equity interest in the entity is held by
"benefit plan investors," which include benefit plans described in ERISA or
under section 4975 of the Code, whether or not they are subject to Title I of
ERISA, as well as entities whose underlying assets include assets of a Plan by
reason of a Plan's investment in the entity.
If no exception under the plan asset regulations applies and if a Plan
(or a person investing Plan assets, such as an insurance company general
account) acquires an equity interest in the trust, then the assets of the trust
would be considered to be assets of the Plan. Because the loans held by the
trust may be deemed assets of each Plan that purchases an equity interest, an
investment by a Plan in an equity interest issued by the trust might be a
prohibited transaction under ERISA and subject to an excise tax under section
4975 of the Code, and may cause transactions undertaken in the course of
operating the trust to constitute prohibited transactions, unless a statutory,
regulatory or administrative exemption applies.
The DOL issued to Bear, Stearns & Co. Inc. ("Bear, Stearns") an
individual underwriter exemption (Prohibited Transaction Exemption 90-30, 55
Fed. Reg. 21461 (1990)), which is set forth in Prohibited Transaction Exemption
2002-41, 67 Fed. Reg. 54487 (2002). It exempts from the application of certain
of the prohibited transaction rules transactions relating to the acquisition,
sale and holding by Plans of certain asset-backed securities, including
certificates issued by entities, including trusts, that hold certain types of
receivables or obligations and with respect to which Bear, Stearns or certain of
its affiliates, is the underwriter, or the manager or co-manager of an
underwriting syndicate.
The underwriter exemption sets forth the following general conditions
which must be satisfied before a transaction involving the acquisition, sale and
holding of the securities or a transaction in connection with the servicing,
operation and management of the trust fund may be eligible for exemptive relief
thereunder:
o The acquisition of the securities by a Plan is on terms (including
the price for the securities) that are at least as favorable to the
investing Plan as they would be in an arm's-length transaction with
an unrelated party.
o The rights and interests evidenced by the securities acquired by the
Plan are not subordinated to the rights and interests evidenced by
other securities of the same trust fund, other than in the case of a
"designated transaction" (as defined below).
o The securities acquired by the Plan have received a rating at the
time of such acquisition that is in one of the three (or in the case
of a designated transaction, four) highest generic rating categories
from any of Fitch Ratings, Moody's Investors Service, Inc. and
Standard & Poor's, a division of the McGraw-Hill Companies, Inc.
o The trustee is not an affiliate of the depositor, the servicer, any
borrower whose obligations under one or more mortgage loans
constitute more than 5% of the aggregate unamortized principal
balance of the assets in the trust, the counterparty in a permitted
notional principal transaction, or any of their respective affiliates
(together with the trustee and the underwriters, the "restricted
group").
120
o The sum of all payments made to and retained by the underwriters in
connection with the distribution of the securities represents not
more than reasonable compensation for underwriting or placing such
securities; the sum of all payments made to and retained by the
depositor pursuant to the sale of the mortgage loans to the trust
represents not more than the fair market value of such mortgage
loans; and the sum of all payments made to and retained by the
servicers represent not more than reasonable compensation for the
servicers' services under the pooling and servicing agreements and
reimbursement of the servicers' reasonable expenses in connection
therewith.
o The Plan investing in the securities is an "accredited investor" as
defined in Rule 501(a)(1) of Regulation D of the Securities and
Exchange Commission under the Securities Act of 1933, as amended.
For purposes of the underwriter exemption, a "designated transaction"
means a transaction in which the assets underlying the securities consist of
single-family residential, multi-family residential, home equity, manufactured
housing and/or commercial mortgage obligations that are fully secured by
single-family residential, multi-family residential or commercial real property
or leasehold interests in the foregoing.
Moreover, the underwriter exemption provides relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when a
fiduciary causes a Plan to acquire securities in a trust containing receivables
on which such person (or its affiliate) is an obligor; provided, that among
other requirements:
o the person (or its affiliate) is not an obligor with respect to more
than 5% of the fair market value of the obligations or receivables
contained in the trust;
o the Plan is not a plan with respect to which any member of the
restricted group is the "plan sponsor" (as defined in section
3(16)(B) of ERISA);
o in the case of an acquisition in connection with the initial issuance
of securities, at least 50% of each class of securities in which
Plans have invested is acquired by persons independent of the
restricted group and at least 50% of the aggregate interest in the
trust fund is acquired by persons independent of the restricted
group;
o a Plan's investment in securities of any class does not exceed 25% of
all of the securities of that class outstanding at the time of the
acquisition; and
121
o immediately after the acquisition, no more than 25% of the assets of
any Plan with respect to which such person has discretionary
authority or renders investment advice are invested in securities
representing an interest in one or more trusts containing assets sold
or serviced by the same entity.
The underwriter exemption also provides exemptive relief to certain
mortgage-backed and asset-backed securities transactions that utilize
pre-funding accounts and that otherwise satisfy the requirements of the
underwriter exemption. Mortgage loans or other secured receivables supporting
payments to securityholders, and having a value equal to no more than 25% of the
total principal amount of the securities being offered by the trust, may be
transferred to the trust within a 90-day or three-month funding period following
the closing date instead of being required to be either identified or
transferred on or before the closing date. The relief is available when the
following conditions are met:
o The funding limit (i.e., the ratio of the amount allocated to the
pre-funding account to the total principal amount of the securities
being offered) must not exceed 25%.
o All the additional obligations transferred after the closing date
must meet the same terms and conditions for eligibility as the
original obligations used to create the trust, which terms and
conditions have been approved by a rating agency; provided, that the
terms and conditions for determining the eligibility of an obligation
may be changed if such changes receive prior approval either by a
majority vote of the outstanding securityholders or by a rating
agency.
o The transfer of additional obligations to the trust during the
funding period must not result in the securities to be covered by the
underwriter exemption receiving a lower credit rating from a rating
agency upon termination of the funding period than the rating that
was obtained at the time of the initial issuance of the securities by
the trust.
o Solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate for all of the obligations in the
trust at the end of the funding period must not be more than 100
basis points lower than the average interest rate for the obligations
transferred to the trust on the closing date.
o In order to insure that the characteristics of the additional
obligations are substantially similar to the original obligations
which were transferred to the trust fund:
1. the characteristics of the additional obligations must be monitored
by an insurer or other credit support provider that is independent of
the depositor; or
2. an independent accountant retained by the depositor must provide the
depositor with a letter (with copies provided to each rating agency
rating the securities, the related underwriter and the related
trustee) stating whether or not the characteristics of the additional
obligations conform to the characteristics described in the related
prospectus or prospectus supplement and/or pooling and servicing
agreement. In preparing the letter, the independent accountant must
use the same type of procedures as were applicable to the obligations
transferred to the trust as of the closing date.
122
o The period of pre-funding must end no later than three months or 90
days after the closing date or earlier in certain circumstances if
the pre-funding account falls below the minimum level specified in
the pooling and servicing agreement or an event of default occurs.
o Amounts transferred to any pre-funding account and/or capitalized
interest account used in connection with the pre-funding may be
invested only in certain permitted investments.
o The related prospectus or prospectus supplement must describe:
1. any pre-funding account and/or capitalized interest account used in
connection with a pre-funding account;
2. the duration of the period of pre-funding;
3. the percentage and/or dollar amount of the funding limit for the
trust; and
4. that the amounts remaining in the pre-funding account at the end of
the funding period will be remitted to securityholders as repayments
of principal.
o The related pooling and servicing agreement must describe the
permitted investments for the pre-funding account and/or capitalized
interest account and, if not disclosed in the related prospectus or
prospectus supplement, the terms and conditions for eligibility of
additional obligations.
The underwriter exemption also permits Plans to purchase securities,
including subordinated securities underwritten by Bear, Stearns, rated in any of
the four highest ratings categories (provided that all other requirements of the
underwriter exemption are met).
In general, neither PTCE 83-1, which exempts certain transactions
involving Plan investments in mortgage trusts, nor the underwriter exemption
applies to a trust which contains unsecured obligations. However, under the
underwriter exemption, residential and home equity loan receivables issued in
designated transactions may be less than fully secured if:
o the rights and interests evidenced by the securities issued in the
designated transaction are not subordinated to the rights and
interests evidenced by other securities of the same trust fund,
o the securities have received a rating at the time of acquisition that
is in one of the two highest generic rating categories from a rating
agency, and
o the receivables are secured by collateral whose fair market value on
the closing date of the designated transaction is at least 80% of the
sum of the outstanding principal balance due under the receivable and
the outstanding principal balance of any other receivable of higher
priority which is secured by the same collateral.
123
Any Plan fiduciary that proposes to cause a Plan to purchase securities should
consult with counsel concerning the impact of ERISA and the Code, the
applicability of PTCE 83-1, the underwriter exemption, or any other exemption
and the potential consequences in their specific circumstances, prior to making
an investment. Moreover, each Plan fiduciary should determine whether, under the
general fiduciary standards of investment prudence and diversification, an
investment in the securities is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
Legal Matters
The legality of the securities of each series, including the material
federal income tax consequences with respect to the securities, will be passed
upon for the depositor by Sidley Austin Brown & Wood LLP, New York, New York,
Stroock & Stroock & Lavan LLP, New York, New York, Thacher Proffitt & Wood LLP,
New York, New York or other counsel designated in the prospectus supplement.
Financial Information
A new trust fund will be formed for each series of securities. No trust
fund will engage in any business activities or have any assets or obligations
prior to the issuance of the related series of securities. Accordingly, no
financial statements with respect to any trust fund will be included in this
prospectus or in the related prospectus supplement.
Available Information
The depositor has filed with the SEC a registration statement under the
Securities Act of 1933, as amended, with respect to the securities. This
prospectus, which forms a part of the registration statement, and the prospectus
supplement relating to each series of securities contain summaries of the
material terms of the documents referred to herein and therein, but do not
contain all of the information set forth in the registration statement pursuant
to the Rules and Regulations of the SEC. For further information, reference is
made to the registration statement and its exhibits. The registration statement
and exhibits can be inspected and copied at prescribed rates at the public
reference facilities maintained by the SEC at its Public Reference Section, 450
Fifth Street, N.W., Washington, D.C. 20549, and at its Regional Offices located
as follows: Midwest Regional Office, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511; and Northeast Regional Office, 7 World Trade
Center, Suite 1300, New York, New York 10048. In addition, the SEC maintains a
Web site at http://www.sec.gov containing reports, proxy and information
statements and other information regarding registrants, including the depositor,
that file electronically with the SEC.
124
Incorporation of Certain Information by Reference
This prospectus incorporates by reference all documents and reports
filed by the depositor, Bear Stearns Asset Backed Securities, Inc., with respect
to a trust fund pursuant to Section 13(a), 14 or 15(d) of the Securities
Exchange Act of 1934, as amended, prior to the termination of the offering of
the related securities. Upon request by any person to whom this prospectus is
delivered in connection with the offering of one or more classes securities, the
depositor will provide or cause to be provided without charge a copy of any of
the documents and/or reports incorporated herein by reference, in each case to
the extent the documents or reports relate to those classes of securities, other
than the exhibits to the documents (unless the exhibits are specifically
incorporated by reference in such documents). Requests to the depositor should
be directed in writing to: Bear Stearns Asset Backed Securities, Inc., 383
Madison Avenue, New York, New York 10179, telephone number (212) 272-2000. The
depositor has determined that its financial statements are not material to the
offering of any securities.
Investors may read and copy the documents and/or reports incorporated
herein by reference at the Public Reference Room of the Securities and Exchange
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Investors may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. In addition, the SEC maintains a website at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding issuers, including each trust fund, that file
electronically with the SEC.
Ratings
It is a condition to the issuance of the securities of each series
offered by this prospectus and the accompanying prospectus supplement that they
shall have been rated in one of the four highest rating categories by the
nationally recognized statistical rating agency or agencies specified in the
prospectus supplement.
Each such rating will be based on, among other things, the adequacy of
the value of the trust fund assets and any credit enhancement with respect to
the related class and will reflect the rating agency's assessment solely of the
likelihood that the related holders will receive payments to which they are
entitled. No rating will constitute an assessment of the likelihood that
principal prepayments on the related loans will be made, the degree to which the
rate of prepayments might differ from that originally anticipated or the
likelihood of early optional termination of the securities. A rating should not
be deemed a recommendation to purchase, hold or sell securities, inasmuch as it
does not address market price or suitability for a particular investor. A rating
will not address the possibility that prepayment at higher or lower rates than
anticipated by an investor may cause such investor to experience a lower than
anticipated yield or that an investor purchasing a security at a significant
premium might fail to recoup its initial investment under certain prepayment
scenarios.
There is also no assurance that any rating will remain in effect for
any given period of time or that it may not be lowered or withdrawn entirely by
the applicable rating agency in the future if in its judgment circumstances so
warrant. In addition to being lowered or withdrawn due to any erosion in the
adequacy of the value of trust fund assets or any credit enhancement with
respect to a series, a rating might also be lowered or withdrawn because of,
among other reasons, an adverse change in the financial or other condition of a
credit enhancement provider or a change in the rating of the credit enhancement
provider's long-term debt.
125
The amount, type and nature of any credit enhancement established with
respect to a series of securities will be determined on the basis of criteria
established by each rating agency named in the related prospectus supplement.
These criteria are sometimes based upon an actuarial analysis of the behavior of
mortgage loans in a larger group. Such analysis is often the basis upon which
each rating agency determines the amount of credit enhancement required with
respect to each class of securities. There can be no assurance that the
historical data supporting any such actuarial analysis will accurately reflect
future experience nor any assurance that the data derived from a large pool of
mortgage loans will accurately predict the delinquency, foreclosure or loss
experience of any particular pool of loans. No assurance can be given that
values of any properties have remained or will remain at their levels on the
respective dates of origination of the related loans. If residential real estate
markets should experience an overall decline in property values such that the
principal balances of the loans in a particular trust fund and any secondary
financing on the related properties become equal to or greater than the value of
those properties, the rates of delinquencies, foreclosures and losses could be
higher than those now generally experienced in the mortgage lending industry. In
additional, adverse economic conditions (which may or may not affect real
property values) may affect the timely payment by borrowers of scheduled
payments of principal of and interest on the loans and, accordingly, the rates
of delinquencies, foreclosures and losses with respect to any trust fund. To the
extent that losses are not covered by credit enhancement, losses will be borne,
at least in part, by the holders of one or more classes of the securities of the
related series.
Legal Investment Considerations
Unless otherwise specified in the related prospectus supplement, the
securities will not constitute "mortgage-related securities" within the meaning
of the Secondary Market Mortgage Credit Enhancement Act of 1984, as amended.
Accordingly, investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether and to
what extent the securities constitute legal investments for them.
Plan of Distribution
The depositor may offer each series of securities through Bear, Stearns
& Co. Inc. (BS&Co.) or one or more other firms that may be designated at the
time of the related offering. The participation of BS&Co. in any offering will
comply with Schedule E to the By-Laws of the National Association of Securities
Dealers, Inc. The prospectus supplement relating to each series of securities
will set forth the specific terms of the offering of the series and of each
class within the series, the names of the underwriters, the purchase price of
the securities, the proceeds to the depositor from the sale, any securities
exchange on which the securities may be listed, and, if applicable, the initial
public offering prices, the discounts and commissions to the underwriters and
any discounts and concessions allowed or reallowed to dealers. The place and
time of delivery of each series of securities will also be set forth in the
related prospectus supplement. BS&Co. is an affiliate of the depositor.
126
Glossary of Terms
Agency Securities. Mortgage-backed securities issued or guaranteed by
Ginnie Mae, Fannie Mae or Freddie Mac.
Asset Value. Unless otherwise specified in the related prospectus
supplement with respect to the primary assets in the trust fund, the product of
the Asset Value percentage set forth in the related indenture multiplied by the
lesser of
o the stream of remaining regularly scheduled payments in the primary
assets net of certain amounts payable as expenses, together with
income earned on each regularly scheduled payment received through
the day preceding the next distribution date at the Assumed
Reinvestment Rate, if any, discounted to present value at the highest
interest rate on the notes of the series over periods equal to the
interval between payments on the notes and
o the then outstanding principal balance of the primary assets.
Assumed Reinvestment Rate. With respect to a series of securities, the
highest rate permitted by the rating agencies named in the related prospectus
supplement or a rate insured by means of a surety bond, guaranteed investment
contract, reinvestment agreement or other arrangement satisfactory to the rating
agencies.
Home Equity Loans. Closed-end loans and/or revolving credit line loans
secured by mortgages, deeds of trust or other similar security instruments
creating senior or junior liens on one- to four-family residential properties or
mixed-use properties.
Home Improvement Contracts. Home Improvement installment sales
contracts and installment loan agreements which are either unsecured or secured
by mortgages, deeds of trust or similar security instruments creating generally
junior liens on one- to four-family residential properties or mixed-use
properties or secured by purchase money security interests in the related home
improvements.
Insurance Proceeds. Amounts received by the related servicer under any
title insurance policy, hazard insurance policy or other insurance policy
covering any primary asset in a trust fund, other than amounts to be applied to
the restoration or repair of the related property or released to the borrower
under the related agreement.
Liquidation Proceeds. Amounts received by the related servicer in
connection with the liquidation of the primary assets or related real property
in a trust fund, whether through foreclosure sale, repossession or otherwise,
including payments in connection with the primary assets received from the
borrower, other than amounts required to be paid or refunded to the borrower
under the applicable loan documents or pursuant to law, net of the related
liquidation expenses.
127
OID Regulations. Sections 1271 through 1275 of the Internal Revenue
Code of 1986, as amended, and the Treasury regulations issued thereunder on
February 2, 1994 and amended on June 11, 1996.
Manufactured Housing Contracts. Manufactured housing installment sales
contracts and installment loan agreements secured by senior or junior liens on
the related manufactured homes or secured by mortgages, deeds of trust or other
similar security instruments creating senior or junior liens on the real estate
on which the related manufactured homes are located.
Private Label Securities. Private mortgage-backed securities, other
than Agency Securities, backed or secured by underlying loans that may be
Residential Loans, Home Equity Loans, Home Improvement Contracts and/or
Manufactured Housing Contracts.
Residential Loans. Loans secured by mortgages, deeds of trust or other
similar security instruments creating senior or junior liens on one- to
four-family residential properties.
U.S. Person: Any of the following:
o a citizen or resident of the United States;
o a corporation or a partnership (including an entity treated as a
corporation or partnership for U.S. federal income tax purposes)
organized in or under the laws of the United States, or any State
thereof or the District of Columbia (unless in the case of a
partnership Treasury regulations are adopted that provide otherwise);
o an estate whose income from sources outside the United States is
includible in gross income for federal income tax purposes regardless
of its connection with the conduct of a trade or business within the
United States; or
o a trust if a court within the United States is able to exercise
primary supervision of the administration of the trust and one or
more U.S. Persons have the authority to control all substantial
decisions of the trust.
In addition, certain trusts which would not qualify as U.S. Persons under the
above definition but which are eligible to and make an election to be treated as
U.S. Persons will also be treated as U.S. Persons.
128
$142,245,000
(Approximate)
Bear Stearns Asset Backed Securities Trust 2003-SD2
Issuer
Asset-Backed Certificates, Series 2003-SD2
EMC Mortgage Corporation
Seller and Servicer
Wells Fargo Bank Minnesota,
National Association
Master Servicer and Securities Administrator
Bear Stearns Asset Backed Securities, Inc.
Depositor
Bear, Stearns & Co. Inc.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying
prospectus. We have not authorized anyone to provide you with
different information.
We are not offering the Series 2003-SD2 Asset-Backed Certificates in any state
where the offer is not permitted.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the Series 2003-SD2 Asset-Backed Certificates and with respect
to their unsold allotments or subscriptions. In addition, all dealers
selling the Series 2003-SD2 Asset-Backed
Certificates will be required to
deliver a prospectus supplement and
prospectus until December 24, 2003.
September 26, 2003