Prospectus Supplement dated November 22, 2005
To Prospectus dated September 26, 2005
$170,000,000 (APPROXIMATE)
HOME LOAN MORTGAGE LOAN TRUST 2005-1
HOME EQUITY LOAN ASSET-BACKED CERTIFICATES, SERIES 2005-1
OCEAN BANK, F.S.B., FINANCIAL ASSET SECURITIES CORP.,
AS SELLER AND SERVICER AS DEPOSITOR
Certificate
Principal Certificate Price to Underwriting Proceeds to the
Certificate Balance Rate Public Discount Depositor (2)
- ----------------------------------------------------------------------------------------------------------------------
Class A-1 $92,500,000 Variable (1) 100.00% 0.35% 99.65%
- ----------------------------------------------------------------------------------------------------------------------
Class A-2 $35,250,000 Variable (1) 100.00% 0.35% 99.65%
- ----------------------------------------------------------------------------------------------------------------------
Class A-3 $42,250,000 Variable (1) 100.00% 0.35% 99.65%
- ----------------------------------------------------------------------------------------------------------------------
Total Offered
Certificates $170,000,000 $169,405,000
- ----------------------------------------------------------------------------------------------------------------------
(1) The pass-through rate for the Class A Certificates is calculated as
described under "Summary" and "Description of the Certificates--The
Certificate Interest Rate".
(2) Before deducting expenses, estimated to be approximately $465,000.
THE CERTIFICATES
o represent the entire beneficial interest in a trust, whose assets are a group
of fixed-rate and adjustable-rate home equity loans.
o currently have no trading market.
o are not deposits and are not guaranteed by the Federal Deposit Insurance
Corporation.
o are obligations of the trust only and are not obligations of the seller and
servicer or its affiliates.
CREDIT ENHANCEMENT
o will be provided in the form of a spread account and an irrevocable and
unconditional certificate guaranty insurance policy issued by Ambac Assurance
Corporation.
THE TRUST
o will make one or more REMIC elections for federal income tax purposes.
Review the information in Risk Factors on page S-9 of this prospectus supplement
and on page 6 in the accompanying prospectus.
For complete information about the Class A Certificates, read both this
prospectus supplement and the accompanying prospectus. This prospectus
supplement must be accompanied by the prospectus if it is being used to offer
and sell the certificates.
[Ambac Logo]
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE CERTIFICATES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
[RBS Greenwich Capital Logo]
EUROPEAN ECONOMIC AREA
In relation to each Member State of the European Economic Area which has
implemented the Prospectus Directive (each, a "Relevant Member State"), each
Underwriter has represented and agreed that with effect from and including the
date on which the Prospectus Directive is implemented in that Relevant Member
State (the "Relevant Implementation Date") it has not made and will not make an
offer of certificates to the public in that Relevant Member State prior to the
publication of a prospectus in relation to the certificates which has been
approved by the competent authority in that Relevant Member State or, where
appropriate, approved in another Relevant Member State and notified to the
competent authority in that Relevant Member State, all in accordance with the
Prospectus Directive, except that it may, with effect from and including the
Relevant Implementation Date, make an offer of certificates to the public in
that Relevant Member State at any time:
(a) to legal entities which are authorized or regulated to operate in the
financial markets or, if not so authorized or regulated, whose corporate purpose
is solely to invest in securities;
(b) to any legal entity which has two or more of (1) an average of at least 250
employees during the last financial year; (2) a total balance sheet of more than
(euro)43,000,000 and (3) an annual net turnover of more than (euro)50,000,000,
as shown in its last annual or consolidated accounts; or
(c) in any other circumstances which do not require the publication by the
Issuer of a prospectus pursuant to Article 3 of the Prospectus Directive.
For the purposes of this provision, the expression an "offer of certificates to
the public" in relation to any certificates in any Relevant Member State means
the communication in any form and by any means of sufficient information on the
terms of the offer and the certificates to be offered so as to enable an
investor to decide to purchase or subscribe the certificates, as the same may be
varied in that Member State by any measure implementing the Prospectus Directive
in that Member State and the expression "Prospectus Directive" means Directive
2003/71/EC and includes any relevant implementing measure in each Relevant
Member State.
UNITED KINGDOM
Each Underwriter has represented and agreed that:
(a) it has only communicated or caused to be communicated and will only
communicate or cause to be communicated an invitation or inducement to engage in
investment activity (within the meaning of Section 21 of the Financial Services
and Markets Act) received by it in connection with the issue or sale of the
certificates in circumstances in which Section 21(1) of the Financial Services
and Markets Act does not apply to the Issuer; and
(b) it has complied and will comply with all applicable provisions of the
Financial Services and Markets Act with respect to anything done by it in
relation to the certificates in, from or otherwise involving the United Kingdom.
i
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS:
We provide information to you about the certificates offered by this prospectus
supplement in two separate documents that progressively provide more detail: (1)
the accompanying prospectus, which provides general information, some of which
may not apply to your certificates and (2) this prospectus supplement, which
describes the specific terms of your certificates.
IF INFORMATION VARIES BETWEEN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT.
You should rely only on the information contained or incorporated by reference
in this prospectus supplement and the accompanying prospectus. We have not
authorized anyone to provide you with different information.
We are not offering the certificates in any state where the offer is not
permitted. We do not claim that the information in this prospectus supplement
and prospectus is accurate as of any date other than the dates stated on their
respective covers.
--------------------
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the certificates and with respect to their unsold allotments or
subscriptions. In addition, all dealers selling the certificates will be
required to deliver a prospectus supplement and prospectus for ninety days
following the date of this prospectus supplement.
--------------------
We include cross-references in this prospectus supplement and the accompanying
prospectus to captions in these materials where you can find further related
discussions. The following tables of contents provide the pages on which these
captions are located.
ii
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Page
SUMMARY......................................................................S-1
RISK FACTORS.................................................................S-9
THE CERTIFICATE INSURER.....................................................S-17
OCEAN BANK, F.S.B...........................................................S-19
DESCRIPTION OF THE MORTGAGE LOANS...........................................S-24
PREPAYMENT AND YIELD CONSIDERATIONS.........................................S-40
ASSUMED MORTGAGE LOAN CHARACTERISTICS.......................................S-43
DESCRIPTION OF THE CERTIFICATES.............................................S-50
DESCRIPTION OF THE PURCHASE AGREEMENT.......................................S-75
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.............................S-75
USE OF PROCEEDS.............................................................S-75
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.....................................S-76
STATE TAXES.................................................................S-78
ERISA CONSIDERATIONS........................................................S-79
LEGAL INVESTMENT CONSIDERATIONS.............................................S-80
UNDERWRITING................................................................S-80
EXPERTS.....................................................................S-81
LEGAL MATTERS...............................................................S-81
RATINGS.....................................................................S-81
INDEX OF DEFINED TERMS......................................................S-82
ANNEX I......................................................................A-1
iii
SUMMARY
This summary highlights selected information from this prospectus
supplement and does not contain all of the information that you need to consider
in making your investment decision. To understand all of the terms of the
offering of the Class A Certificates, it is necessary that you read carefully
this entire prospectus supplement and the accompanying prospectus.
This summary provides an overview of certain calculations, cash flows
and other information to aid your understanding and is qualified by the full
description of these calculations, cash flows and other information in this
prospectus supplement and the accompanying prospectus.
Some of the information that follows consists of forward-looking
statements relating to future economic performance or projections and other
financial items. Forward-looking statements are subject to a variety of risks
and uncertainties, such as general economic and business conditions and
regulatory initiatives and compliance, many of which are beyond the control of
the parties participating in this transaction. Accordingly, what actually
happens may be very different from the projections included herein.
Whenever we refer to a percentage of some or all of the mortgage loans
in the trust, that percentage has been calculated on the basis of the total of
the scheduled principal balances of the statistic calculation mortgage loans as
of October 31, 2005 unless we specify otherwise. We explain in this prospectus
supplement under "DESCRIPTION OF THE CERTIFICATES--Distributions of Principal"
how the scheduled principal balance of a mortgage loan is determined. Whenever
we refer in this Summary or in the Risk Factors section of this prospectus
supplement to the total principal balance of any mortgage loans, we mean the
total of the scheduled principal balances of the statistic calculation mortgage
loans as of October 31, 2005, unless we specify otherwise.
OFFERED CERTIFICATES
Certificate Last Scheduled
Certificate Principal Distribution
Certificate Interest Rate Balance (1) Date (2) CUSIP
- ---------------------------- ------------- ----------- -------------- -----------
Class A-1................... Variable (3) $92,500,000 April 2036 43718R AB 9
Class A-2................... Variable (3) $35,250,000 April 2036 43718R AC 7
Class A-3................... Variable (3) $42,250,000 April 2036 43718R AD 5
- ------------
(1) The certificate principal balance is approximate, as described in this
prospectus supplement.
(2) The actual final distribution date may be earlier or later, and could be
substantially earlier, than the last scheduled distribution date.
(3) The Class A Certificates will accrue interest at a rate of one-month LIBOR
plus an applicable margin on or prior to the optional termination date (or
one-month LIBOR plus an applicable margin following the optional
termination date), subject to an available funds cap rate described herein
and a maximum rate of 14%.
S-1
THE TRUST
Home Loan Mortgage Loan Trust 2005-1 will be formed by Financial Asset
Securities Corp. (the "Depositor). Ocean Bank, F.S.B. will sell the mortgage
loans to the Depositor and the Depositor will deposit the mortgage loans with
the Trust. Deutsche Bank National Trust Company will act as trustee for the
benefit of the certificateholders.
ORIGINATOR, SELLER AND SERVICER
Ocean Bank, F.S.B., a federal savings bank.
We refer you to "OCEAN BANK, F.S.B." in this prospectus supplement for
more detail.
DEPOSITOR
Financial Asset Securities Corp., a Delaware corporation and an
affiliate of Greenwich Capital Markets, Inc.
TRUSTEE
Deutsche Bank National Trust Company, a national banking association,
will be the trustee.
CERTIFICATE INSURER
Ambac Assurance Corporation, a Wisconsin-domiciled stock insurance
company, will issue a certificate guaranty insurance policy for the benefit of
the Class A Certificates.
We refer you to "THE CERTIFICATE INSURER" in this prospectus supplement
for more detail.
CLOSING DATE
On or about November 29, 2005.
THE CERTIFICATES
On the closing date, the trust will issue the Class A-1 Certificates,
Class A-2 Certificates and Class A-3 Certificates (collectively, the "Class A
Certificates"), which are senior certificates.
On the closing date, the trust will also issue the Class C Certificates
and the Class R Certificates, which are subordinated certificates.
The Class A Certificates will be offered for purchase in denominations
of $25,000 and multiples of $1 in excess thereof; provided that Class A
Certificates must be purchased in minimum total investments of $100,000 per
class. Neither the Class C Certificates nor the Class R Certificates are being
offered to the public.
REGISTRATION OF CLASS A CERTIFICATES
The trust will issue the Class A Certificates in book-entry form. You
will hold your interests either through a depository in the United States or
upon request through one of two depositories in Europe. While the certificates
are book-entry they will be registered in the name of the applicable depository,
or in the name of the depository's nominee. Transfers within any depository
system will be made in accordance with the usual rules and operating procedures
of that system. Cross-market transfers between two different depository systems
may be made through a third-party bank and/or the related depositories. The
limited circumstances under which definitive certificates will replace the
book-entry certificates are described in this prospectus supplement.
We refer you to "RISK FACTORS--Book-Entry Certificates"; "DESCRIPTION
OF THE CERTIFICATES--Book-Entry Certificates" and "ANNEX I" in this prospectus
supplement for more detail.
TRUST PROPERTY
The trust property is held by the trustee for the benefit of the
certificateholders. The trust property includes:
o a group of fixed-rate and adjustable-rate home equity loans secured
by
S-2
first-lien and second-lien deeds of trust or mortgages on primarily
one- to four-family residential properties;
o payments on the initial mortgage loans received after October 31,
2005 (other than payments relating to interest accrued on any
initial mortgage loan through the related due date in October, 2005)
and payments on the subsequent mortgage loans received after the
related cut-off date (other than payments relating to interest
accrued on any subsequent mortgage loan through the related due date
in the calendar month of the related cut-off date);
o property that secured a mortgage loan which has been acquired by
foreclosure or deed in lieu of foreclosure;
o rights of the depositor under the mortgage loan purchase agreement
pursuant to which the depositor purchased the mortgage loans from
the seller. Under certain circumstances, if the representations and
warranties made by the seller about the mortgage loans are breached,
then it will be obligated to repurchase those mortgage loans;
o rights of the seller under any hazard insurance policies covering
the mortgaged properties;
o the spread account, the basis risk reserve fund, the pre-funding
account and the capitalized interest account;
o the unconditional certificate guaranty insurance policy and any
payments thereunder;
o the interest rate corridor and certain payments thereunder; and
o certain other property.
THE MORTGAGE LOANS
On November 29, 2005, the trust will acquire an initial pool of
mortgage loans consisting of fixed-rate and adjustable-rate, fully amortizing
mortgage loans. Set forth below is selected information about the mortgage loans
that have been identified by the seller to be sold to the trust on the closing
date, called the statistic calculation mortgage loans. The information in this
prospectus supplement with respect to each statistic calculation mortgage loan
is based on information for that statistic calculation mortgage loan as of
October 31, 2005. On or prior to the closing date, approximately $17,983,937 of
additional mortgage loans will be delivered to the trust. The statistic
calculation mortgage loans, together with the additional mortgage loans, will
constitute the initial mortgage loans. The initial mortgage loans will have a
cut-off date of the later of the close of business on October 31, 2005 or the
date of origination of the related initial mortgage loan.
Statistic Calculation Mortgage Loans
o number of mortgage loans: 1,611
o aggregate principal balance: $112,016,063
o geographic concentration in excess of 5%: 7 states
o average principal balance: $69,532
o maximum principal balance: $643,154
o loan rate range: 5.100% to 12.950%
o weighted average loan rate: 7.858% (approximate)
o first lien: 72.17% (approximate)
o second lien: 27.83% (approximate)
S-3
o weighted average original term to maturity, based on principal
balance: 334 months (approximate)
o original term to maturity range: 60 to 360 months
o weighted average remaining term to stated maturity, based on
principal balance: 330 months (approximate)
o remaining term to stated maturity range: 46 months to 360 months
o last maturity date: November 1, 2035
o combined loan-to-value ratio range: 5.79% to 90.00%
o weighted average combined loan-to-value ratio: 69.47% (approximate)
Prior to the issuance of the certificates, certain of the statistic
calculation mortgage loans may be removed from the mortgage pool as a result of
incomplete documentation or otherwise and any mortgage loans that fully prepay
or default will be removed. Other mortgage loans, together with the additional
mortgage loans, will be included in the initial mortgage pool prior to the
issuance of the certificates. However, the removal and inclusion of such
mortgage loans and the addition of the subsequent mortgage loans will not
materially alter the characteristics of the statistic calculation mortgage loans
as described in this prospectus supplement, although the range of loan rates and
maturities and certain other characteristics of the mortgage loans as described
in this prospectus supplement may vary.
Subsequent Mortgage Loans
On the closing date, the seller will deposit funds into a pre-funding
account from the proceeds from the sale of the mortgage loans to the depositor.
The initial pre-funding deposit amount will not be more than approximately
$40,000,000. The trust will use this amount to buy subsequent mortgage loans
from the seller from time to time on or prior to February 24, 2006. The
subsequent mortgage loans will have a cut-off date of the later of the close of
business on the last day of the month preceding the month in which the related
mortgage loan is conveyed to the trust and the date of origination of the
related subsequent mortgage loan.
We refer you to "DESCRIPTION OF THE MORTGAGE LOANS" in this prospectus
supplement for more detail.
SERVICING
The servicer will be responsible for servicing, managing and making
collections on the mortgage loans. The servicer will deposit all collections in
respect of the mortgage loans into the collection account. Each calendar month
the servicer will be paid a portion of the interest payments as a fee for its
services. The amount of the fee paid to the servicer is based on the balance of
the pool of mortgage loans as of the first day of that calendar month.
We refer you to "DESCRIPTION OF THE CERTIFICATES--Servicing
Compensation and Payment of Expenses" in this prospectus supplement for more
detail.
MONTHLY ADVANCES AND INTEREST SHORTFALLS
The servicer will make cash advances with respect to delinquent
payments of interest on the mortgage loans to the extent the servicer reasonably
believes that the cash advances can be repaid from future collections on the
related mortgage loans. These cash advances are only intended to maintain a
regular flow of interest on the certificates and are not intended to guarantee
or insure against losses.
The servicer has agreed that, under certain circumstances, it will
deposit in the distribution account shortfalls in interest attributable to
prepayments, which amounts are not reimbursable to the servicer.
The maximum amount the servicer will deposit each month as a result of
shortfalls relating to prepayments is the amount of the servicing fee for the
preceding month.
S-4
Neither the servicer nor the certificate insurer is obligated to
provide funds to cover any shortfalls in interest collections on the mortgage
loans that are attributable to the application of the Servicemembers Civil
Relief Act of 2003. The certificate insurer is not obligated to provide funds to
cover any prepayment interest shortfalls.
We refer you to "RISK FACTORS--Interest Payments on the Mortgage Loans
and Resulting Reductions in Interest Distributions on the Class A Certificates"
and "DESCRIPTION OF THE CERTIFICATES--Advances" in this prospectus supplement
for more detail.
DISTRIBUTIONS TO CERTIFICATEHOLDERS
You will be entitled to receive payments of interest each month. Your
interest will be based on one-month LIBOR, subject to a maximum rate of 14% and
an available funds cap rate, and the amount you will be entitled to receive will
vary depending upon one-month LIBOR and the number of days in the accrual
period.
The amount of principal you will be entitled to receive will vary
depending on a number of factors, including the payments received on the
mortgage loans. Each month, the trustee will calculate the amounts to be paid to
the certificateholders. If you hold a certificate on the last business day prior
to the related distribution date, you will be entitled to receive payments on
such distribution date; provided, however, that if the certificates are no
longer held in book-entry form, you will be entitled to receive payments on a
distribution date if you hold a certificate on the last business day of the
calendar month immediately preceding that distribution date. The distribution
date will be the 15th day of each month or, if such day is not a business day,
the next business day, starting in December 2005.
We refer you to "DESCRIPTION OF THE CERTIFICATES--Priority of
Distributions" in this prospectus supplement for more detail.
The pass through rate for the Class A Certificates on each distribution
date is equal to the lesser of (a) a per annum rate of one-month LIBOR plus the
applicable margin set forth below on or prior to the optional termination date,
or a per annum rate of one-month LIBOR plus the applicable margin set forth
below following the optional termination date (b) 14% and (c) a per annum rate
equal to (i) (x) 12 multiplied by (y) (i) the interest due on the mortgage loans
less the sum of the Servicing Fee, the Trustee Fee and the Certificate Insurer
premium divided by (ii) the aggregate principal balance of the mortgage loans as
of the beginning of the prior calendar month (adjusted to reflect an actual/360
day count convention for the related accrual period).
MARGIN
------------------------
CLASS (1) (2)
----- ----- -----
A-1 0.10% 0.20%
A-2 0.25% 0.50%
A-3 0.36% 0.72%
INTEREST
Interest on the Class A Certificates accrues from the preceding
distribution date to the day preceding the current distribution date (except in
the case of the first accrual period, in which case interest will accrue from
the closing date through the day preceding the first distribution date) on the
basis of the actual number of days elapsed and a year consisting of 360 days.
You will receive each month's interest on the distribution date following the
accrual period. On each distribution date, you will be entitled to the
following:
o interest that accrued at the certificate interest rate on the
certificate principal balance of your certificate on the first day
of the related accrual period; and
o any interest that was due on a prior distribution date and not paid,
together with interest on that amount.
S-5
Your interest entitlement will be reduced by shortfalls in interest
collections due to (i) the application of the Servicemembers Civil Relief Act of
2003 and (ii) prepayment interest shortfalls in excess of the servicing fee for
the distribution date.
The Class C Certificates will accrue interest as provided in the
pooling and servicing agreement. The Class R Certificates will not accrue
interest.
We refer you to "DESCRIPTION OF THE CERTIFICATES--Interest" in this
prospectus supplement for more detail.
PRINCIPAL
On each distribution date, to the extent funds are available, you will
be entitled to distributions of principal. The maximum amount for distribution
as principal payments on your certificate and any distribution date will
generally be the sum of
o payments of principal on the mortgage loans received during the
prior calendar month, and all other amounts received during the
prior calendar month relating to principal on the mortgage loans
o plus, the amount of any principal losses realized on the mortgage
loans during the prior calendar month.
We refer you to "DESCRIPTION OF THE CERTIFICATES--Principal" in this
prospectus supplement for more detail.
CREDIT ENHANCEMENT
SPREAD ACCOUNT
The trustee will establish a spread account for the benefit of the
certificate insurer and the certificateholders. The spread account will be
funded on the Closing Date with an initial deposit of 0.50% of the aggregate
principal balance of the initial mortgage loans as of the cut-off date and the
original pre-funded amount. Thereafter, the spread account will be funded from
excess interest on the mortgage loans up to a specified percentage of the
principal balance of the initial mortgage loans and the original pre-funded
amount. The trustee will withdraw amounts on deposit in the spread account,
prior to making any draws on the policy, to pay principal and interest due on
the Class A Certificates. With the consent of the certificate insurer, the
spread account may be terminated or other assets, including other fixed-rate and
adjustable-rate mortgage loans similar to the mortgage loans in the pool, may be
substituted for the assets then held in the spread account.
We refer you to "DESCRIPTION OF THE CERTIFICATES--Spread Account" in
this prospectus supplement for more detail.
THE INSURANCE POLICY
Ambac Assurance Corporation, a Wisconsin-domiciled stock insurance
corporation, will issue an insurance policy for the benefit of the Class A
Certificates. The policy will unconditionally and irrevocably guarantee payment
of (1) the outstanding Certificate principal balance of the Class A Certificates
by the distribution date in April, 2036, and (2) accrued and unpaid interest
calculated at the certificate interest rate due on the Class A Certificates on
each distribution date.
On each distribution date, the trustee will calculate to what extent
the funds available to make the payments of principal and interest, including
amounts in the spread account and, during the funding period, the capitalized
interest account, are insufficient to pay the amounts due on the Class A
Certificates.
If an insufficiency exists and it is covered by the policy, then the
trustee will make a draw on the policy.
If for any reason the certificate insurer does not make the payments
required under the policy, the holders of the Class A Certificates will rely
solely on the mortgage loans and the
S-6
spread account and, during the funding period, the capitalized interest account,
for their payments of interest and principal and certificateholders may suffer a
loss.
The policy does not cover shortfalls in interest collections on the
mortgage loans that are attributable to prepayment interest shortfalls or the
application of the Servicemembers Civil Relief Act of 2003.
We refer you to "DESCRIPTION OF THE CERTIFICATES--The Policy", and "THE
CERTIFICATE INSURER" in this prospectus supplement for more detail.
INTEREST RATE CORRIDOR
On the closing date, the trust will purchase an interest rate corridor
from The Royal Bank of Scotland plc, as corridor contract counterparty. Under
the interest rate corridor, the corridor contract counterparty may be required
to make monthly payments on each corridor payment date under certain
circumstances commencing in December 2005. The last corridor payment date is in
January 2009. Any amounts received under the interest rate corridor will be
available to pay class A available funds cap carryover amounts. The interest
rate corridor will provide only temporary, limited protection against upward
movements in one-month LIBOR and is intended to diminish the amount of basis
risk shortfalls experienced by the Class A Certificates during the period it is
in effect.
We refer you to "DESCRIPTION OF THE CERTIFICATES--Interest Rate
Corridor" and "--Basis Risk Reserve Fund" in this prospectus supplement for more
detail.
OPTIONAL TERMINATION OF THE TRUST
The servicer may, subject to certain limitations specified in the
pooling and servicing agreement, purchase all of the remaining assets of the
trust when the principal balance of the mortgage loans is less than or equal to
10% of the sum of the aggregate principal balance of the initial mortgage loans
on the cut-off date and the amount deposited in the pre-funding account on the
closing date.
We refer you to "DESCRIPTION OF THE CERTIFICATES--Termination; Purchase
of the Mortgage Loans" in this prospectus supplement for more detail.
FEDERAL TAX CONSEQUENCES
One or more elections will be made to treat designated portions of the
trust (exclusive of the basis risk reserve fund, the spread account, the
pre-funding account, the interest rate corridor contract and the capitalized
interest account) as real estate mortgage investment conduits for federal income
tax purposes.
ERISA CONSIDERATIONS
Generally, the Class A Certificates offered by this prospectus
supplement may be purchased by employee benefit plans or other retirement
arrangements subject to the Employee Retirement Income Security Act of 1974 or
Section 4975 of the Internal Revenue Code of 1986, as amended. A fiduciary of an
employee benefit plan or other retirement arrangement must determine that the
purchase of a certificate is consistent with its fiduciary duties under
applicable law and does not result in a non-exempt prohibited transaction under
applicable law.
We refer you to "ERISA CONSIDERATIONS" in this prospectus supplement
and in the accompanying prospectus for more detail.
LEGAL INVESTMENT CONSIDERATIONS
The Secondary Mortgage Market Enhancement Act of 1984 defines "mortgage
related securities" to include only first-lien mortgages, and not second-lien
mortgages. Because the mortgage loans in the mortgage pool owned by the trust
include second-lien mortgage loans, the Class A Certificates will not be
"mortgage related securities" under that definition. Some institutions may be
limited in their legal investment authority to only first-lien
S-7
mortgages or "mortgage related securities" and will be unable to invest in the
Class A Certificates.
We refer you to "LEGAL INVESTMENT CONSIDERATIONS" and "LEGAL
INVESTMENT" in the accompanying prospectus for more detail.
CERTIFICATE RATINGS
Before the Class A Certificates can be issued, the trust must obtain
ratings on the Class A Certificates of:
o AAA by Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc.
o Aaa by Moody's Investors Service, Inc.
Ratings such as the ratings obtained for the Class A Certificates
address credit risk. When evaluating credit risk, the rating agencies evaluate
the likelihood of whether or not you will receive your interest and principal
payments. Credit risk does not relate to the likelihood or rate of prepayments
on the mortgage loans. Prepayments affect the timing of your payments, such that
your actual return could differ substantially from your anticipated return on
your investment.
We refer you to "RATINGS" and "RISK FACTORS--Certificate Ratings Relate
to Credit Risk Only" in this prospectus supplement for more detail.
S-8
RISK FACTORS
You should carefully consider the following risk factors prior to any
purchase of certificates. You should also carefully consider the information set
forth under "RISK FACTORS" in the accompanying prospectus.
PREPAYMENTS AFFECT TIMING AND RATES OF RETURN
Home equity loans, such as the mortgage loans in the mortgage pool,
have been originated in significant volume only during the past few years and
neither the depositor nor the servicer is aware of any publicly available
studies or statistics on the rate of prepayment of home equity loans similar to
the mortgage loans in the mortgage pool. Generally, home equity loans are not
viewed by borrowers as permanent financing; therefore, the mortgage loans in the
mortgage pool may experience a higher rate of prepayment than traditional
mortgage loans. The trust's prepayment experience may be affected by a wide
variety of factors, including general economic conditions, interest rates, the
availability of alternative financing and homeowner mobility. Prepayments on the
mortgage loans in the mortgage pool will result in earlier distributions of
principal on your certificates.
In certain circumstances, breaches of representations, warranties or
covenants of the seller may result in repurchases of the related mortgage loans
by the seller. Such repurchases would have substantially the same effect on
certificateholders as a prepayment of such mortgage loans.
With respect to the purchase of Class A Certificates purchased at a
premium, if the principal on the mortgage loans in the mortgage pool is repaid
faster than you anticipate, then your yield may be lower than you anticipate.
As of the cut-off date, approximately 78.32% of the statistic
calculation mortgage loans by cut-off date principal balance imposed a penalty
for certain full or partial prepayments of a mortgage loan. If a mortgage loan
imposes a prepayment penalty and the mortgagor makes a prepayment during the
first three years after origination and the amount of such prepayment is in
excess of a certain amount, a penalty is imposed and will be collected to the
extent permitted under applicable law. Prepayment penalties may discourage
mortgagors from prepaying their mortgage loans during the penalty period and,
accordingly, affect the rate of prepayment of such mortgage loans even in a
declining interest rate environment.
We refer you to "PREPAYMENT AND YIELD CONSIDERATIONS" in this
prospectus supplement for more detail.
In addition, substantially all of the mortgage loans in the mortgage
pool contain due-on-sale provisions requiring the mortgagor to prepay the
mortgage loan in full when the mortgaged property is sold. The servicer will be
required to enforce such provisions unless enforcement is not permitted by
applicable law or the servicer permits the purchaser of the related mortgaged
property to assume the mortgage loan. Enforcement of due-on-sale provisions
results in the trust receiving proceeds on a mortgage loan earlier than it
otherwise would.
We refer you to "LEGAL ASPECTS OF LOANS--Due-On-Sale Clauses In
Mortgage Loans" in the accompanying prospectus.
As of the cut-off date, approximately 90.10% of the statistic
calculation mortgage loans by cut-off date principal balance are adjustable-rate
mortgage loans, each of which has a fixed loan rate for the first two or three
years after origination, which then converts to an adjustable loan rate based on
the sum of
S-9
six-month LIBOR and a specified margin set forth in the related mortgage note.
This type of adjustable-rate mortgage loan is commonly referred to as a hybrid
mortgage loan. The prepayment experience on hybrid mortgage loans may differ
from the prepayment experience on fixed-rate mortgage loans due to provisions
which provide for conversion from a fixed loan rate to an adjustable loan rate
after a certain period of time, initial and subsequent periodic rate caps and a
minimum and maximum loan rate. In particular, hybrid mortgage loans may be
subject to higher prepayment rates as they approach the date they are scheduled
to start accruing interest at an adjustable rate. As a hybrid mortgage loan
approaches its initial rate adjustment date, the mortgagor may become more
likely to refinance that loan to avoid an increase in the loan rate, even if
prevailing fixed-rate mortgage loans are only available at rates that are
slightly lower or higher than the loan rate before adjustment.
The rate at which the amounts described above are paid on the mortgage
loans in the mortgage pool will affect the payment rate on the certificates. If
the timing and amount of such payment is not as anticipated, your rate of return
will differ from your anticipated rate of return.
SUBSEQUENT MORTGAGE LOAN FUNDING MAY RESULT IN AN ACCELERATED RATE OF PRINCIPAL
PAYMENT
If the seller is unable to originate and deliver a sufficient amount of
eligible subsequent mortgage loans to the trust by the close of business on
February 24, 2006, the amount remaining in the pre-funding account will be
distributed on the first distribution date thereafter as a payment of principal
to the holders of the Class A Certificates in the same manner as described in
this prospectus supplement under "DESCRIPTION OF THE CERTIFICATES--Priority of
Distribution".
CHANGES IN ONE-MONTH LIBOR WILL AFFECT YIELD ON THE CLASS A CERTIFICATES
The Class A Certificates will receive interest at a rate that varies
directly with changes in one-month LIBOR, subject to a maximum rate of 14% and
an available funds cap rate as described herein. Accordingly, the yield on the
Class A Certificates will be sensitive to changes in one-month LIBOR.
We refer you to "DESCRIPTION OF THE CERTIFICATES--Distribution of
Interest" and "--Calculation of LIBOR" in this prospectus supplement for more
detail.
RECENTLY ORIGINATED LOANS MORE LIKELY TO EXPERIENCE EARLY DEFAULTS
Although little data is available, defaults on mortgage loans are
generally expected to occur with greater frequency in the early years of the
term of a mortgage loan. If there is a higher rate of defaults than you expected
in the mortgage pool and the certificate insurer fails to perform its
obligations under the policy, then you may experience a loss.
DELAY IN RECEIPT OF LIQUIDATION PROCEEDS; LIQUIDATION PROCEEDS MAY BE LESS THAN
MORTGAGE LOAN BALANCE
Substantial delays could be encountered in connection with the
liquidation of delinquent mortgage loans. Further, liquidation expenses such as
legal fees, real estate taxes and maintenance and preservation expenses will
reduce the portion of liquidation proceeds payable to you. In addition, there
may be certain instances where, based upon the relevant costs associated with
the foreclosure process, the servicer will decide not to foreclose on the loan.
If a mortgaged property fails to provide adequate security for a mortgage loan,
you will incur a loss on your investment if the certificate insurer fails to
perform its obligation under the policy.
S-10
We refer you to "LEGAL ASPECTS OF LOANS--Foreclosure" in the
accompanying prospectus for more detail.
PRIORITY OF LIENS
Some of the mortgage loans are secured by mortgages which are second in
priority to a first priority mortgage loan that is not included in the trust.
For mortgage loans in the trust secured by second-lien mortgages, the servicer
may consent under certain circumstances to a new first priority lien regardless
of the principal amount.
Mortgage loans that are secured by second mortgages will receive
proceeds from the sale of the related mortgaged property only after any first
mortgage loan and prior statutory liens have been paid. If the remaining
proceeds are insufficient to satisfy a mortgage loan and the certificate insurer
fails to perform its obligations under the policy, then:
o there will be a delay in distributions to you while a deficiency
judgment, if any, against the borrower is sought;
o you may incur a loss if a deficiency judgment cannot be obtained or
collected.
Approximately 27.83% of the statistic calculation mortgage loans in the
statistic calculation mortgage pool by cut-off date principal balance are
secured by second mortgages or deeds of trust.
We refer you to "LEGAL ASPECTS OF LOANS--Junior Mortgages; Rights of
Senior Mortgages" in the accompanying prospectus for more detail.
ADDITIONAL AND SUBSEQUENT MORTGAGE LOANS MAY HAVE CHARACTERISTICS THAT DIFFER
FROM THOSE OF THE STATISTIC CALCULATION MORTGAGE LOANS WHICH MAY REDUCE YOUR
YIELD TO MATURITY
Following the transfer of the additional mortgage loans and the
subsequent mortgage loans to the trust, the characteristics of the mortgage pool
may differ from the information presented in this prospectus supplement. The
characteristics that may differ include, among others, the composition of the
mortgage pool and of the mortgagors of the mortgage loans, the credit quality of
the mortgagors, the range and distribution of loan rates, the range and
distribution of principal balances, the range and distribution of loan-to-value
ratios and the range and distribution of remaining terms to stated maturity. We
recommend that you consider potential variances when making your investment
decision concerning the offered certificates. The seller will be required to
deliver additional and subsequent mortgage loans having characteristics which,
in the aggregate, are not materially different from the statistic calculation
mortgage loans.
CERTAIN MORTGAGE LOANS HAVE COMBINED HIGH LOAN-TO-VALUE RATIOS WHICH MAY PRESENT
A GREATER RISK OF LOSS RELATING TO SUCH MORTGAGE LOANS
Mortgage loans with a combined loan-to-value ratio of greater than 80%
may present a greater risk of loss than mortgage loans with combined
loan-to-value ratios of 80% or below. Approximately 25.43% of the statistic
calculation mortgage loans in the statistic calculation mortgage pool by cut-off
date principal balance had a combined loan-to-value ratio at origination in
excess of 80% and are not covered by any primary mortgage insurance. No
statistic calculation mortgage loan had a combined loan-to-value ratio exceeding
90.00% at origination. An overall decline in the residential real estate market,
a rise in interest rates over a period of time and the general condition of a
mortgaged property, as well as other factors, may have the effect of reducing
the value of such mortgaged property from the appraised
S-11
value at the time the mortgage loan was originated. If there is a reduction in
value of the mortgaged property, the combined loan-to-value ratio may increase
over what it was at the time of origination. Such an increase may reduce the
likelihood of liquidation or other proceeds being sufficient to satisfy the
mortgage loan. There can be no assurance that the combined loan-to-value ratio
of any mortgage loan determined at any time after origination is less than or
equal to its original combined loan-to-value ratio. Additionally, the seller's
determination of the value of a mortgaged property used in the calculation of
the combined loan-to-value ratios of the mortgage loans may differ from the
appraised value of such mortgaged property or the actual value of such mortgaged
property.
We refer you to "DESCRIPTION OF THE MORTGAGE LOANS--General" in this
prospectus supplement for more detail.
GEOGRAPHIC CONCENTRATION MAY AFFECT PERFORMANCE
To the extent that specific geographic regions have experienced or may
experience weaker economic conditions or greater rates of decline in real estate
values than the United States generally, a concentration of the mortgage loans
in the mortgage pool in that region may be expected to increase all of the risks
relating to the mortgage loans in the mortgage pool. The seller and the
depositor can neither quantify the impact of any recent property value declines
on the mortgage loans nor predict whether, to what extent or for how long such
declines may continue.
The concentration of statistic calculation mortgage loans that
constitute at least 5.00% of the statistic calculation mortgage loans for a
given state, as an approximate percentage of the cut-off date principal balance
is as follows:
STATE PERCENTAGE
----- ----------
New Jersey 17.75%
New York 12.41%
Rhode Island 10.30%
Pennsylvania 7.23%
Florida 6.25%
Virginia 5.73%
Maryland 5.56%
HURRICANES MAY POSE SPECIAL RISKS
At the end of August 2005, Hurricane Katrina and Hurricane Rita caused
catastrophic damage to areas in the Gulf Coast region of the United States. The
seller will represent and warrant as of the Closing Date that each mortgaged
property is free of material damage and in average repair (including Mortgage
Loans that are secured by properties in the states of Texas, Louisiana,
Mississippi and Alabama that are located in a FEMA Individual Assistance
designated area as a result of Hurricane Katrina or Hurricane Rita). In the
event of a breach of that representation and warranty that materially and
adversely affects the value of such Mortgage Loan, the seller will be obligated
to repurchase or substitute for the related Mortgage Loan. Any such repurchase
would have the effect of increasing the rate of principal distributions on the
Certificates. Any damage to a mortgaged property that secures a Mortgage Loan in
the trust fund occurring after the Closing Date as a result of any other
casualty event occurring after the Closing Date (including, but not limited to,
other hurricanes) will not cause a breach of this representation and warranty.
S-12
The full economic impact of Hurricane Katrina and Hurricane Rita is
uncertain but may affect the ability of mortgagors to make payments on their
mortgage loans. We have no way to determine the particular nature of such
economic effects, how long any of these effects may last, or how these effects
may impact the performance of the Mortgage Loans. Any impact of these events on
the performance of the Mortgage Loans may increase the amount of losses borne by
the holders of the Certificates or impact the weighted average lives of the
Certificates.
UNDERWRITING STANDARDS
The seller's underwriting standards generally are less stringent than
those of Fannie Mae or Freddie Mac with respect to a borrower's credit history
and in certain other respects. A borrower's tarnished credit history may not
preclude the seller from making a loan. As a result of this approach to
underwriting, the mortgage loans in the mortgage pool may experience higher
rates of delinquencies, defaults and foreclosures than mortgage loans
underwritten in a manner which is more similar to the Fannie Mae and Freddie Mac
guidelines.
We refer you to "OCEAN BANK, F.S.B." in this prospectus supplement for
more detail.
INTEREST PAYMENTS ON THE MORTGAGE LOANS AND RESULTING REDUCTIONS IN INTEREST
DISTRIBUTIONS ON THE CLASS A CERTIFICATES
Prepayments of Principal May Reduce Interest Payments. When a principal
prepayment is made on a mortgage loan, the mortgagor is charged interest only up
to the date of prepayment, instead of a full month. This may result in an
interest shortfall. The servicer is obligated to pay these interest shortfalls,
without any right of reimbursement up to the amount of its servicing fee for the
preceding month. If the servicing fee is insufficient to pay prepayment interest
shortfalls, they will not be covered by the policy.
Prepayments of Mortgage Loans May Reduce the Interest Rate on the Class
A Certificates. If the mortgage loans in the mortgage pool with relatively
higher loan rates prepay, then the weighted average loan rate of the mortgage
loans in the mortgage pool will be reduced. This may limit the rate at which
interest accrues on the Class A Certificates.
Relief Act Interest Shortfalls Are Not Covered by the Servicer or the
Policy. Your certificates may be subject to certain shortfalls in interest
collections arising from the application of the Servicemembers Civil Relief Act
of 2003 (referred to in this prospectus supplement as the Relief Act).
The Relief Act provides relief to borrowers who enter active military
service and to borrowers in reserve status who are called to active duty after
the origination of their mortgage loan. The Relief Act provides generally that
these borrowers may not be charged interest on a mortgage loan in excess of 6%
per annum during the period of the borrower's active duty. These shortfalls are
not required to be paid by the related borrower at any future time, will not be
offset by a reduction to the servicing fee and will not be covered by payments
by the certificate insurer under the policy. Such shortfalls will reduce accrued
interest on the Class A Certificates. In addition, the Relief Act imposes
certain limitations that would impair the servicer's ability to foreclose on an
affected mortgage loan during the borrower's period of active service and, under
some circumstances, during an additional period thereafter.
We refer you to "LEGAL ASPECTS OF LOANS--Servicemembers Civil Relief
Act" in the accompanying prospectus for more detail.
S-13
CLAIMS UNDER THE HOME OWNERSHIP AND EQUITY PROTECTION ACT OF 1994 AND SIMILAR
LAWS
The Home Ownership and Equity Protection Act of 1994 sets forth certain
requirements in the origination of loans such as the mortgage loans. The
mortgagor under any mortgage loan covered by the act is permitted to make any
claim under the act against either the originator of the mortgage loan or
against a purchaser of the mortgage loan, such as the trust. It is the policy of
the seller not to originate mortgage loans covered by the act. Nevertheless,
some mortgage loans in the mortgage pool may be covered by the act. The
inclusion of any such mortgage loans in the mortgage pool would constitute a
breach of the seller's representations and warranties under the mortgage loan
purchase agreement and the seller would be required to repurchase or replace
such mortgage loan. If the seller is unable to repurchase or replace such a
mortgage loan, the trust will be subject to all of the claims and defenses which
the borrower could assert against the seller. In such event, if the certificate
insurer fails to perform its obligations under the policy, then you would bear
any related loss.
In addition to the Home Ownership and Equity Protection Act of 1994, a
number of legislative proposals have been introduced at the federal, state and
local level that are designed to discourage predatory lending practices. Some
states have enacted, or may enact, laws or regulations that prohibit inclusion
of some provisions in mortgage loans that have interest rates or origination
costs in excess of prescribed levels, and require that borrowers be given
certain disclosures prior to the consummation of the mortgage loans. In some
cases, state or local law may impose requirements and restrictions greater than
those in the Home Ownership and Equity Protection Act of 1994. An originator's
failure to comply with these laws could subject the trust (and other assignees
of the mortgage loans) to monetary penalties and could result in the borrowers
rescinding the mortgage loans against either the trust or subsequent holders of
the mortgage loans.
Lawsuits have been brought in various states making claims against
assignees of High Cost Loans for violations of state law allegedly committed by
the originator. Named defendants in these cases include numerous participants
within the secondary mortgage market, including some securitization trusts.
Under the anti-predatory lending laws of some states, the borrower is
required to meet a net tangible benefits test in connection with the origination
of the related mortgage loan. This test may be highly subjective and open to
interpretation. As a result, a court may determine that a mortgage loan does not
meet the test even if the originator reasonably believed that the test was
satisfied.
The mortgage lending and servicing business involves the collection of
numerous accounts and compliance with various federal, state and local laws that
regulate consumer lending. Lenders and servicers may be subject from time to
time to various types of claims, legal actions (including class action
lawsuits), investigations, subpoenas and inquiries in the course of their
business. It is impossible to predict the outcome of any particular actions,
investigations or inquiries or the resulting legal and financial liability. If
any such proceeding were determined adversely to the Originator or Servicer and
were to have a material adverse effect on its financial condition, the ability
of the Servicer to service the Mortgage Loans in accordance with the pooling
agreement, or the ability of the Originator to fulfill its obligation to
repurchase or substitute for defective Mortgage Loans, could be impaired.
We refer you to "RISK FACTORS--Violations Of Lending Laws Could Result
In Losses On Primary Assets" and "LEGAL ASPECTS OF LOANS--Consumer Protection
Laws" in the accompanying prospectus for more detail.
S-14
NEW JERSEY MORTGAGE LOANS AND HIGH COST LOANS
Following the sale of the subsequent mortgage loans to the trust, up to
approximately 10.5% of the mortgage loans in the mortgage pool, by cut-off date
principal balance, will be high cost loans under various state and local laws
and regulations (the "High Cost Loans"), the majority of which will be subject
to the New Jersey Home Ownership and Equity Protection Act of 2002 (the "New
Jersey Act"). Because the originator is a federally chartered thrift, it is not
subject to the New Jersey Act or such other state and local laws and regulations
by virtue of federal preemption. The High Cost Loans will be sold, however, to
the depositor, an entity that is neither a federal thrift nor a national bank
and is an entity which may not invoke federal preemption to avoid compliance
with the New Jersey Act or such other state and local laws and regulations. The
depositor will then assign these loans to the trustee which is a national bank
and is exempt from the New Jersey Act and such other state and local laws and
regulations. The availability of a preemption defense by the trust on behalf of
the certificateholders with respect to these loans is not free from doubt.
MASSACHUSETTS AND TEXAS MORTGAGE LOANS
Approximately 4.25% and 1.07% of the statistic calculation mortgage
loans in the statistic calculation mortgage pool, by cut-off date principal
balance, are secured by mortgaged properties in Massachusetts and Texas,
respectively. Massachusetts and Texas impose significant limitations on the
origination and servicing of home equity loans like the mortgage loans. If these
limitations are not satisfied, the lien of the mortgage loan may be invalid or,
in the case of limitations on servicing, all of the principal and interest due
may be forfeited.
INSOLVENCY OF SELLER; RECLASSIFICATION OF SALE AS A LOAN
The sale of the mortgage loans from the seller to the depositor will be
treated by the seller, the Depositor and the trust as a sale of the mortgage
loans. The seller will warrant that the transfer is a sale of its interest in
the mortgage loans. The depositor will warrant that the transfer of the mortgage
loans to the trust is a valid transfer and assignment of the mortgage loans to
the trustee. In the event of an insolvency of the seller, it is possible that a
receiver or conservator for, or a creditor of, the seller may argue that the
transaction between the seller and the depositor was a pledge of the mortgage
loans in connection with a borrowing by the seller rather than a true sale. Such
an attempt, if successful, and even if unsuccessful, could result in delays in
distributions to you.
BOOK-ENTRY CERTIFICATES
Liquidity of Certificates. Issuance of the Class A Certificates in
book-entry form may reduce the liquidity of these certificates in the secondary
trading market because investors may be unwilling to purchase Class A
Certificates for which they cannot obtain physical certificates.
Limit on Ability to Pledge. Because transactions in the Class A
Certificates can be effected only through DTC, Clearstream, Euroclear,
participating organizations, indirect participants and certain banks, your
ability to pledge a Class A Certificate to persons or entities that do not
participate in the DTC, Clearstream or Euroclear system or otherwise to take
actions in respect of such certificates may be limited due to lack of a physical
certificate representing the Class A Certificates.
Delays in Distributions. You may experience some delay in the receipt
of distributions of interest and principal on the Class A Certificates because
such distributions will be forwarded by the trustee to DTC and DTC will credit
such distributions to the accounts of its participants which will thereafter
credit them to your account either directly or indirectly through indirect
participants.
S-15
We refer you to "DESCRIPTION OF THE CERTIFICATES--Book-Entry
Certificates" in this prospectus supplement for more detail.
CERTIFICATE RATINGS RELATE TO CREDIT RISK ONLY
The ratings of the Class A Certificates will depend primarily on an
assessment by Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc. and Moody's Investors Service, Inc. of the mortgage loans and
upon the financial strength of the certificate insurer. Any future reduction in
a rating assigned to the financial strength of the certificate insurer may
result in a corresponding reduction in the rating of the Class A Certificates.
There is no assurance that the ratings will remain in place for any given period
of time or that the ratings will not be lowered or withdrawn by the rating
agencies. In general, the ratings address the likelihood that you will receive
distributions of principal and interest and do not address the likelihood of
prepayments on mortgage loans or the possibility that you might realize a lower
than anticipated yield.
We refer you to "RATINGS" in this prospectus supplement for more
detail.
IMPACT OF TERRORIST EVENTS AND MILITARY ACTION
The effects that terrorist attacks in the United States or other
incidents and related military action may have on the performance of the
mortgage loans or on the values of mortgaged properties cannot be determined at
this time. Investors should consider the possible effects on delinquency,
default and prepayment experience of the mortgage loans. Federal agencies and
non-government lenders have and may continue to defer, reduce or forgive
payments and delay foreclosure proceedings in respect of loans to borrowers
affected in some way by recent and possible future events. In addition,
activation of a substantial number of U.S. military reservists or members of the
National Guard may significantly increase the proportion of mortgage loans with
loan rates reduced by application of the Relief Act or similar state laws. The
interest distributable to holders of the Class A Certificates will be reduced on
a proportionate basis by any reductions in the amount of interest collectible on
the mortgage loans as a result of application of the Relief Act and neither the
servicer nor any other party will be required to fund any interest shortfall
caused by any such reduction. In addition, certain persons not covered by the
Relief Act may be eligible for similar loan payment relief under applicable
state laws.
We do not know the number of mortgage loans that have been or may be
affected by the application of the Relief Act.
YOUR CERTIFICATES WILL BE LIMITED OBLIGATIONS SOLELY OF THE TRUST AND NOT OF ANY
OTHER PARTY
The certificates will not represent an interest in or obligation of the
depositor, the servicer, the originator, the underwriter, the seller or the
trustee or any of their respective affiliates. Neither the certificates nor the
mortgage loans will be guaranteed or insured by any governmental agency or
instrumentality, or by the depositor, the servicer, the originator, the
underwriter, the seller, the trustee or any of their respective affiliates.
Proceeds of the assets included in the trust and the certificate insurance
policy will be the sole source of payments on the certificates, and there will
be no recourse to the depositor, the servicer, the originator, the underwriter,
the seller or the trustee in the event that these proceeds are insufficient or
otherwise unavailable to make all payments provided for under the certificates.
THE INTEREST RATE CORRIDOR CONTRACT IS SUBJECT TO COUNTERPARTY RISK
The assets of the trust include the interest rate corridor contract
which will require the counterparty thereunder to make certain payments to the
trust for the benefit of the holders of the
S-16
certificates. To the extent that payments on such certificates depend in part on
payments to be received by the trustee under the interest rate corridor
contract, the ability of the trustee to make such distributions on the
certificates will be subject to the credit risk of the counterparty to the
interest rate corridor contract. Although there is a mechanism in place to
facilitate replacement of the interest rate corridor contract upon the default
or credit impairment of the interest rate corridor contract counterparty, there
can be no assurance that any such mechanism will result in the ability of the
trustee to obtain a suitable replacement interest rate corridor contract.
SUITABILITY OF THE CERTIFICATES AS INVESTMENTS
The certificates are not suitable investments for any investor that
requires a regular or predictable schedule of monthly payments or payment on any
specific date. The certificates are complex investments that should be
considered only by investors who, either alone or with their financial, tax and
legal advisors, have the expertise to analyze the prepayment, reinvestment,
default and market risk, the tax consequences of an investment and the
interaction of these factors.
THE CERTIFICATE INSURER
The information set forth in the following paragraphs has been provided
by Ambac Assurance Corporation (the "Certificate Insurer").
Ambac Assurance Corporation is a Wisconsin-domiciled stock insurance
corporation regulated by the Office of the Commissioner of Insurance of the
State of Wisconsin and licensed to do business in 50 states, the District of
Columbia, the Commonwealth of Puerto Rico, the Territory of Guam and the U.S.
Virgin Islands. Ambac Assurance Corporation primarily insures newly-issued
municipal and structured finance obligations. Ambac Assurance Corporation is a
wholly-owned subsidiary of Ambac Financial Group, Inc. (formerly, AMBAC, Inc.),
a 100% publicly-held company. Moody's Investors Service, Inc., Standard & Poor's
and Fitch Ratings have each assigned a triple-A financial strength rating to
Ambac Assurance Corporation.
The consolidated financial statements of Ambac Assurance Corporation
and subsidiaries as of December 31, 2004 and 2003 and for each of the years in
the three-year period ended December 31, 2004, prepared in accordance with U. S.
generally accepted accounting principles, included in the Annual Report on Form
10-K of Ambac Financial Group, Inc. (which was filed with the Securities and
Exchange Commission (the "Commission") on March 15, 2005; Commission File No.
1-10777), the unaudited consolidated financial statements of Ambac Assurance
Corporation and subsidiaries as of September 30, 2005 and for the three- and
nine-month periods ended September 30, 2005 and September 30, 2004 included in
the Quarterly Report on Form 10-Q of Ambac Financial Group, Inc. for the period
ended September 30, 2005 (which was filed with the Commission on November 9,
2005), the unaudited consolidated financial statements of Ambac Assurance
Corporation and subsidiaries as of June 30, 2005 and for the three- and
six-month periods ended June 30, 2005 and June 30, 2004 included in the
Quarterly Report on Form 10-Q of Ambac Financial Group, Inc. for the period
ended June 30, 2005 (which was filed with the Commission on August 9, 2005), the
unaudited consolidated financial statements of Ambac Assurance Corporation and
subsidiaries as of March 31, 2005 and for the three - month periods ended March
31, 2005 and March 31, 2004 included in the Quarterly Report on Form 10-Q of
Ambac Financial Group, Inc. for the period ended March 31, 2005 (which was filed
with the Commission on May 10, 2005), and the Current Reports on Form 8-K filed
with the Commission on April 11, 2005, April 20, 2005, May 5, 2005, July 20,
2005, and August 2, 2005 and the information furnished and deemed to be filed
under Item 2.02 contained in Ambac Financial Group's Current Report on Form 8-K
dated and filed on October 19, 2005, as they relate to Ambac Assurance
Corporation, are hereby incorporated by reference into this Prospectus
Supplement and shall be deemed to be a part hereof. Any statement
S-17
contained in a document incorporated herein by reference shall be modified or
superseded for the purposes of this Prospectus Supplement to the extent that a
statement contained herein by reference herein also modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Prospectus
Supplement.
All consolidated financial statements of Ambac Assurance Corporation
and subsidiaries included in documents filed by Ambac Financial Group, Inc. with
the Commission pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934, as amended, subsequent to the date of this Prospectus
Supplement and prior to the termination of the offering of the Class A
Certificates shall be deemed to be incorporated by reference into this
Prospectus Supplement and to be a part hereof from the respective dates of
filing such consolidated financial statements.
The following table sets forth the capitalization of Ambac Assurance
Corporation and subsidiaries as of December 31, 2003, December 31, 2004 and
September 30, 2005 in conformity with U. S. generally accepted accounting
principles.
AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CAPITALIZATION TABLE
(DOLLARS IN MILLIONS)
December 31, December 31, September 30,
2003 2004 2005
------------ ------------ -------------
(unaudited)
Unearned premiums...................... $2,553 $2,783 $2,888
Long-term debt......................... 189 1,074 1,069
Notes payable to affiliates............ 84 - -
Other liabilities...................... 2,008 2,192 2,015
----- ----- -----
Total liabilities...................... 4,834 6,049 5,972
----- ----- -----
Stockholder's equity
Common stock........................ 82 82 82
Additional paid-in capital.......... 1,144 1,233 1,252
Accumulated other comprehensive income 243 238 165
Retained earnings................... 3,430 4,094 4,314
----- ----- -----
Total stockholder's equity............. 4,899 5,647 5,813
----- ----- -----
Total liabilities and stockholder's equity $9,733 $11,696 $11,785
====== ======= =======
For additional financial information concerning Ambac Assurance
Corporation, see the audited consolidated financial statements of Ambac
Assurance Corporation incorporated by reference herein. Copies of the
consolidated financial statements of Ambac Assurance Corporation incorporated by
reference, and copies of Ambac Assurance Corporation's annual statement for the
year ended December 31, 2004 prepared on the basis of accounting practices
prescribed or permitted by the State of Wisconsin Office of the Commissioner of
Insurance, are available without charge from Ambac Assurance Corporation. The
address of Ambac Assurance Corporation's administrative offices and its
telephone number are One State Street Plaza, 19th Floor, New York, New York
10004 and (212) 668-0340.
S-18
The Certificate Insurer makes no representation regarding the
Certificates or the advisability of investing in the Certificates and makes no
representation regarding, nor has it participated in the preparation of this
Prospectus Supplement other than the information supplied by the Certificate
Insurer and presented under the heading "The Certificate Insurer" in this
Prospectus Supplement and in the consolidated financial statements incorporated
in this Prospectus Supplement by reference.
OCEAN BANK, F.S.B.
The information set forth below concerning Ocean Bank, F.S.B., formerly
known as Home Loan and Investment Bank, F.S.B. ("Ocean Bank") has been provided
by Ocean Bank. Ocean Bank will be responsible for servicing the Mortgage Loans
(as defined herein) in accordance with Ocean Bank's policies and procedures for
servicing home equity loans and in accordance with the terms of a pooling and
servicing agreement (the "Agreement"), dated as of November 1, 2005, among Ocean
Bank, F.S.B., as seller and servicer (in such capacities, the "Seller" and
"Servicer"), Financial Asset Securities Corp., as depositor (the "Depositor")
and Deutsche Bank National Trust Company, as trustee (the "Trustee") for the
trust established pursuant to the Agreement (the "Trust").
As of September 30, 2005, Ocean Bank employed 228 persons at its
Warwick, Rhode Island headquarters and an additional 10 employees in branch
offices located in Warwick and Providence, Rhode Island. As of September 30,
2005, as of fiscal year end December 31, 2004, and as of fiscal year end
December 31, 2003, the net worth of Ocean Bank was $57,867,763, $66,123,918 and
$64,832,919, respectively. Copies of the audited financial statements of Ocean
Bank for the past three fiscal years, prepared on the basis of generally
accepted accounting principles, may be obtained upon written request from John
M. Murphy, President, at One Home Loan Plaza, Warwick, Rhode Island 02886. Ocean
Bank's net income for the nine months ended September 30, 2005 and for the
fiscal years ended December 31, 2004 and 2003 was $306,918, $8,017,719 and
$6,622,779, respectively.
LOAN ORIGINATION HISTORY
Ocean Bank originates mortgage loans on residential dwellings,
assembles and sells pools of mortgages to major commercial banks and other
financial institutions, and services mortgage portfolios placed with such
investors. All loans that are originated by Ocean Bank are underwritten by Ocean
Bank.
As of September 30, 2005, Ocean Bank conducted loan originations in a
number of states including New York, New Jersey, Pennsylvania, Massachusetts,
New Hampshire, Maine, Rhode Island, Connecticut, Vermont, Illinois, Virginia,
Delaware, Nevada, Arizona, Colorado, Utah, Maryland, Washington, Oregon,
Michigan, California, New Mexico, Ohio, Florida, Indiana, Wisconsin and Texas.
The dollar amounts of first and second mortgage loans originated during
the nine months ended September 30, 2005 and fiscal years ended December 31,
2004 and 2003 were $285,019,837, $368,839,575 and $375,039,983, respectively.
UNDERWRITING CRITERIA
Ocean Bank endeavors to originate first and second mortgage loans using
standard underwriting procedures based upon the applicant's general
creditworthiness and the real estate equity used as collateral security.
Mortgage loan applications are underwritten, and collateral properties
are appraised prior to closing. Underwriting, and the determination whether to
make specific loan originations, is centralized at Ocean Bank's headquarters in
Warwick, Rhode Island. All loans are required to be reviewed and
S-19
approved by an underwriter, each of whom is granted specific credit limits based
on experience and seniority. Only three senior officers of Ocean Bank can
approve loans over $150,000, and all loans over $200,000 require written
approval of the President of Ocean Bank.
Ocean Bank lends primarily on suburban and urban single family homes in
major metropolitan areas.
Ocean Bank does not originate mortgage loans which result in lower than
a third lien position on real estate. Ocean Bank will consider making a mortgage
loan in a subordinate position to a privately held first mortgage loan provided
a copy of the recorded security instrument and note are reviewed prior to credit
approval. Second mortgage loans will also be made behind adjustable or variable
rate first rate mortgage loans provided the payment used when calculating the
debt ratio is either (a) in the case of loans which adjust annually or will
adjust within one year of the date of application, based on the maximum rate
provided in the note on the next adjustment date, or (b) in the case of loans
which adjust less frequently than annually and do not have an adjustment date
within one year of the date of application, based on the current interest rate.
Loan applications are considered through a combination of reviews of
credit bureau reports and/or individual certifications. Except in the case of
non-income verified loans, income is verified through various means, including
applicant interviews, written verification, review of pay stubs and tax returns,
among other items, and the borrower's demonstration of sufficient levels of
disposable income to satisfy debt repayment requirements. The applicant's
employer is usually contacted to verify employment and employee compensation. A
Verification of Employment form (VOE) is usually presented to the applicant's
employer in addition to telephonic verification and receipt of W-2s or the last
two check stubs.
Self-Employed Applicant's Commission/Bonuses Tax Returns: A tax return
for the most recent year or years signed by the borrower is required from
self-employed applicants and applicants who derive 25% of their income from
commissions and/or bonuses. Consistency in commission and/or bonus income must
be established. Checking account statements are used solely as additional
verifications of income.
Rental Income: Rental income must be documented by lease, notarized
rental receipts, or two (2) years' tax returns. Ocean Bank calculates 75% of
total rents received which is subtracted from total mortgage payments on rental
property to derive a cash flow, if any, which amount is then treated as
additional income in the credit review process. If the subtraction of rental
income from the mortgage payment results in a negative cash flow, such amount is
subtracted from the applicant's monthly income.
Social Security-Veterans Administration (VA) Compensation and
Retirement Income: Social Security and VA compensation must be supported by an
awards letter from the appropriate agency. If such a letter is unavailable,
1099R forms or bank account statements indicating equal deposit amounts are
required.
Retirement income must be supported by an annuity letter or similar
awards document outlining all details of income. If unavailable either (i)
copies of recent bank account statements verifying direct deposit, or (ii)
copies of the most recent year's tax return, or (iii) copies of the most recent
year's 1099R forms are required.
Child and/or Spousal Support: The applicant must provide Ocean Bank
with evidence that the alimony or child support is expected to continue for at
least two (2) years after the date of the loan. A copy of the final decree of
divorce or separation agreement specifically setting the amount and term, if
any, of support is acceptable. Canceled checks may also be used as an additional
form of proof.
S-20
Appraisals: All properties are appraised by independent fee appraisers
approved by Ocean Bank in advance of funding. Appraisers are selected based upon
a review of sample appraisals, professional experience, education, and
professional organizations to which they belong and typical or specific
properties appraised. All appraisers must be approved by the Vice President of
Underwriting and must be independent from borrowers. Management reviews
references, credentials, and examples of prior appraisals before engaging an
appraiser. Appraisals are performed after analysis of other sales of properties
in the area in which the related mortgaged property is located, and a full
interior inspection appraisal is performed using forms acceptable to either The
Federal National Mortgage Association ("Fannie Mae") or The Federal Home Loan
Mortgage Corporation ("Freddie Mac") in connection with each mortgaged property.
If an appraisal with respect to a mortgaged property appears to be inconsistent
with appraisals previously conducted on comparable properties by the same or
other appraisers, Ocean Bank will engage a review appraiser to conduct a
drive-by review appraisal of the property as part of its quality control
procedures.
Title Companies and Closing Agents: Loans are closed through approved
attorneys, title insurers, or agents of title insurers, and are generally
insured by title companies which are licensed in the states in which the related
properties are located.
Variations from Underwriting Criteria: As described above, Ocean Bank
uses the foregoing criteria as guidelines only. On a case-by-case basis, Ocean
Bank may determine that the prospective mortgagor warrants a debt
service-to-income ratio exception, a loan-to-value exception or a pricing
exception. An exception may be allowed if the application reflects certain
compensating factors, among others: low loan-to-value ratio; pride of ownership;
stable employment of five or more years at the applicant's current place of
employment; and residence of five or more years at the applicant's current
residence. A significant number of Mortgage Loans represent such exceptions.
QUALITY CONTROL PROCEDURES HIGHLIGHTS
Each month, Ocean Bank's quality control department conducts a review
and verification of approximately 10% of the loans originated during the
previous month with specific attention to the following areas:
Legal Documentation: Mortgage note, mortgage, deed of trust,
truth-in-lending disclosure, title policy and all other applicable origination
documents are reviewed for existence, accuracy, and proper signatures.
Credit Documentation: All credit verifications (i.e., VOE etc.), credit
applications and credit reports are reviewed for existence, accuracy and proper
signatures.
All results are reported to management on a monthly basis. Management
meets with the department supervisors in both underwriting and quality control
to review results. Quality control functions are performed separately from loan
originating and underwriting.
Quality Control Appraisals: Each appraisal is reviewed with emphasis on
the following areas: verification of occupancy, valuation method, and review of
comparable sales.
In addition to the review discussed above, re-inspections are performed
on one-half of the reviewed loans, i.e., approximately 5% of originations. If a
pattern of questionable values or methodology becomes apparent for an appraiser,
a meeting is arranged to discuss these problems, and the appraisal firm may be
replaced.
S-21
COLLECTION PROCEDURES
As of September 30, 2005, Ocean Bank serviced a mortgage loan portfolio
of conventional mortgage loans that it originated with an aggregate unpaid
principal balance of approximately $359,216,466.
Collections are conducted by Ocean Bank's service center at its
corporate headquarters in Warwick, Rhode Island.
If foreclosure is necessary, Ocean Bank's workout department supervises
and monitors all related procedures (including bankruptcy proceedings) conducted
by the foreclosing attorneys. If title passes to the mortgagee, this department
insures that secured property is preserved and protected. After review and
analysis, a disposition strategy is developed and the property is marketed.
The collection department is structured in such a way that the most
senior (experienced) collectors are responsible for the accounts which are most
delinquent; i.e., 10-29 day accounts are contacted by junior personnel, 30-59
day accounts by the next most senior employees, etc. Collection supervisors are
responsible for all accounts which are sixty (60) or more days delinquent.
Workout officers are responsible for all accounts which are ninety (90) or more
days delinquent. Their duties include maintaining contact with attorneys
currently handling litigation against the borrower as well as marketing of any
property acquired through foreclosure.
Procedure on 10-29 days delinquent: Ocean Bank's servicing computer
system automatically queues a delinquent account when a borrower is ten (10)
days delinquent. Immediately, a phone call is initiated to the borrower
regarding the delinquent payment. Each account is assigned to a computer
"tickler" file for all promises of payment. The delinquent account is
electronically filed by the appropriate promised date within the tickler file.
Any account who has broken two (2) promises is referred to a more senior
collector for further collection.
Procedure on 30-59 days delinquent: As soon as an account reaches
thirty (30) days delinquent, a serious delinquency notice is sent followed by a
phone call by a collector. Between thirty (30) and forty-five (45) days
delinquent, the collector analyzes the situation of the borrower and makes a
determination for further action. These accounts are reviewed every two (2) days
with the collection supervisor as to what further action should be taken. After
all the information is compiled and analyzed a determination is made as to the
borrower's ability to repay the debt. The collection supervisor and the
servicing manager review all accounts received; if agreed, the account is
referred to an attorney for collection and possible foreclosure proceedings.
Procedure over 60 days delinquent: When an account is sixty (60) days
delinquent, it is monitored by a collection supervisor. The collection
supervisor updates information regarding the principal balance of any first lien
and taxes owed, and maintains contact with the borrower to monitor the
situation. The servicing manager will determine whether a visit to the property
is warranted. After all collection procedures have been exhausted and the
account becomes one hundred twenty (120) days delinquent, an attorney is usually
instructed to begin foreclosure proceedings. Workout officers handle all
accounts over ninety (90) days delinquent and keep in constant contact with the
borrower and the attorney. Any account which is in excess of one hundred twenty
(120) days delinquent is visited for reappraisal by an approved appraiser to
determine the condition of the collateral property and the strength of the
equity position of Ocean Bank.
S-22
DELINQUENCY AND LOSS EXPERIENCE
The following table sets forth Ocean Bank's delinquency and loss
experience, on its entire portfolio of conventional mortgage loans serviced by
Ocean Bank at the date indicated, all of which were originated or purchased by
Ocean Bank. There can be no assurance that the delinquency and loss experience
on the Mortgage Loans (most of which have been originated during the past twelve
months) will be consistent with the historical information provided below. Such
losses and delinquencies on the Mortgage Loans may be higher than the historical
information presented below.
At
At December 31, September 30,
----------------------------------------------- -------------
2002 2003 2004 2005
------------ ------------ ------------ ------------
Total Outstanding Principal Balance........ $413,319,745 $294,062,803 $341,602,628 $359,219,466
DELINQUENCY
Period of Delinquency:
30-59 Days Principal Balance.......... $7,927,262 $3,143,553 $3,222,088 $5,262,116
Percent of Delinquency by Principal
Balance............................... 1.92% 1.07% 0.94% 1.46%(1)
Period of Delinquency:
60-89 Days Principal Balance.......... $3,246,688 $1,684,843 $2,181,071 $2,583,821
Percent of Delinquency by Principal
Balance............................... 0.79% 0.57% 0.64% 0.72%(1)
Period of Delinquency:
90 Days or More Principal Balance..... $12,517,081 $11,705,551 $11,530,488 $10,537,581
Percent of Delinquency by Principal
Balance............................... 3.03% 3.98% 3.38% 2.93%(1)
Total Delinquencies:
Principal Balance..................... $23,691,031 $16,533,947 $16,933,647 $18,383,518
Percent of Delinquency by Principal
Balance............................... 5.73% 5.62% 4.96% 5.12%(1)
REO........................................ $3,391,562 $2,508,498 $1,640,739 $1,372,549
Net Gains/(Losses) on Liquidated Loans..... $(1,382,762) $(1,860,792) $(1,481,108) $(700,151)
Net Gains/(Losses) on Liquidated Loans as a
Percent of Total Outstanding Principal Balance (0.3346)% (0.6328)% (0.4336)% (0.1949)% (1)
- ------------------
(1) Not annualized.
The above delinquency and loss experience percentages are calculated on
the basis of the total conventional mortgage loans serviced by Ocean Bank at the
date indicated, all of which were originated or purchased by Ocean Bank.
S-23
DESCRIPTION OF THE MORTGAGE LOANS
GENERAL
The mortgage pool (the "Mortgage Pool") will include:
(a) the fixed-rate and adjustable-rate mortgage loans
identified by the Seller to be sold to the Depositor
and in turn sold by the Depositor to the Trust on the
Closing Date and described in this Prospectus
Supplement (the "Statistic Calculation Mortgage
Loans");
(b) the additional fixed-rate and adjustable-rate
mortgage loans to be sold by the Seller to the
Depositor and in turn sold by the Depositor to the
Trust on the Closing Date (the "Additional Mortgage
Loans", and together with the Statistic Calculation
Mortgage Loans, the "Initial Mortgage Loans"); and
(c) the subsequent fixed-rate and adjustable-rate
mortgage loans to be sold to the Trust by the Seller
from time to time on or prior to February 24, 2006
(the "Subsequent Mortgage Loans", and together with
the Initial Mortgage Loans, the "Mortgage Loans").
The statistical information presented in this Prospectus Supplement
describes the Mortgage Loans based on the characteristics of the Statistic
Calculation Mortgage Loans as of close of business on October 31, 2005. Unless
otherwise set forth herein, approximate percentages set forth with respect to
the Statistic Calculation Mortgage Loans are measured by the respective
aggregate Principal Balances (as defined herein) of the Statistic Calculation
Mortgage Loans as of the Cut-Off Date (as defined herein). With respect to any
date of determination, the "Pool Balance" will be equal to the aggregate of the
Principal Balances of all Mortgage Loans as of such date. The "Principal
Balance" of a Mortgage Loan (other than a Liquidated Mortgage Loan) on any day
is equal to its Cut-Off Date Principal Balance, minus all collections credited
against the Cut-Off Date Principal Balance of such Mortgage Loan. The "Cut-Off
Date Principal Balance" of a Mortgage Loan is the outstanding principal balance
as of the related Cut-Off Date. The "Cut-Off Date" with respect to (i) the
Statistic Calculation Mortgage Loans is the close of business on October 31,
2005, (ii) each Additional Mortgage Loan will be the later of October 31, 2005
and the date of origination of such Additional Mortgage Loan and (iii) each
Subsequent Mortgage Loan will be the later of the close of business on the last
day of the month preceding the month in which such Subsequent Mortgage Loan is
conveyed to the Trust and the date of origination of such Subsequent Mortgage
Loan. The Principal Balance of a Liquidated Mortgage Loan (as defined herein)
after the Due Period in which such Mortgage Loan becomes a Liquidated Mortgage
Loan will be zero.
The statistic calculation mortgage pool (the "Statistic Calculation
Mortgage Pool") consists of 1,611 Mortgage Loans, and the related mortgaged
properties (the "Mortgaged Properties") are located in 32 states as set forth
herein. As of the Cut-Off Date, the Statistic Calculation Mortgage Loans had an
aggregate Cut-Off Date Principal Balance of $112,016,063. Approximately 9.90%
and 90.10% of the Statistic Calculation Mortgage Pool consists of fixed-rate and
adjustable-rate Mortgage Loans, respectively, with remaining terms to maturity
of not more than 360 months. As of the Cut-Off Date, the maximum Principal
Balance of any of the Statistic Calculation Mortgage Loans was $643,154, the
minimum Principal Balance thereof was $9,579, and the Principal Balance of such
Statistic Calculation Mortgage Loans averaged $69,532. As of the Cut-Off Date,
the loan rates payable on the Statistic Calculation Mortgage Loans (the "Loan
Rates") ranged from 5.100% to 12.950% per annum, and the weighted average Loan
Rate for the Statistic Calculation Mortgage Loans was 7.858% per annum. As of
the Cut-Off Date, the original term to stated maturity of the Statistic
Calculation Mortgage Loans ranged
S-24
from 60 months to 360 months, the remaining term to stated maturity ranged from
46 months to 360 months, the weighted average original term to stated maturity
was approximately 334 months, the weighted average remaining term to stated
maturity was approximately 330 months, and the CLTV (as defined herein) ranged
from 5.79% to 90.00% with a weighted average CLTV of 69.47%, and the FICO Scores
ranged from 458 to 810 with a weighted average FICO Score of 608. The Statistic
Calculation Mortgage Loans had stated maturities ranging from August 26, 2009 to
November 1, 2035. All of the Statistic Calculation Mortgage Loans required
monthly payments of principal that will fully amortize such Mortgage Loans by
their respective maturity dates. The Statistic Calculation Mortgage Loans are
secured by either first or second mortgages or deeds of trust on Mortgaged
Properties. The Statistic Calculation Mortgage Pool consists of 72.17% of loans
secured by first liens on the related Mortgaged Properties and 27.83% of loans
secured by second liens on the related Mortgaged Properties. No Statistic
Calculation Mortgage Loan was 30 or more days delinquent as of the Cut-Off Date.
The Mortgaged Properties securing the Statistic Calculation Mortgage Loans
consist primarily of residential properties that are one- to four-family
properties. Based upon representations of the mortgagors at the time of
origination, 96.06% of the related Mortgaged Properties were owner occupied.
None of the Statistic Calculation Mortgage Loans was originated by Ocean Bank to
facilitate the sale of property acquired by Ocean Bank in connection with prior
foreclosures.
ADJUSTABLE-RATE MORTGAGE LOANS
All of the adjustable-rate Mortgage Loans are "hybrid mortgage loans"
that generally have Loan Rates that first adjust after an initial fixed rate
period of two or three years following origination depending on the terms of the
particular mortgage note and then adjust semi-annually thereafter. The
adjustable-rate Mortgage Loans provide for semi-annual adjustment of the related
Loan Rate based on the Six-Month LIBOR, as described at "--The Index" below. In
the case of the adjustable-rate Mortgage Loans, there will be corresponding
adjustments to the monthly payment amount, in each case on each adjustment date
applicable thereto (each such date, an "Adjustment Date"); provided that the
first such adjustment (i) in the case of approximately 97.31% of the
adjustable-rate Statistic Calculation Mortgage Loans, approximately two years
following origination, and (ii) in the case of approximately 2.69% of the
adjustable-rate Statistic Calculation Mortgage Loans, approximately three years
following origination. On each Adjustment Date for an adjustable-rate Mortgage
Loan, the Loan Rate will be adjusted to equal the sum, rounded generally to the
nearest multiple of 1/8%, of the index and a fixed percentage amount (the
"Margin"), provided that the Loan Rate on each such adjustable-rate Mortgage
Loan will not increase or decrease by more than 1.000% (the "Subsequent Periodic
Rate Cap") on any related Adjustment Date and will not exceed a specified
maximum Loan Rate over the life of such Mortgage Loan (the "Maximum Rate") or be
less than a specified minimum Loan Rate over the life of such Mortgage Loan (the
"Minimum Rate"). The Loan Rate generally will not increase or decrease on the
first Adjustment Date by more than a fixed percentage specified in the related
Mortgage Note (the "Initial Periodic Rate Cap"); the Initial Periodic Rate Caps
are 2.000% for 82.40% of the adjustable-rate Statistic Calculation Mortgage
Loans and 3.000% for 17.60% of the adjustable-rate Statistic Calculation
Mortgage Loans. Effective with the first monthly payment due on each
adjustable-rate Mortgage Loan after each related Adjustment Date, the monthly
payment amount will be adjusted to an amount that will amortize fully the
outstanding Principal Balance of the related Mortgage Loan over its remaining
term, and pay interest at the Loan Rate as so adjusted. Due to the application
of the Initial Periodic Rate Caps, Subsequent Periodic Rate Caps and Maximum
Rates, the Loan Rate on each such adjustable-rate Mortgage Loan, as adjusted on
any related Adjustment Date, may be less than the sum of the index and the
related Margin, rounded as described above. The Margins of the adjustable-rate
Statistic Calculation Mortgage Loans ranged from 3.900% to 11.050% with a
weighted average Margin of 6.633%. The Maximum Rate of the adjustable-rate
Statistic Calculation Mortgage Loans ranged from 11.150% to 19.660% with a
weighted average Maximum Rate of 14.233%. The Minimum Rate of the
adjustable-rate Statistic Calculation Mortgage
S-25
Loans ranged from 5.150% to 12.300% with a weighted average Minimum Rate of
7.887%. See "--The Index" below. See "--The Index" below.
The adjustable-rate Mortgage Loans generally do not permit the
mortgagor to convert the adjustable Loan Rate to a fixed Loan Rate.
THE INDEX
The index applicable to the determination of the Loan Rates for all of
the adjustable-rate Mortgage Loans will be the average of the interbank offered
rates for six month United States dollar deposits in the London market,
calculated as provided in the related Mortgage Note (the "Six-Month LIBOR") and
as most recently available as of the first Business Day of the month immediately
preceding the month of the related Adjustment Date.
MORTGAGE LOAN CHARACTERISTICS
Unless otherwise set forth herein, set forth below is approximate
statistical information with respect to the Statistic Calculation Mortgage Loans
measured by the respective aggregate Principal Balances thereof as of the
Cut-Off Date. On or prior to the Closing Date, Additional Mortgage Loans will be
delivered to the Trust. In addition, prior to the Closing Date, Statistic
Calculation Mortgage Loans may be removed and other mortgage loans may be
substituted for the removed loans. However, the removal and inclusion of such
Mortgage Loans and the addition of the Subsequent Mortgage Loans will not
materially alter the characteristics of the Statistic Calculation Mortgage Loans
as described in this Prospectus Supplement, although the composition of the
Mortgage Pool and of the Mortgagors of the Mortgage Loans, the credit quality of
the Mortgagors, the range and distribution of Loan Rates, the range and
distribution of Principal Balances, the range and distribution of loan-to-value
ratios and the range and distribution of remaining terms to stated maturity and
certain other characteristics of the Mortgage Loans as described in this
Prospectus Supplement may differ. The Seller will be required to deliver
Additional Mortgage Loans and Subsequent Mortgage Loans having characteristics
which, in the aggregate, are not materially different from the Statistic
Calculation Mortgage Loans. The sum of the columns below may not equal the total
indicated due to rounding.
S-26
CUT-OFF DATE PRINCIPAL BALANCES
NUMBER
OF STATISTIC CUT-OFF DATE % OF CUT-OFF DATE
CALCULATION AGGREGATE AGGREGATE PRINCIPAL
CUT-OFF DATE PRINCIPAL BALANCES ($) MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
-------------------------------------------- -------------- ----------------- -------------------
9,579 - 50,000......................... 895 $ 27,178,791.52 24.26%
50,001 - 100,000......................... 408 28,180,427.02 25.16
100,001 - 150,000......................... 147 18,093,954.11 16.15
150,001 - 200,000......................... 76 13,357,229.47 11.92
200,001 - 250,000......................... 32 7,212,558.73 6.44
250,001 - 300,000......................... 23 6,340,297.07 5.66
300,001 - 350,000......................... 15 4,791,372.13 4.28
350,001 - 400,000......................... 5 1,847,451.29 1.65
400,001 - 450,000......................... 2 817,857.43 0.73
450,001 - 500,000......................... 4 1,916,301.04 1.71
500,001 - 550,000......................... 2 1,036,162.33 0.93
600,001 - 643,154......................... 2 1,243,660.79 1.11
----- ----------------- -------
TOTAL.............................. 1,611 $ 112,016,062.93 100.00%
----- ----------------- -------
S-27
GEOGRAPHIC DISTRIBUTION
NUMBER
OF STATISTIC CUT-OFF DATE % OF CUT-OFF DATE
CALCULATION AGGREGATE AGGREGATE PRINCIPAL
STATE MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------- -------------- ----------------- -------------------
Arizona...................................... 17 $ 1,668,463.75 1.49%
California................................... 30 2,671,513.41 2.38
Colorado..................................... 3 438,001.68 0.39
Connecticut.................................. 33 1,874,061.31 1.67
Delaware..................................... 19 1,394,360.03 1.24
Florida...................................... 120 6,999,730.33 6.25
Georgia...................................... 52 3,160,822.78 2.82
Illinois..................................... 65 2,761,896.20 2.47
Indiana...................................... 23 887,940.18 0.79
Kentucky..................................... 10 586,281.20 0.52
Louisiana.................................... 14 691,671.50 0.62
Maine........................................ 32 2,258,684.57 2.02
Maryland..................................... 76 6,227,240.94 5.56
Massachusetts................................ 58 4,758,236.32 4.25
Michigan..................................... 58 3,315,369.28 2.96
Minnesota.................................... 12 498,077.29 0.44
Nevada....................................... 20 1,380,589.14 1.23
New Hampshire................................ 16 706,152.65 0.63
New Jersey................................... 254 19,887,738.61 17.75
New York..................................... 164 13,899,122.66 12.41
North Carolina............................... 30 1,941,000.57 1.73
Ohio......................................... 58 2,585,752.59 2.31
Oklahoma..................................... 10 386,838.87 0.35
Oregon....................................... 1 177,908.43 0.16
Pennsylvania................................. 172 8,098,923.22 7.23
Rhode Island................................. 103 11,541,612.02 10.30
Tennessee.................................... 22 1,100,116.62 0.98
Texas........................................ 28 1,194,759.40 1.07
Utah......................................... 3 266,046.47 0.24
Virginia..................................... 81 6,420,068.43 5.73
Washington................................... 6 391,826.08 0.35
Wisconsin.................................... 21 1,845,256.40 1.65
----- ----------------- -------
TOTAL.............................. 1,611 $ 112,016,062.93 100.00%
----- ----------------- -------
S-28
COMBINED LOAN-TO-VALUE RATIOS
NUMBER
OF STATISTIC CUT-OFF DATE % OF CUT-OFF DATE
CALCULATION AGGREGATE AGGREGATE PRINCIPAL
COMBINED LOAN-TO-VALUE RATIO (%) MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
-------------------------------------------- -------------- ----------------- -------------------
5.79- 10.00.............................. 7 $ 171,406.00 0.15%
10.01- 20.00.............................. 30 1,161,485.17 1.04
20.01- 30.00.............................. 48 1,935,178.89 1.73
30.01- 40.00.............................. 68 3,704,037.32 3.31
40.01- 50.00.............................. 147 8,377,336.86 7.48
50.01- 60.00.............................. 178 11,298,932.88 10.09
60.01- 70.00.............................. 303 19,726,923.59 17.61
70.01- 80.00.............................. 504 37,151,312.01 33.17
80.01- 90.00.............................. 326 28,489,450.21 25.43
----- ----------------- -------
TOTAL.............................. 1,611 $ 112,016,062.93 100.00%
----- ----------------- -------
With respect to each Statistic Calculation Mortgage Loan the original
Combined Loan-to-Value Ratios ("CLTV") shown above are equal to (i) the sum of
(a) the original Principal Balance of such Mortgage Loan at the date of
origination plus (b) the remaining balance of the first lien, if any, at the
date of origination of such Mortgage Loan divided by (ii) the lesser of (a) the
value of the related Mortgaged Property, based upon the appraisal made at the
time of origination of such Mortgage Loan, or (b) the purchase price of such
Mortgaged Property if the mortgage loan proceeds from such Mortgage Loan are
used to purchase such Mortgaged Property. No assurance can be given that the
values of such Mortgaged Properties have remained or will remain at their levels
as of the dates of origination of the related Mortgage Loans. If the residential
real estate market should experience an overall decline in property values such
that the outstanding balances of such Mortgage Loans together with the
outstanding balances of the related first liens become equal to or greater than
the value of the related Mortgaged Properties, the actual losses could be higher
than those now generally experienced in the mortgage lending industry.
LIEN POSITION
NUMBER
OF STATISTIC CUT-OFF DATE % OF CUT-OFF DATE
CALCULATION AGGREGATE AGGREGATE PRINCIPAL
LIEN POSITION MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------- -------------- ----------------- -------------------
First Lien................................... 874 $ 80,842,403.44 72.17%
Second Lien.................................. 737 31,173,659.49 27.83
----- ----------------- -------
TOTAL.............................. 1,611 $ 112,016,062.93 100.00%
----- ----------------- -------
S-29
LOAN RATES
NUMBER
OF STATISTIC CUT-OFF DATE % OF CUT-OFF DATE
CALCULATION AGGREGATE AGGREGATE PRINCIPAL
LOAN RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
------------------------------------------- -------------- ----------------- -------------------
5.100 - 5.500........................... 12 $ 1,530,655.68 1.37%
5.501 - 6.000........................... 26 3,775,639.40 3.37
6.001 - 6.500........................... 58 7,874,375.48 7.03
6.501 - 7.000........................... 200 19,011,696.90 16.97
7.001 - 7.500........................... 283 21,506,432.09 19.20
7.501 - 8.000........................... 293 21,050,426.65 18.79
8.001 - 8.500........................... 239 13,569,011.56 12.11
8.501 - 9.000........................... 92 4,940,420.36 4.41
9.001 - 9.500........................... 154 7,040,058.55 6.28
9.501 - 10.000........................... 97 5,326,744.51 4.76
10.001 - 10.500........................... 78 3,503,132.63 3.13
10.501 - 11.000........................... 49 1,934,420.29 1.73
11.001 - 11.500........................... 19 643,948.87 0.57
11.501 - 12.000........................... 7 193,929.93 0.17
12.001 - 12.500........................... 2 88,241.18 0.08
12.501 - 12.950........................... 2 26,928.85 0.02
----- ----------------- -------
TOTAL.............................. 1,611 $ 112,016,062.93 100.00%
----- ----------------- -------
REMAINING MONTHS TO STATED MATURITY
NUMBER
OF STATISTIC CUT-OFF DATE % OF CUT-OFF DATE
CALCULATION AGGREGATE AGGREGATE PRINCIPAL
REMAINING MONTHS TO STATED MATURITY (MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
-------------------------------------------- -------------- ----------------- -------------------
46 - 48................................. 1 $ 31,832.83 0.03%
49 - 72................................. 10 266,578.84 0.24
73 - 96................................. 1 16,408.57 0.01
97 - 120................................. 71 2,254,322.75 2.01
145 - 168................................. 21 844,945.41 0.75
169 - 192................................. 154 5,323,583.92 4.75
217 - 240................................. 239 9,359,947.50 8.36
265 - 288................................. 3 178,213.64 0.16
289 - 312................................. 6 347,511.81 0.31
337 - 360................................. 1,105 93,392,717.66 83.37
----- ---------------- -------
TOTAL.............................. 1,611 $ 112,016,062.93 100.00%
----- ---------------- -------
S-30
MONTHS SINCE ORIGINATION
NUMBER
OF STATISTIC CUT-OFF DATE % OF CUT-OFF DATE
CALCULATION AGGREGATE AGGREGATE PRINCIPAL
MONTHS SINCE ORIGINATION (MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------- -------------- ----------------- -------------------
Less than or equal to 0...................... 248 $ 18,059,723.24 16.12%
1 - 23....................................... 1,363 93,956,339.69 83.88
----- ----------------- -------
TOTAL.............................. 1,611 $ 112,016,062.93 100.00%
----- ----------------- -------
PROPERTY TYPE
NUMBER
OF STATISTIC CUT-OFF DATE % OF CUT-OFF DATE
CALCULATION AGGREGATE AGGREGATE PRINCIPAL
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------- -------------- ----------------- -------------------
Single Family Detached....................... 1,207 $ 81,842,235.33 73.06%
2-4 Units.................................... 116 11,976,502.03 10.69
PUD Detached................................. 71 6,319,771.93 5.64
Single Family Attached....................... 124 5,819,718.35 5.20
Condominium.................................. 62 3,868,543.99 3.45
PUD Attached................................. 30 2,174,315.23 1.94
Townhouse.................................... 1 14,976.07 0.01
----- ----------------- -------
TOTAL.............................. 1,611 $ 112,016,062.93 100.00%
----- ----------------- -------
OCCUPANCY TYPE(1)
NUMBER
OF STATISTIC CUT-OFF DATE % OF CUT-OFF DATE
CALCULATION AGGREGATE AGGREGATE PRINCIPAL
OCCUPANCY TYPE MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------- -------------- ----------------- -------------------
Owner Occupied............................... 1,548 $ 107,598,035.25 96.06%
Non-owner Occupied........................... 63 4,418,027.68 3.94
----- ----------------- -------
TOTAL.............................. 1,611 $ 112,016,062.93 100.00%
----- ----------------- -------
(1) Based upon representations made by the Mortgagors at the time of
origination of such Mortgage Loans.
PRODUCT TYPE
NUMBER
OF STATISTIC CUT-OFF DATE % OF CUT-OFF DATE
CALCULATION AGGREGATE AGGREGATE
PRODUCT TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------------------------- -------------- ----------------- -----------------
2/28 6 MO LIBOR.............................. 1,454 $ 98,205,248.28 87.67%
Fixed Rate................................... 122 11,093,242.42 9.90
3/27 6 MO LIBOR.............................. 35 2,717,572.23 2.43
----- ----------------- -------
TOTAL.............................. 1,611 $ 112,016,062.93 100.00%
----- ----------------- -------
S-31
ORIGINAL TERMS TO STATED MATURITY
NUMBER
OF STATISTIC CUT-OFF DATE % OF CUT-OFF DATE
CALCULATION AGGREGATE AGGREGATE
ORIGINAL TERM (MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------------------------------------- -------------- ----------------- -----------------
60 - 60................................. 11 $ 298,411.67 0.27%
61 - 120................................. 72 2,270,731.32 2.03
121 - 180................................. 175 6,168,529.33 5.51
181 - 240................................. 239 9,359,947.50 8.36
241 - 300................................. 9 525,725.45 0.47
301 - 360................................. 1,105 93,392,717.66 83.37
----- ----------------- -------
TOTAL.............................. 1,611 $ 112,016,062.93 100.00%
----- ----------------- -------
FICO SCORE(1)
NUMBER
OF STATISTIC CUT-OFF DATE % OF CUT-OFF DATE
CALCULATION AGGREGATE AGGREGATE
FICO SCORE(1) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------------------------- -------------- ----------------- -----------------
Not Available................................ 17 $ 1,040,252.66 0.93%
441 - 460................................. 1 28,933.21 0.03
461 - 480................................. 4 584,296.59 0.52
481 - 500................................. 10 761,949.19 0.68
501 - 520................................. 21 1,412,154.11 1.26
521 - 540................................. 63 4,953,310.04 4.42
541 - 560................................. 179 12,191,518.32 10.88
561 - 580................................. 251 14,835,552.22 13.24
581 - 600................................. 245 16,707,874.80 14.92
601 - 620................................. 246 17,036,310.27 15.21
621 - 640................................. 205 14,622,200.34 13.05
641 - 660................................. 150 11,848,962.72 10.58
661 - 680................................. 102 7,238,602.47 6.46
681 - 700................................. 49 3,548,282.12 3.17
701 - 720................................. 21 2,218,663.34 1.98
721 - 740................................. 22 1,275,199.21 1.14
741 - 760................................. 14 1,191,315.81 1.06
761 - 780................................. 4 146,775.54 0.13
781 - 800................................. 5 293,947.88 0.26
801 - 810................................. 2 79,962.09 0.07
----- ----------------- -------
TOTAL.............................. 1,611 $ 112,016,062.93 100.00%
----- ----------------- -------
(1) Relates to the Original FICO Score, or Updated Fico Score (if available).
FICO Scores are current for all Mortgage Loans with seasoning greater than 6
months.
S-32
PREPAYMENT PENALTY TERM
NUMBER
OF STATISTIC CUT-OFF DATE % OF CUT-OFF DATE
CALCULATION AGGREGATE AGGREGATE
PREPAY PENALTY TERM (YEARS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------------------------- -------------- ----------------- -----------------
0............................................ 243 $ 24,282,145.61 21.68%
36........................................... 1,368 87,733,917.32 78.32
----- ----------------- -------
TOTAL.............................. 1,611 $ 112,016,062.93 100.00%
----- ----------------- -------
DOCUMENTATION TYPE
NUMBER
OF STATISTIC CUT-OFF DATE % OF CUT-OFF DATE
CALCULATION AGGREGATE AGGREGATE
DOCUMENTATION TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------------------------- -------------- ----------------- -----------------
Full Documentation........................... 1,611 $ 112,016,062.93 100.00%
----- ----------------- -------
TOTAL.............................. 1,611 $ 112,016,062.93 100.00%
----- ----------------- -------
MARGIN (ADJUSTABLE-RATE MORTGAGE LOANS)
NUMBER
OF STATISTIC CUT-OFF DATE % OF CUT-OFF DATE
CALCULATION AGGREGATE AGGREGATE PRINCIPAL
MARGIN (%) MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
------------------------------------------- -------------- ----------------- -------------------
3.900 - 4.000........................... 3 $ 209,709.81 0.21%
4.001 - 4.500........................... 11 1,366,427.68 1.35
4.501 - 5.000........................... 30 4,389,368.70 4.35
5.001 - 5.500........................... 88 9,586,148.85 9.50
5.501 - 6.000........................... 245 20,681,158.88 20.49
6.001 - 6.500........................... 302 20,191,998.96 20.01
6.501 - 7.000........................... 279 18,468,834.12 18.30
7.001 - 7.500........................... 133 7,063,815.41 7.00
7.501 - 8.000........................... 97 4,896,742.04 4.85
8.001 - 8.500........................... 122 6,209,852.36 6.15
8.501 - 9.000........................... 70 3,593,114.26 3.56
9.001 - 9.500........................... 78 3,064,523.68 3.04
9.501 - 10.000........................... 22 856,910.39 0.85
10.001 - 10.500........................... 8 307,215.37 0.30
11.001 - 11.050........................... 1 37,000.00 0.04
----- ----------------- -------
TOTAL.............................. 1,489 $ 100,922,820.51 100.00%
----- ----------------- -------
S-33
MAXIMUM RATE (ADJUSTABLE-RATE MORTGAGE LOANS)
NUMBER
OF STATISTIC CUT-OFF DATE % OF CUT-OFF DATE
CALCULATION AGGREGATE AGGREGATE PRINCIPAL
MAXIMUM RATE (%) MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
------------------------------------------- -------------- ----------------- -------------------
11.150 - 11.500........................... 7 $ 806,134.72 0.80%
11.501 - 12.000........................... 20 2,908,244.68 2.88
12.001 - 12.500........................... 51 6,505,441.54 6.45
12.501 - 13.000........................... 177 15,691,512.94 15.55
13.001 - 13.500........................... 273 19,902,344.35 19.72
13.501 - 14.000........................... 243 16,621,670.08 16.47
14.001 - 14.500........................... 179 10,479,156.88 10.38
14.501 - 15.000........................... 32 2,448,850.29 2.43
15.001 - 15.500........................... 67 4,007,694.37 3.97
15.501 - 16.000........................... 78 6,043,344.54 5.99
16.001 - 16.500........................... 76 4,284,341.02 4.25
16.501 - 17.000........................... 69 2,901,457.27 2.87
17.001 - 17.500........................... 86 3,391,815.43 3.36
17.501 - 18.000........................... 45 1,847,280.72 1.83
18.001 - 18.500........................... 42 1,464,928.31 1.45
18.501 - 19.000........................... 33 1,195,559.46 1.18
19.001 - 19.500........................... 10 388,043.91 0.38
19.501 - 19.660........................... 1 35,000.00 0.03
----- ----------------- -------
TOTAL.............................. 1,489 $ 100,922,820.51 100.00%
----- ----------------- -------
MINIMUM RATE (ADJUSTABLE-RATE MORTGAGE LOANS)
NUMBER
OF STATISTIC CUT-OFF DATE % OF CUT-OFF DATE
CALCULATION AGGREGATE AGGREGATE
MINIMUM RATE (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------------------------------------- -------------- ----------------- -----------------
5.150 - 5.500........................... 7 $ 806,134.72 0.80%
5.501 - 6.000........................... 20 2,908,244.68 2.88
6.001 - 6.500........................... 50 6,666,516.60 6.61
6.501 - 7.000........................... 181 16,020,109.34 15.87
7.001 - 7.500........................... 279 20,624,721.99 20.44
7.501 - 8.000........................... 281 19,827,732.08 19.65
8.001 - 8.500........................... 224 12,762,055.08 12.65
8.501 - 9.000........................... 85 4,500,333.48 4.46
9.001 - 9.500........................... 144 6,531,933.94 6.47
9.501 - 10.000........................... 88 4,967,529.91 4.92
10.001 - 10.500........................... 69 3,016,947.17 2.99
10.501 - 11.000........................... 46 1,756,997.97 1.74
11.001 - 11.500........................... 13 461,563.55 0.46
11.501 - 12.000........................... 1 35,000.00 0.03
12.001 - 12.300........................... 1 37,000.00 0.04
----- ----------------- -------
TOTAL.............................. 1,489 $ 100,922,820.51 100.00%
----- ----------------- -------
S-34
INITIAL PERIODIC RATE CAP (ADJUSTABLE-RATE MORTGAGE LOANS)
NUMBER
OF STATISTIC CUT-OFF DATE % OF CUT-OFF DATE
CALCULATION AGGREGATE AGGREGATE PRINCIPAL
INITIAL PERIODIC RATE CAP (%) MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------- -------------- ----------------- -------------------
2.000........................................ 1,124 $ 83,160,901.88 82.40%
3.000........................................ 365 17,761,918.63 17.60
----- ----------------- -------
TOTAL.............................. 1,489 $ 100,922,820.51 100.00%
----- ----------------- -------
SUBSEQUENT PERIODIC RATE CAP (ADJUSTABLE-RATE MORTGAGE LOANS)
NUMBER
OF STATISTIC CUT-OFF DATE % OF CUT-OFF DATE
CALCULATION AGGREGATE AGGREGATE PRINCIPAL
SUBSEQUENT PERIODIC RATE CAP (%) MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------- -------------- ----------------- -------------------
1.000........................................ 1,489 $ 100,922,820.51 100.00%
----- ----------------- -------
TOTAL.............................. 1,489 $ 100,922,820.51 100.00%
----- ----------------- -------
S-35
FIRST RATE ADJUSTMENT DATE (ADJUSTABLE-RATE MORTGAGE LOANS)
NUMBER
OF STATISTIC CUT-OFF DATE % OF CUT-OFF DATE
CALCULATION AGGREGATE AGGREGATE PRINCIPAL
FIRST RATE ADJUSTMENT DATE MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ---------------------------------------------- -------------- ----------------- -------------------
November 2005................................. 1 $189,241.33 0.19%
December 2005................................. 6 419,445.28 0.42
January 2006.................................. 4 151,781.38 0.15
February 2006................................. 9 696,174.01 0.69
March 2006.................................... 13 988,976.29 0.98
April 2006.................................... 8 731,978.67 0.73
May 2006...................................... 9 621,405.82 0.62
June 2006..................................... 10 441,998.14 0.44
July 2006..................................... 6 341,250.56 0.34
August 2006................................... 7 200,405.52 0.20
September 2006................................ 3 85,559.04 0.08
October 2006.................................. 1 22,640.20 0.02
November 2006................................. 4 181,817.98 0.18
December 2006................................. 11 642,307.73 0.64
January 2007.................................. 21 1,063,607.27 1.05
February 2007................................. 42 3,755,977.15 3.72
March 2007.................................... 112 7,127,137.60 7.06
April 2007.................................... 125 7,589,298.42 7.52
May 2007...................................... 148 8,309,838.92 8.23
June 2007..................................... 169 13,791,137.00 13.67
July 2007..................................... 135 8,793,540.89 8.71
August 2007................................... 196 12,484,745.92 12.37
September 2007................................ 217 15,833,604.34 15.69
October 2007.................................. 204 14,028,951.60 13.90
November 2007................................. 1 140,000.00 0.14
March 2008.................................... 2 71,677.69 0.07
April 2008.................................... 1 12,747.98 0.01
May 2008...................................... 6 590,927.37 0.59
June 2008..................................... 5 135,705.50 0.13
July 2008..................................... 7 881,144.82 0.87
August 2008................................... 4 516,847.03 0.51
September 2008................................ 2 80,949.06 0.08
----- --------------- -------
TOTAL:................................... 1,489 $100,922,820.51 100.00%
----- --------------- -------
S-36
NEXT RATE ADJUSTMENT DATE (ADJUSTABLE-RATE MORTGAGE LOANS)
NUMBER
OF STATISTIC CUT-OFF DATE % OF CUT-OFF DATE
CALCULATION AGGREGATE AGGREGATE PRINCIPAL
NEXT RATE ADJUSTMENT DATE MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------- -------------- ----------------- -------------------
November 2005................................ 1 $ 189,241.33 0.19%
December 2005................................ 6 419,445.28 0.42
January 2006................................. 4 151,781.38 0.15
February 2006................................ 9 696,174.01 0.69
March 2006................................... 13 988,976.29 0.98
April 2006................................... 8 731,978.67 0.73
May 2006..................................... 9 621,405.82 0.62
June 2006.................................... 10 441,998.14 0.44
July 2006.................................... 6 341,250.56 0.34
August 2006.................................. 7 200,405.52 0.20
September 2006............................... 3 85,559.04 0.08
October 2006................................. 1 22,640.20 0.02
November 2006................................ 4 181,817.98 0.18
December 2006................................ 11 642,307.73 0.64
January 2007................................. 21 1,063,607.27 1.05
February 2007................................ 42 3,755,977.15 3.72
March 2007................................... 112 7,127,137.60 7.06
April 2007................................... 125 7,589,298.42 7.52
May 2007..................................... 148 8,309,838.92 8.23
June 2007.................................... 169 13,791,137.00 13.67
July 2007.................................... 135 8,793,540.89 8.71
August 2007.................................. 196 12,484,745.92 12.37
September 2007............................... 217 15,833,604.34 15.69
October 2007................................. 204 14,028,951.60 13.90
November 2007................................ 1 140,000.00 0.14
March 2008................................... 2 71,677.69 0.07
April 2008................................... 1 12,747.98 0.01
May 2008..................................... 6 590,927.37 0.59
June 2008.................................... 5 135,705.50 0.13
July 2008.................................... 7 881,144.82 0.87
August 2008.................................. 4 516,847.03 0.51
September 2008............................... 2 80,949.06 0.08
----- ----------------- -------
TOTAL.............................. 1,489 $ 100,922,820.51 100.00%
----- ----------------- -------
CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS
On the Closing Date, the Seller will deposit not more than
approximately $40,000,000 (the "Original Pre-Funded Amount") into a segregated
account maintained with the Trustee on behalf of the Trust (the "Pre-Funding
Account"). Amounts on deposit in the Pre-Funding Account will be withdrawn to
purchase Subsequent Mortgage Loans from time to time (each such purchase date, a
"Subsequent Transfer Date") from the Seller from the Closing Date until the
earlier to occur of the following (the "Funding Period").
(1) the date on which the amount on deposit in the Pre-Funding Account
is less than $100,000; and
S-37
(2) the close of business on February 24, 2006.
The purchase price for the Subsequent Mortgage Loans will equal the
outstanding Principal Balances of those Mortgage Loans as of the related Cut-Off
Dates and will be paid by withdrawal of funds on deposit in the Pre-Funding
Account. The Subsequent Mortgage Loans may have characteristics that differ from
the Initial Mortgage Loans included in the Trust. Accordingly, the statistical
characteristics of the Mortgage Loans in the Trust will vary upon the
acquisition of Subsequent Mortgage Loans; provided, however, that the obligation
of the Trust to purchase Subsequent Mortgage Loans on any date during the
Funding Period is subject to the following requirements in addition to other
requirements set forth in the Agreement:
o the Subsequent Mortgage Loans may not be 30 or more days
contractually delinquent as of the related Cut-Off Dates;
o the remaining term to stated maturity of the Subsequent Mortgage
Loans will not exceed 30 years;
o the Subsequent Mortgage Loans will not have a Loan Rate as of the
related Cut-Off Dates less than 5%;
o the Subsequent Mortgage Loans will not be subject to the Home
Ownership and Equity Protection Act of 1994; and
o the addition of the Subsequent Mortgage Loans will not adversely
affect the ratings assigned to the Class A Certificates without
taking the Policy into account.
S-38
Following the addition of the Additional Mortgage Loans and the
Subsequent Mortgage Loans, the Mortgage Pool (based on the related Cut-Off
Dates) will have the following characteristics:
Weighted Average Loan Rate.................................... At least 7.80%
Weighted Average Margin....................................... At least 6.50%
First Lien Original Balance < $50,000......................... Not more than 11.00%
Weighted Average Remaining Term to Stated Maturity............ Not more than 335 months
Weighted Average Original Combined
Loan-to-Value Ratio........................................ Not more than 70.00%
Combined Loan-to-Value > 85%.................................. Not more than 2.00%
Fixed-Rate Mortgage Loans..................................... Not more than 12.00%
Second Liens.................................................. Not more than 29.00%
Non-Owner Occupancy........................................... Not more than 4.00%
Full Documentation............................................ At least 100.00%
Two- to Four-Unit Residential Dwellings....................... Not more than 11.00%
Weighted Average FICO (Non-Zero).............................. At least 605
FICO Score (Non-Zero) < 560................................... Not more than 18.00%
Weighted Average Debt-to-Income Ratio......................... Not more than 42.00%
Debt-to-Income Ratio > 40%.................................... Not more than 62.00%
Minimum Prepayment Penalty.................................... At least 75.00%
Original Principal Balance > $300,000......................... Not more than 14.00%
New York State Concentration.................................. Not more than 18.00%
New Jersey State Concentration................................ Not more than 20.00%
Top Three States Concentration................................ Not more than 45.00%
Weighted Average FICO Score (Non-Zero) for
Loans with Loan-to-Value > 80%............................. At least 610
FICO Score (Non-Zero) < 560 for Loans with
Loan-to-Value > 80%........................................ Not more than 12.00%
In addition, each Additional Mortgage Loan and Subsequent Mortgage Loan
(based on the related Cut-Off Dates) will have the following characteristics:
Loan Rate..................................................... At least 5.00%
Original Combined Loan-to-Value............................... Not more than 90.00%
FICO Score (Non-Zero)......................................... At least 451
Debt-to-Income Ratio.......................................... Not more than 57.00%
Original Principal Balance.................................... Not more than $700,000
A mandatory distribution of principal will be made to the holders of
the Class A Certificates if the aggregate Cut-Off Date Principal Balance of the
Subsequent Mortgage Loans delivered to the Trust is less than the Original
Pre-Funded Amount (in an amount equal to the amount remaining on deposit in the
Pre-Funding Account at the end of the Funding Period) in the same manner as
described in this Prospectus Supplement under "DESCRIPTION OF THE
CERTIFICATES--Priority of Distributions". See "PREPAYMENT AND YIELD
CONSIDERATIONS--Mandatory Payment" in this Prospectus Supplement.
S-39
PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
The rate of principal payments on the Class A Certificates, the
aggregate amount of distributions on the Class A Certificates and the yield to
maturity of the Class A Certificates will be related to the rate and timing of
payments of principal on the Mortgage Loans. The rate of principal payments on
the Mortgage Loans will in turn be affected by the amortization schedules of
such Mortgage Loans and by the rate of principal prepayments (including for this
purpose prepayments resulting from refinancing, liquidations of the Mortgage
Loans due to defaults, casualties, condemnations and repurchases by the Seller).
Approximately 78.32% of the Statistic Calculation Mortgage Loans by the Cut-Off
Date Principal Balance provided for payment by the mortgagor (the "Mortgagor")
of a prepayment charge on full or partial prepayments within the first three
years as provided in the related Mortgage Note. After the first three years, the
Mortgage Loans that have prepayment penalties may be prepaid by the Mortgagors
at any time without penalty.
PREPAYMENTS
Prepayments, liquidations, purchases and repurchases of the Mortgage
Loans (including any optional purchase of the remaining Mortgage Loans in
connection with the termination of the Trust) will result in distributions on
the Class A Certificates, as applicable, of principal amounts which would
otherwise be distributed over the remaining terms of such Mortgage Loans. Since
the rate of payment of principal of the Mortgage Loans will depend on future
events and a variety of factors, no assurance can be given as to such rate or
the rate of principal prepayments. The extent to which the yield to maturity of
a Class A Certificate may vary from the anticipated yield will depend upon the
degree to which such Certificate is purchased at a discount or premium, and the
degree to which the timing of payments thereon is sensitive to prepayments,
liquidations and purchases of the Mortgage Loans. Further, if you purchased your
Certificates at a premium, a faster than anticipated rate of principal payments
on the Mortgage Loans could result in an actual yield to you that is lower than
the anticipated yield. In addition, when a principal prepayment is made on a
Mortgage Loan, the Mortgagor is charged interest only up to the date of such
prepayment and a "Prepayment Interest Shortfall" may result.
The rate of prepayment on the Mortgage Loans cannot be predicted. Home
equity loans such as the Mortgage Loans have been originated in significant
volume only during the past few years and neither the Depositor nor the Seller
is aware of any publicly available studies or statistics on the rate of
prepayment of home equity loans similar to the Mortgage Loans. Generally, home
equity loans are not viewed by borrowers as permanent financing. Accordingly,
the Mortgage Loans may experience a higher rate of prepayment than traditional
first mortgage loans. The prepayment experience of the Mortgage Loans may be
affected by a wide variety of factors, including economic conditions, prevailing
interest rate levels, the availability of alternative financing and homeowner
mobility and changes affecting the deductibility for federal income tax purposes
of interest payments on home equity loans. All of the Mortgage Loans contain
"due-on-sale" provisions, and the Servicer is required by the Agreement to
enforce such provisions, unless such enforcement is not permitted by applicable
law. The enforcement of a "due-on-sale" provision will have the same effect as a
prepayment of the related Mortgage Loan. See "MATERIAL LEGAL ASPECTS OF THE
LOANS--Due-On-Sale Clauses" in the Prospectus.
The Mortgage Pool consists of fixed-rate Mortgage Loans and
adjustable-rate Mortgage Loans. As with fixed-rate obligations generally, the
rate of prepayment on a pool of mortgage loans with fixed rates is affected by
prevailing market rates for mortgage loans of a comparable term and risk level.
When the market interest rate is below the mortgage coupon, mortgagors may have
an increased incentive to refinance their mortgage loans. Depending on
prevailing market rates, the future outlook for market rates
S-40
and economic conditions generally, some mortgagors may sell or refinance
mortgaged properties in order to realize their equity in the mortgaged
properties, to meet cash flow needs or to make other investments. No assurance
can be given as to the level of prepayments that the Mortgage Loans will
experience.
As is the case with conventional fixed-rate mortgage loans,
adjustable-rate mortgage loans may be subject to a greater rate of principal
prepayments in a declining interest rate environment. For example, if prevailing
interest rates fall significantly, adjustable-rate mortgage loans could be
subject to higher prepayment rates than if prevailing interest rates remain
constant because the availability of fixed-rate mortgage loans at competitive
interest rates may encourage mortgagors to refinance their adjustable-rate
mortgage loans to "lock in" a lower fixed loan rate. The existence of periodic
rate caps, maximum rates and minimum rates may affect the likelihood of
prepayment. No assurance can be given as to the level of prepayments that the
Mortgage Loans will experience.
MANDATORY PAYMENT
If at the end of the Funding Period there are funds remaining in the
Pre-Funding Account, the holders of the Class A Certificates will receive an
additional distribution allocable to principal of such funds in the same manner
as described in this Prospectus Supplement under "DESCRIPTION OF THE
CERTIFICATES--Priority of Distributions". Although there can be no assurance,
the Seller anticipates that there will be no material principal payment to the
Certificateholders if the entire Original Pre-Funded Amount is not used to
purchase Subsequent Mortgage Loans.
LIBOR
The yield to you will be sensitive to fluctuations in One-Month LIBOR.
Changes in One-Month LIBOR may not correlate with the changes in
prevailing interest rates. It is possible that lower prevailing loan rates,
which might be expected to result in faster prepayments, could occur
concurrently with an increased level of One-Month LIBOR. Conversely, higher
prevailing loan rates, which would be expected to result in slower prepayments,
could occur concurrently with a lower level of One-Month LIBOR.
WEIGHTED AVERAGE LIVES
Generally, greater than anticipated prepayments of principal will
increase the yield on Class A Certificates purchased at a price less than par
and will decrease the yield on Class A Certificates purchased at a price greater
than par. The effect on an investor's yield due to principal prepayments on the
Mortgage Loans occurring at a rate that is faster (or slower) than the rate
anticipated by the investor in the period immediately following the issuance of
such Certificate will not be entirely offset by a subsequent like reduction (or
increase) in the rate of principal payments. The Weighted Average Life of the
Class A Certificates will also be affected by the amount and timing of
delinquencies and defaults on the related Mortgage Loans and the related
recoveries, if any, on defaulted Mortgage Loans and related foreclosed Mortgaged
Properties.
The "Weighted Average Life" of a Certificate refers to the average
amount of time that will elapse from the date of issuance to the date each
dollar in respect of principal of such Certificate is repaid. The Weighted
Average Life of a Class A Certificate will be influenced by, among other
factors, the rate at which principal payments are made on the Mortgage Loans.
Prepayments on Mortgage Loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement with
respect to the Mortgage Loans is a constant
S-41
prepayment rate ("CPR"), which represents an assumed rate of prepayment each
month relative to the then outstanding Principal Balance of the Mortgage Loans
for the life of such Mortgage Loans. The table below shows prepayment
assumptions at various CPR percentages. For example, Scenario III assumes a 23%
CPR for fixed-rate Mortgage Loans and a 30% CPR for adjustable-rate Mortgage
Loans. CPR does not purport to be a historical description of prepayment
experience or a prediction of the anticipated rate of prepayment of any pool or
group of mortgage loans, including the Mortgage Loans. The Seller believes that
no existing statistics of which it is aware provide a reliable basis for holders
of Class A Certificates to predict the amount or the timing of receipt of
prepayments on the Mortgage Loans in the Mortgage Pool.
Because the following table was prepared on the basis of the
assumptions in the following paragraph, there are discrepancies between
characteristics of the actual Mortgage Loans and the characteristics of the
mortgage loans assumed in preparing the table. Any such discrepancy may have an
effect upon the percentages of the Certificate Principal Balances outstanding
and weighted average lives of the Class A Certificates set forth in the table.
In addition, since the actual Mortgage Loans have characteristics which differ
from those assumed in preparing the table set forth below, the distributions of
principal on the Class A Certificates may be made earlier or later than as
indicated in the table.
Structuring Assumptions
For the purpose of the table below, it is assumed that: (i) the
Mortgage Loans consist of pools of loans with the level-pay characteristics set
forth below, (ii) the Closing Date for the Class A Certificates is November 29,
2005, (iii) distributions on the Class A Certificates are made on the 15th day
of each month regardless of the day on which the Distribution Date actually
occurs, commencing in December 2005 and are made in accordance with the
priorities described herein, (iv) the scheduled monthly payments of principal
and interest on the Mortgage Loans will be timely delivered on the first day of
each month (with no defaults), (v) the Mortgage Loans' prepayment rates are at
the CPR percentages set forth in the table below, (vi) all prepayments are
prepayments in full received on the last day of each month and include 30 days'
interest thereon, (vii) no optional termination is exercised (except when
indicated in the following table), (viii) the Class A Certificates have the
Certificate Interest Rates and initial Class A Certificate Principal Balances as
set forth herein, (ix) the level of One-Month LIBOR for each Accrual Period will
be 4.115% and the level of Six-Month LIBOR for each Accrual Period will be
4.538%, (x) the entire Original Pre-Funded Amount is used to purchase Subsequent
Mortgage Loans, (xi) the Servicing Fee Rate is 0.50% per annum and the Trustee
Fee Rate is 0.012% per annum, (xii) the Base Spread Account Requirement is
calculated at 3.10% of the aggregate Principal Balance of the Initial Mortgage
Loans as of the Cut-off Date and the Original Pre-Funded Amount and the initial
deposit in the Spread Account as of the Closing Date is 0.50% of the aggregate
Principal Balance of the Initial Mortgage Loans as of the Cut-off Date and the
Original Pre-Funded Amount, (xiii) the Additional Mortgage Loans delivered on or
prior to the Closing Date will have a first Due Date during the Due Period in
January 2006, (xiv) the Subsequent Mortgage Loans delivered to the Trust in
December 2005 will have a first Due Date during the Due Period in January 2006,
(xv) the Subsequent Mortgage Loans delivered to the Trust in February 2006 will
have a first Due Date during the Due Period in March 2006, (xvi) no payment is
received under the Corridor Contract and (xvii) the Mortgage Loans are
aggregated into assumed Mortgage Loans having the following characteristics:
S-42
ASSUMED MORTGAGE LOAN CHARACTERISTICS
- ------ --------------------------------- ------------- ------- ------- -------- --------- -------- --------
GROSS ORIGINAL REMAINING
LOAN TERM TO TERM TO
POOL PRINCIPAL RATE MARGIN MATURITY MATURITY MAXIMUM MINIMUM
NUMBER LOAN TYPE BALANCE ($) (%) (%) (MONTHS) (MONTHS) RATE (%) RATE (%)
- ------ --------------------------------- ------------- ------- ------- -------- --------- -------- --------
1 2 yr initial fixed period/ARM (1) 189,898.59 7.44367 6.19367 60 55 13.67921 7.44367
2 2 yr initial fixed period/ARM (1) 16,408.57 7.50000 6.25000 84 80 13.50000 7.50000
3 2 yr initial fixed period/ARM (1) 1,748,542.76 7.95997 6.70997 120 114 14.67154 7.95997
4 2 yr initial fixed period/ARM (1) 4,923,455.25 7.80167 6.55735 180 174 14.14284 7.80167
5 2 yr initial fixed period/ARM (1) 7,282,824.99 8.20881 6.96997 240 235 14.69872 8.20881
6 2 yr initial fixed period/ARM (1) 278,719.89 7.52356 6.27356 300 288 13.87230 7.52356
7 2 yr initial fixed period/ARM (1) 65,311,634.53 7.84452 6.59240 360 356 14.17186 7.84452
8 2 yr initial fixed period/ARM (1) 131,454.79 7.76067 6.51067 120 117 14.13901 7.76067
9 2 yr initial fixed period/ARM (1) 529,448.09 8.31235 7.06235 180 178 14.71935 8.31235
10 2 yr initial fixed period/ARM (1) 909,026.67 8.52752 7.27752 240 237 14.84820 8.52752
11 2 yr initial fixed period/ARM (1) 16,883,834.15 7.94597 6.68298 360 357 14.20353 7.94597
12 3 yr initial fixed period/ARM (1) 46,344.23 7.18064 5.93064 60 56 13.18064 7.18064
13 3 yr initial fixed period/ARM (1) 17,072.39 9.50000 8.25000 120 116 17.50000 9.50000
14 3 yr initial fixed period/ARM (1) 64,348.62 8.62241 7.37241 180 166 16.10177 8.62241
15 3 yr initial fixed period/ARM (1) 119,566.33 7.80164 6.55164 240 226 14.08875 7.80164
16 3 yr initial fixed period/ARM (1) 174,082.45 7.75000 6.50000 300 296 13.75000 7.75000
17 3 yr initial fixed period/ARM (1) 1,782,697.03 7.73423 6.43525 360 354 14.42805 7.73423
18 3 yr initial fixed period/ARM (1) 23,935.13 8.75000 7.50000 180 178 14.75000 8.75000
19 3 yr initial fixed period/ARM (1) 127,709.34 6.75000 5.50000 240 235 12.75000 6.75000
20 3 yr initial fixed period/ARM (1) 361,816.71 6.49358 5.24358 360 358 14.34168 6.49358
21 Fixed Rate (1) 16,716.88 8.25000 N/A 60 59 N/A N/A
22 Fixed Rate (1) 242,442.38 8.10024 N/A 120 117 N/A N/A
23 Fixed Rate (1) 535,024.11 8.23801 N/A 180 176 N/A N/A
24 Fixed Rate (1) 381,280.48 8.35644 N/A 240 238 N/A N/A
25 Fixed Rate (1) 72,923.11 7.99000 N/A 300 298 N/A N/A
26 Fixed Rate (1) 4,529,934.73 7.48717 N/A 360 357 N/A N/A
27 Fixed Rate (1) 45,451.97 5.99000 N/A 60 55 N/A N/A
28 Fixed Rate (1) 114,810.43 9.18308 N/A 120 117 N/A N/A
29 Fixed Rate (1) 92,318.13 9.85050 N/A 180 177 N/A N/A
30 Fixed Rate (1) 539,539.69 8.07554 N/A 240 236 N/A N/A
31 Fixed Rate (1) 4,522,800.51 7.39870 N/A 360 358 N/A N/A
32 2 yr initial fixed period/ARM (2) 30,487.80 7.44367 6.19367 60 60 13.67921 7.44367
33 2 yr initial fixed period/ARM (2) 2,634.36 7.50000 6.25000 84 84 13.50000 7.50000
34 2 yr initial fixed period/ARM (2) 280,724.75 7.95997 6.70997 120 120 14.67154 7.95997
35 2 yr initial fixed period/ARM (2) 790,450.29 7.80168 6.55735 180 180 14.14284 7.80168
36 2 yr initial fixed period/ARM (2) 1,169,241.84 8.20881 6.96997 240 240 14.69872 8.20881
37 2 yr initial fixed period/ARM (2) 44,747.88 7.52356 6.27356 300 300 13.87230 7.52356
38 2 yr initial fixed period/ARM (2) 10,485,641.78 7.84452 6.59240 360 360 14.17186 7.84452
39 2 yr initial fixed period/ARM (2) 21,104.78 7.76067 6.51067 120 120 14.13901 7.76067
40 2 yr initial fixed period/ARM (2) 85,001.74 8.31235 7.06235 180 180 14.71935 8.31235
41 2 yr initial fixed period/ARM (2) 145,942.26 8.52752 7.27752 240 240 14.84820 8.52752
42 2 yr initial fixed period/ARM (2) 2,710,663.16 7.94597 6.68298 360 360 14.20353 7.94597
43 3 yr initial fixed period/ARM (2) 7,440.46 7.18064 5.93064 60 60 13.18064 7.18064
44 3 yr initial fixed period/ARM (2) 2,740.94 9.50000 8.25000 120 120 17.50000 9.50000
45 3 yr initial fixed period/ARM (2) 10,331.03 8.62241 7.37241 180 180 16.10177 8.62241
- ------ -------- ---------- ---------- ----------
INITIAL SUBSEQUENT NEXT
PERIODIC PERIODIC RATE
POOL RATE RATE ADJUSTMENT
NUMBER CAP (%) CAP (%) (MONTHS) INDEX
- ------ -------- ---------- ---------- ----------
1 2.11777 1.00000 19 6 MO LIBOR
2 2.00000 1.00000 20 6 MO LIBOR
3 2.35578 1.00000 18 6 MO LIBOR
4 2.16857 1.00000 18 6 MO LIBOR
5 2.23745 1.00000 19 6 MO LIBOR
6 2.17437 1.00000 12 6 MO LIBOR
7 2.16722 1.00000 20 6 MO LIBOR
8 2.18917 1.00000 21 6 MO LIBOR
9 2.20350 1.00000 22 6 MO LIBOR
10 2.13397 1.00000 21 6 MO LIBOR
11 2.13041 1.00000 21 6 MO LIBOR
12 2.00000 1.00000 32 6 MO LIBOR
13 3.00000 1.00000 32 6 MO LIBOR
14 2.73968 1.00000 22 6 MO LIBOR
15 2.14356 1.00000 22 6 MO LIBOR
16 2.00000 1.00000 32 6 MO LIBOR
17 2.40139 1.00000 30 6 MO LIBOR
18 2.00000 1.00000 34 6 MO LIBOR
19 2.00000 1.00000 31 6 MO LIBOR
20 2.92405 1.00000 34 6 MO LIBOR
21 N/A N/A N/A N/A
22 N/A N/A N/A N/A
23 N/A N/A N/A N/A
24 N/A N/A N/A N/A
25 N/A N/A N/A N/A
26 N/A N/A N/A N/A
27 N/A N/A N/A N/A
28 N/A N/A N/A N/A
29 N/A N/A N/A N/A
30 N/A N/A N/A N/A
31 N/A N/A N/A N/A
32 2.11777 1.00000 24 6 MO LIBOR
33 2.00000 1.00000 24 6 MO LIBOR
34 2.35578 1.00000 24 6 MO LIBOR
35 2.16857 1.00000 24 6 MO LIBOR
36 2.23745 1.00000 24 6 MO LIBOR
37 2.17437 1.00000 24 6 MO LIBOR
38 2.16722 1.00000 24 6 MO LIBOR
39 2.18917 1.00000 24 6 MO LIBOR
40 2.20350 1.00000 24 6 MO LIBOR
41 2.13397 1.00000 24 6 MO LIBOR
42 2.13041 1.00000 24 6 MO LIBOR
43 2.00000 1.00000 36 6 MO LIBOR
44 3.00000 1.00000 36 6 MO LIBOR
45 2.73968 1.00000 36 6 MO LIBOR
S-43
- ------ --------------------------------- ------------- ------- ------- -------- --------- -------- --------
GROSS ORIGINAL REMAINING
LOAN TERM TO TERM TO
POOL PRINCIPAL RATE MARGIN MATURITY MATURITY MAXIMUM MINIMUM
NUMBER LOAN TYPE BALANCE ($) (%) (%) (MONTHS) (MONTHS) RATE (%) RATE (%)
- ------ --------------------------------- ------------- ------- ------- -------- --------- -------- --------
46 3 yr initial fixed period/ARM (2) 19,196.11 7.80164 6.55164 240 240 14.08875 7.80164
47 3 yr initial fixed period/ARM (2) 27,948.56 7.75000 6.50000 300 300 13.75000 7.75000
48 3 yr initial fixed period/ARM (2) 286,208.13 7.73423 6.43525 360 360 14.42805 7.73423
49 3 yr initial fixed period/ARM (2) 3,842.73 8.75000 7.50000 180 180 14.75000 8.75000
50 3 yr initial fixed period/ARM (2) 20,503.46 6.75000 5.50000 240 240 12.75000 6.75000
51 3 yr initial fixed period/ARM (2) 58,088.89 6.49358 5.24358 360 360 14.34168 6.49358
52 Fixed Rate (2) 2,683.86 8.25000 N/A 60 60 N/A N/A
53 Fixed Rate (2) 38,923.61 8.10024 N/A 120 120 N/A N/A
54 Fixed Rate (2) 85,896.95 8.23801 N/A 180 180 N/A N/A
55 Fixed Rate (2) 61,213.77 8.35644 N/A 240 240 N/A N/A
56 Fixed Rate (2) 11,707.65 7.99000 N/A 300 300 N/A N/A
57 Fixed Rate (2) 727,271.24 7.48717 N/A 360 360 N/A N/A
58 Fixed Rate (2) 7,297.22 5.99000 N/A 60 60 N/A N/A
59 Fixed Rate (2) 18,432.56 9.18308 N/A 120 120 N/A N/A
60 Fixed Rate (2) 14,821.47 9.85050 N/A 180 180 N/A N/A
61 Fixed Rate (2) 86,621.93 8.07554 N/A 240 240 N/A N/A
62 Fixed Rate (2) 726,125.86 7.39870 N/A 360 360 N/A N/A
63 2 yr initial fixed period/ARM (3) 33,905.61 7.44367 6.19367 60 60 13.67921 7.44367
64 2 yr initial fixed period/ARM (3) 2,929.68 7.50000 6.25000 84 84 13.50000 7.50000
65 2 yr initial fixed period/ARM (3) 312,195.03 7.95997 6.70997 120 120 14.67154 7.95997
66 2 yr initial fixed period/ARM (3) 879,062.06 7.80167 6.55735 180 180 14.14284 7.80167
67 2 yr initial fixed period/ARM (3) 1,300,317.96 8.20881 6.96997 240 240 14.69872 8.20881
68 2 yr initial fixed period/ARM (3) 49,764.27 7.52356 6.27356 300 300 13.87230 7.52356
69 2 yr initial fixed period/ARM (3) 11,661,119.74 7.84452 6.59240 360 360 14.17186 7.84452
70 2 yr initial fixed period/ARM (3) 23,470.70 7.76067 6.51067 120 120 14.13901 7.76067
71 2 yr initial fixed period/ARM (3) 94,530.74 8.31235 7.06235 180 180 14.71935 8.31235
72 2 yr initial fixed period/ARM (3) 162,302.91 8.52752 7.27752 240 240 14.84820 8.52752
73 2 yr initial fixed period/ARM (3) 3,014,538.01 7.94597 6.68298 360 360 14.20353 7.94597
74 3 yr initial fixed period/ARM (3) 8,274.57 7.18064 5.93064 60 60 13.18064 7.18064
75 3 yr initial fixed period/ARM (3) 3,048.20 9.50000 8.25000 120 120 17.50000 9.50000
76 3 yr initial fixed period/ARM (3) 11,489.18 8.62241 7.37241 180 180 16.10178 8.62241
77 3 yr initial fixed period/ARM (3) 21,348.07 7.80164 6.55164 240 240 14.08875 7.80164
78 3 yr initial fixed period/ARM (3) 31,081.69 7.75000 6.50000 300 300 13.75000 7.75000
79 3 yr initial fixed period/ARM (3) 318,293.11 7.73423 6.43525 360 360 14.42805 7.73423
80 3 yr initial fixed period/ARM (3) 4,273.52 8.75000 7.50000 180 180 14.75000 8.75000
81 3 yr initial fixed period/ARM (3) 22,801.97 6.75000 5.50000 240 240 12.75000 6.75000
82 3 yr initial fixed period/ARM (3) 64,600.87 6.49358 5.24358 360 360 14.34168 6.49358
83 Fixed Rate (3) 2,984.73 8.25000 N/A 60 60 N/A N/A
84 Fixed Rate (3) 43,287.07 8.10024 N/A 120 120 N/A N/A
85 Fixed Rate (3) 95,526.31 8.23801 N/A 180 180 N/A N/A
86 Fixed Rate (3) 68,076.05 8.35644 N/A 240 240 N/A N/A
87 Fixed Rate (3) 13,020.12 7.99000 N/A 300 300 N/A N/A
88 Fixed Rate (3) 808,800.91 7.48717 N/A 360 360 N/A N/A
89 Fixed Rate (3) 8,115.26 5.99000 N/A 60 60 N/A N/A
90 Fixed Rate (3) 20,498.92 9.18308 N/A 120 120 N/A N/A
91 Fixed Rate (3) 16,483.02 9.85050 N/A 180 180 N/A N/A
92 Fixed Rate (3) 96,332.56 8.07554 N/A 240 240 N/A N/A
93 Fixed Rate (3) 807,527.16 7.39870 N/A 360 360 N/A N/A
94 2 yr initial fixed period/ARM (4) 33,905.61 7.44367 6.19367 60 60 13.67921 7.44367
95 2 yr initial fixed period/ARM (4) 2,929.68 7.50000 6.25000 84 84 13.50000 7.50000
- ------ -------- ---------- ---------- ----------
INITIAL SUBSEQUENT NEXT
PERIODIC PERIODIC RATE
POOL RATE RATE ADJUSTMENT
NUMBER CAP (%) CAP (%) (MONTHS) INDEX
- ------ -------- ---------- ---------- ----------
46 2.14356 1.00000 36 6 MO LIBOR
47 2.00000 1.00000 36 6 MO LIBOR
48 2.40139 1.00000 36 6 MO LIBOR
49 2.00000 1.00000 36 6 MO LIBOR
50 2.00000 1.00000 36 6 MO LIBOR
51 2.92405 1.00000 36 6 MO LIBOR
52 N/A N/A N/A N/A
53 N/A N/A N/A N/A
54 N/A N/A N/A N/A
55 N/A N/A N/A N/A
56 N/A N/A N/A N/A
57 N/A N/A N/A N/A
58 N/A N/A N/A N/A
59 N/A N/A N/A N/A
60 N/A N/A N/A N/A
61 N/A N/A N/A N/A
62 N/A N/A N/A N/A
63 2.11777 1.00000 24 6 MO LIBOR
64 2.00000 1.00000 24 6 MO LIBOR
65 2.35578 1.00000 24 6 MO LIBOR
66 2.16857 1.00000 24 6 MO LIBOR
67 2.23745 1.00000 24 6 MO LIBOR
68 2.17437 1.00000 24 6 MO LIBOR
69 2.16722 1.00000 24 6 MO LIBOR
70 2.18917 1.00000 24 6 MO LIBOR
71 2.20350 1.00000 24 6 MO LIBOR
72 2.13397 1.00000 24 6 MO LIBOR
73 2.13041 1.00000 24 6 MO LIBOR
74 2.00000 1.00000 36 6 MO LIBOR
75 3.00000 1.00000 36 6 MO LIBOR
76 2.73968 1.00000 36 6 MO LIBOR
77 2.14356 1.00000 36 6 MO LIBOR
78 2.00000 1.00000 36 6 MO LIBOR
79 2.40139 1.00000 36 6 MO LIBOR
80 2.00000 1.00000 36 6 MO LIBOR
81 2.00000 1.00000 36 6 MO LIBOR
82 2.92405 1.00000 36 6 MO LIBOR
83 N/A N/A N/A N/A
84 N/A N/A N/A N/A
85 N/A N/A N/A N/A
86 N/A N/A N/A N/A
87 N/A N/A N/A N/A
88 N/A N/A N/A N/A
89 N/A N/A N/A N/A
90 N/A N/A N/A N/A
91 N/A N/A N/A N/A
92 N/A N/A N/A N/A
93 N/A N/A N/A N/A
94 2.11777 1.00000 24 6 MO LIBOR
95 2.00000 1.00000 24 6 MO LIBOR
S-44
- ------ --------------------------------- ------------- ------- ------- -------- --------- -------- --------
GROSS ORIGINAL REMAINING
LOAN TERM TO TERM TO
POOL PRINCIPAL RATE MARGIN MATURITY MATURITY MAXIMUM MINIMUM
NUMBER LOAN TYPE BALANCE ($) (%) (%) (MONTHS) (MONTHS) RATE (%) RATE (%)
- ------ --------------------------------- ------------- ------- ------- -------- --------- -------- --------
96 2 yr initial fixed period/ARM (4) 312,195.03 7.95997 6.70997 120 120 14.67154 7.95997
97 2 yr initial fixed period/ARM (4) 879,062.06 7.80167 6.55735 180 180 14.14284 7.80167
98 2 yr initial fixed period/ARM (4) 1,300,317.96 8.20881 6.96997 240 240 14.69872 8.20881
99 2 yr initial fixed period/ARM (4) 49,764.27 7.52356 6.27356 300 300 13.87230 7.52356
100 2 yr initial fixed period/ARM (4) 11,661,119.74 7.84452 6.59240 360 360 14.17186 7.84452
101 2 yr initial fixed period/ARM (4) 23,470.70 7.76067 6.51067 120 120 14.13901 7.76067
102 2 yr initial fixed period/ARM (4) 94,530.74 8.31235 7.06235 180 180 14.71935 8.31235
103 2 yr initial fixed period/ARM (4) 162,302.91 8.52752 7.27752 240 240 14.84820 8.52752
104 2 yr initial fixed period/ARM (4) 3,014,538.01 7.94597 6.68298 360 360 14.20353 7.94597
105 3 yr initial fixed period/ARM (4) 8,274.57 7.18064 5.93064 60 60 13.18064 7.18064
106 3 yr initial fixed period/ARM (4) 3,048.20 9.50000 8.25000 120 120 17.50000 9.50000
107 3 yr initial fixed period/ARM (4) 11,489.18 8.62241 7.37241 180 180 16.10178 8.62241
108 3 yr initial fixed period/ARM (4) 21,348.07 7.80164 6.55164 240 240 14.08875 7.80164
109 3 yr initial fixed period/ARM (4) 31,081.69 7.75000 6.50000 300 300 13.75000 7.75000
110 3 yr initial fixed period/ARM (4) 318,293.11 7.73423 6.43525 360 360 14.42805 7.73423
111 3 yr initial fixed period/ARM (4) 4,273.52 8.75000 7.50000 180 180 14.75000 8.75000
112 3 yr initial fixed period/ARM (4) 22,801.97 6.75000 5.50000 240 240 12.75000 6.75000
113 3 yr initial fixed period/ARM (4) 64,600.87 6.49358 5.24358 360 360 14.34168 6.49358
114 Fixed Rate (4) 2,984.73 8.25000 N/A 60 60 N/A N/A
115 Fixed Rate (4) 43,287.07 8.10024 N/A 120 120 N/A N/A
116 Fixed Rate (4) 95,526.31 8.23801 N/A 180 180 N/A N/A
117 Fixed Rate (4) 68,076.05 8.35644 N/A 240 240 N/A N/A
118 Fixed Rate (4) 13,020.12 7.99000 N/A 300 300 N/A N/A
119 Fixed Rate (4) 808,800.91 7.48717 N/A 360 360 N/A N/A
120 Fixed Rate (4) 8,115.26 5.99000 N/A 60 60 N/A N/A
121 Fixed Rate (4) 20,498.92 9.18308 N/A 120 120 N/A N/A
122 Fixed Rate (4) 16,483.02 9.85050 N/A 180 180 N/A N/A
123 Fixed Rate (4) 96,332.56 8.07554 N/A 240 240 N/A N/A
124 Fixed Rate (4) 807,527.16 7.39870 N/A 360 360 N/A N/A
- ------ --------------------------------- ------------- ------- ------- -------- --------- -------- --------
- ------ -------- ---------- ---------- ----------
INITIAL SUBSEQUENT NEXT
PERIODIC PERIODIC RATE
POOL RATE RATE ADJUSTMENT
NUMBER CAP (%) CAP (%) (MONTHS) INDEX
- ------ -------- ---------- ---------- ----------
96 2.35578 1.00000 24 6 MO LIBOR
97 2.16857 1.00000 24 6 MO LIBOR
98 2.23745 1.00000 24 6 MO LIBOR
99 2.17437 1.00000 24 6 MO LIBOR
100 2.16722 1.00000 24 6 MO LIBOR
101 2.18917 1.00000 24 6 MO LIBOR
102 2.20350 1.00000 24 6 MO LIBOR
103 2.13397 1.00000 24 6 MO LIBOR
104 2.13041 1.00000 24 6 MO LIBOR
105 2.00000 1.00000 36 6 MO LIBOR
106 3.00000 1.00000 36 6 MO LIBOR
107 2.73968 1.00000 36 6 MO LIBOR
108 2.14356 1.00000 36 6 MO LIBOR
109 2.00000 1.00000 36 6 MO LIBOR
110 2.40139 1.00000 36 6 MO LIBOR
111 2.00000 1.00000 36 6 MO LIBOR
112 2.00000 1.00000 36 6 MO LIBOR
113 2.92405 1.00000 36 6 MO LIBOR
114 N/A N/A N/A N/A
115 N/A N/A N/A N/A
116 N/A N/A N/A N/A
117 N/A N/A N/A N/A
118 N/A N/A N/A N/A
119 N/A N/A N/A N/A
120 N/A N/A N/A N/A
121 N/A N/A N/A N/A
122 N/A N/A N/A N/A
123 N/A N/A N/A N/A
124 N/A N/A N/A N/A
- ------ -------- ---------- ---------- ----------
(1) Statistic Calculation Mortgage Loans.
(2) Additional Mortgage Loans delivered to the Trust on the Closing Date.
Additional Mortgage Loans will have a first Due Date in January 2006.
(3) Subsequent Mortgage Loans delivered to the Trust on December 2005.
Subsequent Mortgage Loans will have a first Due Date in January 2006.
(4) Subsequent Mortgage Loans delivered to the Trust on February 2006.
Subsequent Mortgage Loans will have a first Due Date in March 2006.
S-45
PREPAYMENT SCENARIOS(1)
I II III IV V
--- --- --- --- ---
Fixed-Rate Mortgage Loans: 15% 20% 23% 28% 32%
Adjustable-Rate Mortgage Loans: 20% 25% 30% 35% 40%
- ---------------
(1) Percentages of the Fixed-Rate Prepayment Vector in the case of the
fixed-rate mortgage loans and the Adjustable-Rate Prepayment Vector in the case
of the adjustable-rate mortgage loans.
Subject to the foregoing discussion and assumptions, the following
tables indicate the Weighted Average Life of the Class A Certificates and the
percentages of the initial Class A Certificate Principal Balance that would be
outstanding after each of the Distribution Dates shown at various prepayment
scenarios.
S-46
PERCENT OF INITIAL CLASS A-1 CERTIFICATE PRINCIPAL BALANCE OF THE
CLASS A-1 CERTIFICATES
OUTSTANDING
AT THE FOLLOWING PREPAYMENT SCENARIOS
CLASS A-1
---------------------------------------
DISTRIBUTION DATE I II III IV V
----------------- --- --- --- --- ---
November 29, 2005 100 100 100 100 100
November 15, 2006 64 55 47 38 29
November 15, 2007 33 20 7 0 0
November 15, 2008 10 0 0 0 0
November 15, 2009 0 0 0 0 0
November 15, 2010 0 0 0 0 0
November 15, 2011 0 0 0 0 0
November 15, 2012 0 0 0 0 0
November 15, 2013 0 0 0 0 0
November 15, 2014 0 0 0 0 0
November 15, 2015 0 0 0 0 0
November 15, 2016 0 0 0 0 0
November 15, 2017 0 0 0 0 0
November 15, 2018 0 0 0 0 0
November 15, 2019 0 0 0 0 0
November 15, 2020 0 0 0 0 0
November 15, 2021 0 0 0 0 0
November 15, 2022 0 0 0 0 0
November 15, 2023 0 0 0 0 0
November 15, 2024 0 0 0 0 0
November 15, 2025 0 0 0 0 0
November 15, 2026 0 0 0 0 0
November 15, 2027 0 0 0 0 0
November 15, 2028 0 0 0 0 0
November 15, 2029 0 0 0 0 0
November 15, 2030 0 0 0 0 0
November 15, 2031 0 0 0 0 0
November 15, 2032 0 0 0 0 0
November 15, 2033 0 0 0 0 0
November 15, 2034 0 0 0 0 0
November 15, 2035 0 0 0 0 0
November 15, 2036 0 0 0 0 0
Weighted Average Life
(years)** 1.54 1.21 1.00 0.84 0.72
Weighted Average Life
(years)**(1) 1.54 1.21 1.00 0.84 0.72
- --------------------------
* Indicates a percentage greater than 0.00% but less than 0.50%.
** The Weighted Average Life of the Class A-1 Certificates is determined by
(i) multiplying the amount of each distribution in reduction of the Class
A-1 Certificate Principal Balance by the number of years from the date of
issuance of the Certificates to the related Distribution Date, (ii) adding
the results, and (iii) dividing the initial Class A-1 Certificate
Principal Balance.
(1) To the Optional Termination Date.
S-47
PERCENT OF INITIAL CLASS A-2 CERTIFICATE PRINCIPAL BALANCE OF THE
CLASS A-2 CERTIFICATES
OUTSTANDING
AT THE FOLLOWING PREPAYMENT SCENARIOS
CLASS A-2
---------------------------------------
DISTRIBUTION DATE I II III IV V
----------------- --- --- --- --- ---
November 29, 2005 100 100 100 100 100
November 15, 2006 100 100 100 100 100
November 15, 2007 100 100 100 87 58
November 15, 2008 100 83 47 15 0
November 15, 2009 75 31 0 0 0
November 15, 2010 35 0 0 0 0
November 15, 2011 3 0 0 0 0
November 15, 2012 0 0 0 0 0
November 15, 2013 0 0 0 0 0
November 15, 2014 0 0 0 0 0
November 15, 2015 0 0 0 0 0
November 15, 2016 0 0 0 0 0
November 15, 2017 0 0 0 0 0
November 15, 2018 0 0 0 0 0
November 15, 2019 0 0 0 0 0
November 15, 2020 0 0 0 0 0
November 15, 2021 0 0 0 0 0
November 15, 2022 0 0 0 0 0
November 15, 2023 0 0 0 0 0
November 15, 2024 0 0 0 0 0
November 15, 2025 0 0 0 0 0
November 15, 2026 0 0 0 0 0
November 15, 2027 0 0 0 0 0
November 15, 2028 0 0 0 0 0
November 15, 2029 0 0 0 0 0
November 15, 2030 0 0 0 0 0
November 15, 2031 0 0 0 0 0
November 15, 2032 0 0 0 0 0
November 15, 2033 0 0 0 0 0
November 15, 2034 0 0 0 0 0
November 15, 2035 0 0 0 0 0
November 15, 2036 0 0 0 0 0
Weighted Average Life
(years)** 4.66 3.66 3.00 2.50 2.13
Weighted Average Life
(years)**(1) 4.66 3.66 3.00 2.50 2.13
- --------------------------
* Indicates a percentage greater than 0.00% but less than 0.50%.
** The Weighted Average Life of the Class A-2 Certificates is determined by
(i) multiplying the amount of each distribution in reduction of the Class
A-2 Certificate Principal Balance by the number of years from the date of
issuance of the Certificates to the related Distribution Date, (ii) adding
the results, and (iii) dividing the initial Class A-2 Certificate
Principal Balance.
(1) To the Optional Termination Date.
S-48
PERCENT OF INITIAL CLASS A-3 CERTIFICATE PRINCIPAL BALANCE OF THE
CLASS A-3 CERTIFICATES
OUTSTANDING
AT THE FOLLOWING PREPAYMENT SCENARIOS
CLASS A-3
---------------------------------------
DISTRIBUTION DATE I II III IV V
----------------- --- --- --- --- ---
November 29, 2005 100 100 100 100 100
November 15, 2006 100 100 100 100 100
November 15, 2007 100 100 100 100 100
November 15, 2008 100 100 100 100 90
November 15, 2009 100 100 98 73 54
November 15, 2010 100 94 68 48 33
November 15, 2011 100 70 48 31 20
November 15, 2012 81 52 33 20 12
November 15, 2013 64 39 23 13 7
November 15, 2014 51 29 16 8 4
November 15, 2015 40 21 11 5 3
November 15, 2016 32 16 8 4 2
November 15, 2017 25 12 5 2 1
November 15, 2018 19 9 4 1 1
November 15, 2019 15 6 3 1 *
November 15, 2020 12 5 2 1 *
November 15, 2021 9 3 1 * *
November 15, 2022 7 2 1 * *
November 15, 2023 5 2 1 * *
November 15, 2024 4 1 * * *
November 15, 2025 3 1 * * *
November 15, 2026 2 1 * * *
November 15, 2027 2 * * * *
November 15, 2028 1 * * * *
November 15, 2029 1 * * * *
November 15, 2030 1 * * * *
November 15, 2031 * * * * *
November 15, 2032 * * * * *
November 15, 2033 * * * * *
November 15, 2034 * * * * *
November 15, 2035 * * * * *
November 15, 2036 0 0 0 0 0
Weighted Average Life
(years)** 10.26 8.13 6.72 5.60 4.76
Weighted Average Life
(years)**(1) 8.65 6.82 5.60 4.66 3.95
- --------------------------
* Indicates a percentage greater than 0.00% but less than 0.50%.
** The Weighted Average Life of the Class A-3 Certificates is determined by
(i) multiplying the amount of each distribution in reduction of the Class
A-3 Certificate Principal Balance by the number of years from the date of
issuance of the Certificates to the related Distribution Date, (ii) adding
the results, and (iii) dividing the initial Class A-3 Certificate
Principal Balance.
(1) To the Optional Termination Date.
S-49
DESCRIPTION OF THE CERTIFICATES
The Home Loan Mortgage Loan Trust Asset-Backed Certificates, Series
2005-1 (the "Certificates") will consist of three classes of senior Certificates
(the "Class A Certificates") and two classes of subordinated Certificates (the
"Class C Certificates" and the "Class R Certificates"). The Certificates will be
issued pursuant to the Agreement. The form of the Agreement has been filed as an
exhibit to the Registration Statement of which this Prospectus Supplement and
the accompanying prospectus (the "Prospectus") are a part. The following
summaries describe certain provisions of the Agreement. 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 Agreement. Wherever particular
sections or defined terms of the Agreement are referred to, such sections or
defined terms are hereby incorporated herein by reference. Only the Class A
Certificates are offered hereby.
GENERAL
The Class A Certificates will be issued in denominations of $25,000 and
multiples of $1 in excess thereof, provided that Class A Certificates must be
purchased in minimum total investments of $100,000 per class, and will evidence
specified undivided interests in the Trust. The property of the Trust will
consist of, to the extent provided in the Agreement: (i) the Mortgage Loans;
(ii) payments on the Initial Mortgage Loans received after the related Cut-Off
Date (exclusive of payments in respect of accrued interest on each Initial
Mortgage Loan through the related Due Date in October 2005) and payments on the
Subsequent Mortgage Loans received after the related Cut-Off Dates (exclusive of
payments in respect of accrued interest on each Subsequent Mortgage Loan through
the related Due Date in the calendar month of the related Cut-Off Dates); (iii)
Mortgaged Properties relating to the Mortgage Loans that are acquired by
foreclosure or deed in lieu of foreclosure; (iv) the Collection Account, the
Distribution Account, the Basis Risk Reserve Fund, the Pre-Funding Account, the
Capitalized Interest Account and the Spread Account and funds on deposit therein
(excluding net earnings thereon); (v) rights under certain hazard insurance
policies, if any, covering the Mortgaged Properties; (vi) an assignment of the
Depositor's rights under the Purchase Agreement; and (vii) certain payments
under the Corridor Contract.
In addition, the Depositor has caused the Certificate Insurer to issue
an irrevocable and unconditional certificate guaranty insurance policy (the
"Policy") for the benefit of the holders of the Class A Certificates, pursuant
to which the Certificate Insurer will guarantee certain distributions to the
Certificateholders as described herein. Definitive Certificates (as defined
below) will be transferable and exchangeable at the office of the Trustee
designated from time to time for such purposes. As of November 29, 2005 (the
"Closing Date"), the Trustee designates its office located at DB Services
Tennessee, 648 Grassmere Park Road, Nashville, Tennessee 37211-3658, Attn:
Transfer Unit. The Trustee will initially act as Certificate Registrar. See
"--Book-Entry Certificates" below. No service charge will be made for any
registration of exchange or transfer of Certificates, but the Trustee may
require payment of a sum sufficient to cover any tax or other governmental
charge.
The certificate principal balance of the Class A-1 Certificates (the
"Class A-1 Certificate Principal Balance") on any Distribution Date is equal to
the certificate principal balance of the Class A-1 Certificates on the Closing
Date minus the aggregate of amounts actually distributed as principal to the
holders of the Class A-1 Certificates.
The certificate principal balance of the Class A-2 Certificates (the
"Class A-2 Certificate Principal Balance") on any Distribution Date is equal to
the certificate principal balance of the Class A-2 Certificates on the Closing
Date minus the aggregate of amounts actually distributed as principal to the
holders of the Class A-2 Certificates.
S-50
The certificate principal balance of the Class A-3 Certificates (the
"Class A-3 Certificate Principal Balance") on any Distribution Date is equal to
the certificate principal balance of the Class A-3 Certificates on the Closing
Date minus the aggregate of amounts actually distributed as principal to the
holders of the Class A-3 Certificates.
The Class A Certificates represent the right to receive distributions
of interest at the Certificate Interest Rate and distributions of principal as
described below.
The Person in whose name a Certificate is registered as such in the
Certificate Register is referred to herein as a "Certificateholder".
The "Percentage Interest" represented by the respective Class A
Certificate as of any date of determination will be equal to the percentage
obtained by dividing the denomination of the respective Class A Certificates by
the respective Class A Certificate Principal Balance as of the Closing Date.
BOOK-ENTRY CERTIFICATES
The Class A Certificates will be book-entry Certificates (for so long
as they are registered in the name of the applicable depository or its nominee,
the "Book-Entry Certificates"). Persons acquiring beneficial ownership interests
in the Book-Entry Certificates ("Certificate Owners") will hold such
Certificates through The Depository Trust Company ("DTC") in the United States,
or upon request through Clearstream Banking Luxembourg, formerly known as
Cedelbank SA ("Clearstream"), or the Euroclear System ("Euroclear") (in Europe)
if they are participants of such systems, or indirectly through organizations
which are participants in such systems. The Book-Entry Certificates will be
issued in one or more certificates which equal the certificate principal balance
of such Class A Certificates and will initially be registered in the name of
Cede & Co., the nominee of DTC. Clearstream and Euroclear will hold omnibus
positions on behalf of their participants through customers' securities accounts
in Clearstream's and Euroclear's names on the books of their respective
depositaries which in turn will hold such positions in customers' securities
accounts in the depositaries' names on the books of DTC. Citibank will act as
depositary for Clearstream and JP Morgan Chase Bank will act as depositary for
Euroclear (in such capacities, individually the "Relevant Depositary" and
collectively the "European Depositaries"). Investors may hold such beneficial
interests in the Book-Entry Certificates in minimum denominations of $25,000 and
multiples of $1 in excess thereof; provided that Class A Certificates must be
purchased in minimum total investments of $100,000 per class. Except as
described below, no Certificate Owner acquiring a Book-Entry Certificate (each,
a "beneficial owner") will be entitled to receive a physical certificate
representing such Certificate (a "Definitive Certificate"). Unless and until
Definitive Certificates are issued, it is anticipated that the only
"Certificateholder" of the Class A Certificates will be Cede & Co., as nominee
of DTC. Certificate Owners will not be Certificateholders as that term is used
in the Agreement. Certificate Owners are only permitted to exercise their rights
indirectly through DTC and participants of DTC ("DTC Participants").
The Certificate Owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Certificate Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC Participant and on
the records of Clearstream or Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of and
interest on the Book-Entry Certificates from the Trustee through DTC and DTC
Participants. While the Book-Entry Certificates are
S-51
outstanding (except under the circumstances described below), under the rules,
regulations and procedures creating and affecting DTC and its operations (the
"Rules"), DTC is required to make book-entry transfers among DTC Participants on
whose behalf it acts with respect to the Book-Entry Certificates and is required
to receive and transmit distributions of principal of, and interest on, the
Book-Entry Certificates. DTC Participants and indirect participants with whom
Certificate Owners have accounts with respect to Book-Entry Certificates are
similarly required to make book-entry transfers and receive and transmit such
payments on behalf of their respective Certificate Owners. Accordingly, although
Certificate Owners will not possess certificates representing their respective
interests in the Book-Entry Certificates, the Rules provide a mechanism by which
Certificate Owners will receive distributions and will be able to transfer their
interest.
Certificate Owners will not receive or be entitled to receive
certificates representing their respective interests in the Book-Entry
Certificates, except under the limited circumstances described below. Unless and
until Definitive Certificates are issued, Certificate Owners who are not DTC
Participants may transfer ownership of Book-Entry Certificates only through DTC
Participants and indirect participants by instructing such DTC Participants and
indirect participants to transfer Book-Entry Certificates, by book-entry
transfer, through DTC for the account of the purchasers of such Book-Entry
Certificates, which account is maintained with their respective DTC
Participants. Under the Rules and in accordance with DTC's normal procedures,
transfers of ownership of Book-Entry Certificates will be executed through DTC
and the accounts of the respective DTC Participants at DTC will be debited and
credited. Similarly, the DTC Participants and indirect participants will make
debits or credits, as the case may be, on their records on behalf of the selling
and purchasing Certificate Owners.
Because of time zone differences, credits of securities received in
Clearstream or Euroclear as a result of a transaction with a DTC 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 Participants or Clearstream Participants (each as defined
below) on such business day. Cash received in Clearstream or Euroclear as a
result of sales of securities by or through a Clearstream Participant (as
defined below) or Euroclear Participant (as defined below) to a DTC Participant
will be received with value on the DTC settlement date but will be available in
the relevant Clearstream or Euroclear cash account only as of the business day
following settlement in DTC. For information with respect to tax documentation
procedures relating to the Certificates, see "MATERIAL FEDERAL INCOME TAX
CONSEQUENCES" in the Prospectus and "GLOBAL CLEARANCE, SETTLEMENT AND TAX
DOCUMENTATION PROCEDURES--Certain U.S. Federal Income Tax Documentation
Requirements" in Annex I hereto.
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
S-52
procedures for same day funds settlement applicable to DTC. Clearstream
Participants and Euroclear Participants may not deliver instructions directly to
the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company,
performs services for its DTC Participants, some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC Participant in the Book-Entry
Certificates, whether held for its own account or as a nominee for another
person. In general, beneficial ownership of Book-Entry Certificates will be
subject to the Rules, as in effect from time to time.
Clearstream, 67 Bd Grande-Duchesse Charlotte, L-1331 Luxembourg, a
Luxembourg limited liability company, was formed in January 2000 through the
merger of Cedel International and Deutsche Boerse Clearing, the shareholders of
which comprise 93 of the world's major financial institutions.
Clearstream is registered as a bank in Luxembourg, and as such is
subject to regulation by the Institute Monetaire Luxembourgeois, "IML," the
Luxembourg Monetary Authority, which supervises Luxembourg banks.
Clearstream holds securities for its customers ("Clearstream
Participants") and facilitates the clearance and settlement of securities
transactions by electronic book-entry transfers between their accounts.
Clearstream provides various services, including safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Clearstream also deals with domestic securities markets
in several countries through established depository and custodial relationships.
Clearstream has established an electronic bridge with the Euroclear Operator (as
defined below) in Brussels to facilitate settlement of trades between systems.
Clearstream currently accepts over 70,000 securities issues on its books.
Clearstream's customers are world-wide financial institutions including
underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations. Clearstream's United States customers are limited to
securities brokers and dealers and banks. Currently, Clearstream has
approximately 3,000 customers located in over 60 countries, including all major
European countries, Canada, and the United States. Indirect access to
Clearstream is available to other institutions which clear through or maintain a
custodial relationship with an account holder of Clearstream.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between its
participants through simultaneous electronic book-entry delivery against
payment, thereby eliminating the need for physical movement of certificates and
any risk from lack of simultaneous transfers of securities and cash. The
Euroclear System is owned by Euroclear plc and operated through a license
agreement by Euroclear Bank S.A./N.V., a bank incorporated under the laws of the
Kingdom of Belgium (the "Euroclear Operator"). The Euroclear Operator is
regulated and examined by the Belgian Banking and Finance Commission and the
National Bank of Belgium.
The Euroclear Operator holds securities and book-entry interests in
securities for participating organizations and facilitates the clearance and
settlement of securities transactions between Euroclear Participants, and
between Euroclear Participants and participants of certain other securities
intermediaries through electronic book-entry changes in accounts of such
participants or other securities intermediaries. The Euroclear Operator provides
Euroclear Participants, among other things, with safekeeping, administration,
clearance and settlement, securities lending and borrowing, and related
services.
Non-Participants of Euroclear may hold and transfer book-entry
interests in the Book-Entry Certificates through accounts with a Euroclear
Participant or any other securities intermediary that holds a
S-53
book-entry interest in the Book-Entry Certificates through one or more
securities intermediaries standing between such other securities intermediary
and the Euroclear Operator.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System, and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants and has no record of or relationship with persons holding
through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to Cede & Co.. 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 Certificate Owners of
the Book-Entry Certificates that it represents and to each Financial
Intermediary for which it acts as agent. Each such Financial Intermediary will
be responsible for disbursing funds to the Certificate Owners of the Book-Entry
Certificates that it represents.
Under a book-entry format, Certificate Owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede & Co. Distributions with
respect to Certificates held through Clearstream or Euroclear will be credited
to the cash accounts of Clearstream Participants or Euroclear Participants in
accordance with the relevant system's rules and procedures, to the extent
received by the Relevant Depositary. Such distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
Because DTC can only act on behalf of Financial Intermediaries, the ability of a
Certificate Owners to pledge Book-Entry Certificates to persons or entities that
do not participate in the Depository system, or otherwise take actions in
respect of such Book-Entry Certificates, may be limited due to the lack of
physical certificates for such Book-Entry Certificates. In addition, issuance of
the Book-Entry Certificates in book-entry form may reduce the liquidity of such
Certificates in the secondary market since certain potential investors may be
unwilling to purchase Certificates for which they cannot obtain physical
certificates.
Monthly and annual reports on the Trust will be provided to Cede & Co.,
as nominee of DTC, and may be made available by Cede & Co. to Certificate Owners
upon request, in accordance with the rules, regulations and procedures creating
and affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates of such Certificate Owners are credited.
DTC has advised the Trustee that, unless and until Definitive
Certificates are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Certificates under the Agreement only at the direction
of one or more Financial Intermediaries to whose DTC accounts the Book-Entry
Certificates are credited, to the extent that such actions are taken on behalf
of Financial Intermediaries whose holdings include such Book-Entry Certificates.
Clearstream or the Euroclear Operator, as the case may be, will take any other
action permitted to be taken by a Certificateholder under the Agreement on
behalf of a Clearstream Participant or Euroclear Participant only in accordance
with its relevant rules and procedures and subject to the ability of the
Relevant Depositary to effect such actions on its behalf through DTC. DTC may
take actions, at the direction of the related DTC Participants, with respect to
S-54
some Book-Entry Certificates which conflict with actions taken with respect to
other Book-Entry Certificates.
Definitive Certificates will be issued to beneficial owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Depositor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as nominee and
depository with respect to the Book-Entry Certificates and the Depositor or the
Trustee is unable to locate a qualified successor, (b) the Depositor, at its
sole option, with the consent of the Trustee, elects to terminate a book-entry
system through DTC or (c) after the occurrence of an Event of Servicing
Termination (as defined herein), beneficial owners having Percentage Interests
aggregating not less than 51% of the related aggregate Class A Certificate
Principal Balance of the related Book-Entry Certificates advise the Trustee and
DTC through the Financial Intermediaries and the DTC participants in writing
that the continuation of a book-entry system through DTC (or a successor
thereto) is no longer in the best interests of beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all Certificate
Owners of the occurrence of such event and the availability through DTC of such
Definitive Certificate. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as
Certificateholders under the Agreement.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of the Class A Certificates among
participants of DTC, Clearstream and Euroclear, they are under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time.
None of the Depositor, the Servicer, the Seller, the Certificate
Insurer nor the Trustee will have any responsibility for any aspect of the
records relating to or payments made on account of beneficial ownership
interests of the Book-Entry Certificates held by Cede & Co., as nominee for DTC,
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
ASSIGNMENT OF MORTGAGE LOANS
On the Closing Date with respect to the Initial Mortgage Loans, the
Depositor, and on each Subsequent Transfer Date with respect to the Subsequent
Mortgage Loans, the Seller will transfer to the Trust all of its right, title
and interest in and to each Mortgage Loan, each related mortgage note (the
"Mortgage Note"), each related mortgage (the "Mortgage") and other related
documents (collectively, the "Related Documents"), including all payments
received on or with respect to each such Mortgage Loan after the Cut-Off Date
(exclusive of payments in respect of accrued interest on each Initial Mortgage
Loan through the related Due Date in October 2005) with respect to the Initial
Mortgage Loans or the related Cut-Off Date (exclusive of payments in respect of
accrued interest on each Subsequent Mortgage Loan through the related Due Date
in the calendar month of the related Cut-Off Date) with respect to the
Subsequent Mortgage Loans. With respect to any Mortgage Loan, the "Due Date" is
the day of the month on which payments are due from the Mortgagor. The Trustee,
concurrently with the transfer on the Closing Date, will deliver the
Certificates to the Depositor. Each Mortgage Loan transferred to the Trust will
be identified on a schedule (the "Mortgage Loan Schedule") delivered to the
Trustee pursuant to the Agreement. Such schedule will include information such
as the Principal Balance of each Mortgage Loan as of the related Cut-Off Date
and its Loan Rate as well as other information.
S-55
The Agreement provides that the Seller will deliver to the Trustee on
the Closing Date (with respect to the Initial Mortgage Loans) and on each
Subsequent Transfer Date (with respect to the Subsequent Mortgage Loans) the
Mortgage Note relating to each Mortgage Loan and certain other documentation
relating to each Mortgage Loan (together with the Mortgage Note, the "Mortgage
File"). The Seller will generally deliver the assignments of the Mortgage
relating to each Mortgage Loan (including assignments of Mortgages which are
required to be recorded as described below). The assignments of Mortgages are to
be delivered in recordable form. The assignments are not required to be recorded
except in the case of assignments of Mortgages which are secured by Mortgaged
Properties located within the state of Maryland, which are required to be
submitted for recordation by the Seller, at its own expense, and under certain
other limited circumstances.
Within 90 days of the date of delivery thereof, the Trustee will review
the Mortgage Loans and the Related Documents pursuant to the Agreement and if
any Mortgage Loan or Related Document is found to be defective in any material
respect and such defect is not cured within 90 days following notification
thereof to the Seller by the Trustee, the Seller will be obligated to either (i)
substitute for such Mortgage Loan an Eligible Substitute Mortgage Loan;
provided, however, such substitution is permitted only within two years of the
Closing Date and may not be made unless an opinion of counsel is provided to the
effect that such substitution will not disqualify the Trust as a REMIC or result
in a prohibited transaction tax under the Code or (ii) purchase such Mortgage
Loan at a price (the "Purchase Price") equal to the outstanding Principal
Balance of such Mortgage Loan as of the date of purchase, plus the greater of
(a) all accrued and unpaid interest thereon, or (b) 30 days' interest thereon,
computed at the Loan Rate, plus the amount of any unreimbursed Servicing
Advances (as defined herein) made by the Servicer. The Purchase Price will be
deposited in the Collection Account on or prior to the next succeeding
Determination Date after such obligation arises. The obligation of the Seller to
cure, repurchase or substitute for a Defective Mortgage Loan is the sole remedy
regarding any defects in the Mortgage Loans and Related Documents available to
the Trustee or the Certificateholders.
In connection with the substitution of an Eligible Substitute Mortgage
Loan, the Seller will be required to deposit in the Collection Account on or
prior to the next succeeding Determination Date after such obligation arises an
amount (the "Substitution Adjustment") equal to the excess of the Principal
Balance of the related Defective Mortgage Loan over the Principal Balance of
such Eligible Substitute Mortgage Loan together with accrued interest and any
other amounts specified in the Agreement.
An "Eligible Substitute Mortgage Loan" is a mortgage loan substituted
by the Seller for a Defective Mortgage Loan which must, on the date of such
substitution, (i) have an outstanding Principal Balance (or in the case of a
substitution of more than one Mortgage Loan for a Defective Mortgage Loan, an
aggregate Principal Balance), not in excess of, and not more than 5% less than,
the Principal Balance of the Defective Mortgage Loan; (ii) have a Loan Rate not
less than the Loan Rate of the Defective Mortgage Loan and not more than 1% in
excess of the Loan Rate of such Defective Mortgage Loan; (iii) have a mortgage
of the same or higher level of priority as the mortgage relating to the
Defective Mortgage Loan at the time the Defective Mortgage Loan was transferred
to the Trust; (iv) have a remaining term to maturity not more than six months
earlier and not later than the remaining term to maturity of the Defective
Mortgage Loan; (v) comply with each representation and warranty as to the
Mortgage Loans set forth in the Agreement (deemed to be made as of the date of
substitution); and (vi) satisfy certain other conditions specified in the
Agreement.
The Seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
Trustee with respect to each Mortgage Loan (e.g., Cut-Off Date Principal Balance
and the Loan Rate). In addition, the Seller will represent and warrant that,
among other things: (i) at the time of transfer to the Depositor, the Seller has
transferred or assigned all of its right, title and interest in each Mortgage
Loan and the Related Documents, free of any lien; and (ii) each
S-56
Mortgage Loan complied, at the time of origination, in all material respects
with applicable state and federal laws. Upon discovery of a breach of any such
representation and warranty which materially and adversely affects the interests
of the Certificateholders or the Certificate Insurer in the related Mortgage
Loan and Related Documents, the Seller will have a period of 60 days after
discovery or notice of the breach to effect a cure. If the breach cannot be
cured within the 60-day period, the Seller will be obligated to (i) substitute
for such Defective Mortgage Loan an Eligible Substitute Mortgage Loan or (ii)
purchase such Defective Mortgage Loan from the Trust. The same procedure and
limitations that are set forth above for the substitution or purchase of
Defective Mortgage Loans as a result of deficient documentation relating thereto
will apply to the substitution or purchase of a Defective Mortgage Loan as a
result of a breach of a representation or warranty in the Agreement that
materially and adversely affects the interests of the Certificateholders or the
Certificate Insurer.
Mortgage Loans required to be transferred to the Seller as described in
the preceding paragraphs are referred to as "Defective Mortgage Loans".
Pursuant to the Agreement, the Servicer will service and administer the
Mortgage Loans as more fully set forth below.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT AND DISTRIBUTION
ACCOUNT
The Servicer will establish and maintain in the name of the Trustee a
separate trust account (the "Collection Account") for the benefit of the holders
of the Certificates and the Certificate Insurer. The Collection Account will be
an Eligible Account (as defined herein). Within two Business Days after receipt,
the Servicer will deposit or cause to be deposited into the Collection Account
all amounts in respect of the Mortgage Loans (excluding amounts representing the
Servicing Fee, reimbursement for Monthly Advances and Servicing Advances and
insurance proceeds to be applied to the restoration or repair of a Mortgaged
Property or similar items). Amounts so deposited may be invested in Eligible
Investments (as described in the Agreement) maturing no later than one Business
Day prior to the date on which the amount on deposit therein is required to be
deposited in the Distribution Account or on such Distribution Date if approved
by the Rating Agencies and the Certificate Insurer. A "Distribution Date" is the
15th day of each month, or if such day is not a Business Day, then the next
succeeding Business Day, commencing in December 2005.
The Trustee will establish a separate account (the "Distribution
Account") into which will be deposited amounts withdrawn from the Collection
Account for distribution to Certificateholders on a Distribution Date. The
Distribution Account will be an Eligible Account. Amounts on deposit therein may
be invested in Eligible Investments maturing on or before the Business Day prior
to the related Distribution Date.
An "Eligible Account" is an account that is (i) maintained with a
depository institution whose debt obligations at the time of any deposit therein
have the highest short-term debt rating by the Rating Agencies; (ii) one or more
accounts with a depository institution which are fully insured by either the
Savings Association Insurance Fund ("SAIF") or the Bank Insurance Fund ("BIF")
of the Federal Deposit Insurance Corporation established by such fund with a
minimum long-term unsecured debt rating of "Baa3" by Moody's and "BBB" by S&P;
(iii) a segregated trust account maintained with the Trustee or an affiliate of
the Trustee in its fiduciary capacity; or (iv) otherwise acceptable to each
Rating Agency and the Certificate Insurer as evidenced by a letter from each
Rating Agency and the Certificate Insurer to the Trustee, without reduction or
withdrawal of their then current ratings of the Certificates without taking the
Policy into account.
S-57
Eligible Investments are specified in the Agreement and are limited to
investments which meet the criteria of the Rating Agencies from time to time as
being consistent with their then current ratings of the Certificates.
ADVANCES OF INTEREST
Not later than one Business Day prior to each Distribution Date, the
Servicer will remit to the Trustee for deposit in the Distribution Account an
amount, to be distributed on the related Distribution Date, equal to all
payments of interest due on each Mortgage Loan during the related Due Period as
to which no payment was received as of the close of business on the last day of
the related Due Period (net of the Servicing Fee) plus, with respect to each REO
Property which was acquired during or prior to the related Due Period and as to
which a final disposition thereof did not occur in the related Due period, an
amount equal to the excess, if any, of interest on the Principal Balance of the
Mortgage Loan relating to such REO Property for the most recently ended Due
Period for the related Mortgage Loan at the related Loan Rate (net of the
Servicing Fee) over the net income from the REO Property transferred to the
Collection Account for such Distribution Date pursuant to the Agreement (the
"Monthly Advance"). Such obligation of the Servicer continues with respect to
each Mortgage Loan until such Mortgage Loan becomes a Liquidated Mortgage Loan.
In the course of performing its servicing obligations, the Servicer
will pay all reasonable and customary "out-of-pocket" costs and expenses
incurred in the performance of its servicing obligations, including, but not
limited to, the cost of (i) the preservation, restoration and protection of the
Mortgaged Properties, (ii) any enforcement or judicial proceedings, including
foreclosures, and (iii) the management and liquidation of Mortgaged Properties
acquired in satisfaction of the related Mortgage. Each such expenditure will
constitute a "Servicing Advance".
The Servicer's right to reimbursement for Servicing Advances is limited
to late collections on the related Mortgage Loan, including Liquidation
Proceeds, released Mortgaged Property proceeds, Insurance Proceeds and such
other amounts as may be collected by the Servicer from the related Mortgagor or
otherwise relating to the Mortgage Loan in respect of which such unreimbursed
amounts are owed. The Servicer's right to reimbursement for Monthly Advances is
limited to late collections of interest on any Mortgage Loan and to Liquidation
Proceeds (each as defined herein) and Insurance Proceeds on the related Mortgage
Loan. However, if any Servicing Advance or Monthly Advance previously made by
the Servicer is determined by the Servicer to be nonrecoverable from such
sources, the amount of such Nonrecoverable Advance may be reimbursed to the
Servicer from other amounts on deposit in the Collection Account. The Servicer's
right to such reimbursements is prior to the rights of Certificateholders to
receive distributions.
Notwithstanding the foregoing, the Servicer is not required to make any
Monthly Advance or Servicing Advance if in the good faith judgment and sole
discretion of the Servicer, the Servicer determines that such advance will not
be ultimately recoverable from collections received from the Mortgagor in
respect of the related Mortgage Loan or other recoveries in respect of such
Mortgage Loan (a "Nonrecoverable Advance"), as evidenced by an officer's
certificate of the Servicer delivered to the Trustee prior to the related
Distribution Date.
DISTRIBUTION DATES
On each Distribution Date, the holders of the Class A Certificates will
be entitled to receive, from amounts then on deposit in the Distribution
Account, to the extent of funds available therefor in accordance with the
priorities and in the amounts described below under "--Priority of
Distributions", an aggregate amount equal to the sum of (a) the Interest
Distribution Amount and (b) the Class Principal
S-58
Distribution Amount. Distributions will be made in immediately available funds
to holders of Class A Certificates (i) by check or money order mailed to the
address of the person entitled thereto as it appears on the register (the
"Certificate Register") maintained by the Trustee as registrar (the "Certificate
Registrar"), or (ii) upon the request of a Certificateholder, by wire transfer
or otherwise, to the account of such Certificateholder at a domestic bank or
other entity having appropriate facilities therefor, if such Certificateholder
has so notified the Trustee in accordance with the Agreement.
DEPOSITS TO THE DISTRIBUTION ACCOUNT
Amounts in respect of the related Due Period will be deposited into the
Distribution Account (1) in the case of amounts on deposit in the Collection
Account, on the Business Day immediately prior to each Distribution Date and (2)
in the case of amounts on deposit in the Spread Account, to the extent
necessary, on the Distribution Date. Upon deposit in the Distribution Account,
the following amounts will constitute the "Available Funds" for such
Distribution Date: (i) payments of principal and interest on the Mortgage Loans
(net of amounts representing the Servicing Fee and the Trustee Fee and expenses
with respect to each Mortgage Loan and reimbursement for related Monthly
Advances and Servicing Advances); (ii) Net Liquidation Proceeds and Insurance
Proceeds with respect to the Mortgage Loans (net of amounts to be applied to the
restoration or repair of a related Mortgaged Property); (iii) the Purchase Price
for repurchased Defective Mortgage Loans and any related Substitution Adjustment
Amounts; (iv) payments from the Servicer in connection with (a) Monthly
Advances, (b) Prepayment Interest Shortfalls, and (c) the termination of the
Trust with respect to the Mortgage Loans as provided in the Agreement; (v) any
amounts paid under the Policy; (vi) any amounts deposited in the Distribution
Account from the Spread Account; (vii) any amounts deposited in the Distribution
Account from the Capitalized Interest Account; and (viii) on the Distribution
Date immediately following the end of the Funding Period, any principal amounts
remaining in the Pre-Funding Account.
"Insurance Proceeds" are proceeds paid by any insurer (other than the
Certificate Insurer) pursuant to any insurance policy covering a Mortgage Loan
or Mortgaged Property, net of any component thereof (i) covering any expenses
incurred by or on behalf of the Servicer in connection with obtaining such
proceeds, (ii) applied to the restoration or repair of the related Mortgaged
Property, (iii) released to the Mortgagor in accordance with the Servicer's
normal servicing procedures or (iv) required to be paid to any holder of a
mortgage senior to such Mortgage Loan.
"Liquidation Proceeds" with respect to a Mortgage Loan are the proceeds
(including Insurance Proceeds, but not including amounts paid under the Policy)
received in connection with the liquidation of any Mortgage Loan or related REO
Property. With respect to a Mortgage Loan, "Net Liquidation Proceeds" are the
excess of Liquidation Proceeds over the expenses associated with the related
liquidation that are not otherwise reimbursed to the Servicer.
SPREAD ACCOUNT
The Agreement requires the Trustee to establish on the Closing Date and
maintain thereafter a reserve account (the "Spread Account") and to deposit on
each Distribution Date in the Spread Account the amount of Excess Spread that is
required by the Certificate Insurer to be deposited in the Spread Account. The
maximum amount required by the Certificate Insurer to be on deposit in the
Spread Account may be reduced by the Certificate Insurer as described in the
Agreement. On the Closing Date the amount on deposit in the Spread Account will
be 0.50% of aggregate principal balance of the initial mortgage loans as of the
cut-off date and the original pre-funded amount.
On any Distribution Date the excess, if any, of (i) the Available Funds
(exclusive of Insured Amounts and amounts deposited in the Distribution Account
from the Spread Account), over (ii) the sum
S-59
of (a) the "Remittance Amount" which is the sum of the Interest Distribution
Amount and the Class Principal Distribution Amount and (b) certain amounts
payable to the Certificate Insurer representing the insurance premium, amounts
equal to Insured Amounts previously paid on the Class A Certificates and not
reimbursed, I and I Payments, and certain amounts reimbursable to the Servicer
in respect of the Class A Certificates, is the "Excess Spread".
The amount that is required to be on deposit at any time in the Spread
Account is the Base Spread Account Requirement. The "Base Spread Account
Requirement" will be an amount equal to (a) with respect to any Distribution
Date occurring during the period commencing after the Closing Date and ending on
the later to occur of (i) the Distribution Date occurring in November 2007 and
(ii) the Distribution Date upon which the Class A Certificate Principal Balance
is less than or equal to 50% of the sum of the Principal Balance of the Initial
Mortgage Loans and the Original Pre-Funded Amount, 3.10% of the sum of the
Principal Balance of the Initial Mortgage Loans and the Original Pre-Funded
Amount; and (b) with respect to each Distribution Date thereafter, the greater
of (A) 6.20% of the aggregate Principal Balance of the Mortgage Loans at the end
of the related Due Period, (B) the greater of (1) 0.50% of the sum of the
Principal Balance of the Initial Mortgage Loans and the Original Pre-Funded
Amount, and (2) the sum of the Principal Balances of the three largest
outstanding Mortgage Loans, and (C) an amount based on the delinquency and loss
performance of the Mortgage Loans as further described in the Agreement. The
Base Spread Account Requirement will not exceed the aggregate Principal Balance
of the Mortgage Loans on any Distribution Date.
While the applicable Base Spread Account Requirement limits the amount
on deposit in the Spread Account at any one time, the aggregate amount available
through the Spread Account over time is not so limited.
The Agreement provides that on any Distribution Date, if the Base
Spread Account Requirement has been reached, then the portion of the Available
Funds available to be deposited in the Spread Account will be distributed to the
holders of the Class C Certificates on such Distribution Date after
distributions to the holders of the Class A Certificates for any Class A
Available Funds Cap Carryover Amounts. The holders of the Class C Certificates
will not be required to refund any amounts previously and properly distributed
to them, regardless of whether there are sufficient funds available on a
subsequent Distribution Date to make a full distribution to holders of the Class
A Certificates on any such Distribution Date, or to pay the other amounts set
forth above. Funds credited to the Spread Account may be invested in Eligible
Investments that are scheduled to mature on or prior to the Business Day
preceding the next Distribution Date, or such other investments, which may have
maturities extending beyond the next succeeding Business Day, as approved from
time to time by the Rating Agencies and the Certificate Insurer. Investment
earnings on amounts on deposit in the Spread Account will be retained therein
until released at the discretion of the Certificate Insurer.
The Spread Account may be terminated or other assets, including
mortgage loans similar to the Mortgage Loans, may be substituted for some or all
of the assets held therein, if any, provided that the Certificate Insurer and
the Rating Agencies consent to such action and that the then current ratings of
the Class A Certificates assigned by the Rating Agencies (without taking the
Policy into account) are not lowered as a result thereof.
The Spread Account and any income earned thereon will not be assets of
the REMIC.
PRIORITY OF DISTRIBUTIONS
On each Distribution Date the Trustee is required to withdraw from the
Distribution Account the Available Funds, and make the following disbursements
and transfers as described below and to the
S-60
extent of Available Funds (except that amounts paid under the Policy will only
be available for distribution to Certificateholders):
(i) to the holders of the Class A-1, Class A-2 and Class A-3
Certificates, pro rata, an amount equal to the Interest Distribution
Amount for such Distribution Date;
(ii) to the holders of the Class A-1, Class A-2 and Class A-3
Certificates, sequentially in that order, an amount equal to the Class
Principal Distribution Amount for such Distribution Date;
(iii) to the Certificate Insurer an amount equal to the sum of
(1) the related monthly premium for the Policy, (2) an amount
sufficient to reimburse the Certificate Insurer to the extent of any
unreimbursed Insured Amounts paid, with interest thereon at the rate
specified in the Insurance Agreement, and (3) certain amounts owed to
the Certificate Insurer pursuant to the Insurance Agreement ("I and I
Payments");
(iv) to the Servicer certain reimbursable expenses and
unreimbursed Nonrecoverable Advances;
(v) to the Spread Account, the remaining Excess Spread until
the Base Spread Account Requirement is reached;
(vi) to the Basis Risk Reserve Fund and then to the holders of
the Class A Cerificates, an amount equal to any Class A Available Funds
Cap Carryover Amount (after taking into account any deposits made by
the Corridor Contract Counterparty into the Basis Risk Reserve Fund for
such Distribution Date); and
(viii) to the holders of the Class C Certificates, the
balance, if any.
INTEREST RATE CORRIDOR
On the Closing Date, the Trustee, on behalf of the Trust, will enter
into an interest rate corridor (the "Corridor" or the "Corridor Contract") with
The Royal Bank of Scotland plc, as corridor contract counterparty ("Corridor
Contract Counterparty").
The Royal Bank of Scotland plc is a Scottish banking organization and a
direct, wholly owned subsidiary of The Royal Bank of Scotland Group plc ("RBS
Group"), which, together with its subsidiaries, are a diversified financial
services group engaged in a wide range of banking, financial and finance related
activities in the United Kingdom and internationally. The long-term unsecured,
unsubordinated and unguaranteed debt obligations of the Corridor Contract
Counterparty are currently rated "AA" from Standard & Poor's and "Aa1" from
Moody's. Except for the information provided in this paragraph, the Corridor
Contract Counterparty and RBS Group have not been involved in the preparation
of, and do not accept any responsibility for, this prospectus supplement or the
accompanying prospectus. The Corridor Contract Counterparty is an affiliate of
Greenwich Capital Markets, Inc., the underwriter.
Under the Corridor Contract, in exchange for a fixed payment made by
the Seller on behalf of the Trust on the Closing Date, the Corridor Contract
Counterparty will agree to make payments at least one Business Day prior to the
15th day of each month (each, a "Corridor Payment Date"), commencing in December
2005 through and including the last Corridor Payment Date in January 2009, in an
amount, if any, equal to the product of (i) the excess, if any, of (x) the
lesser of (1) One-Month LIBOR (as defined
S-61
under "--The Certificate Interest Rate") and (2) 10.5% (the "Ceiling Rate"),
over (y) the Strike Rate for such Distribution Date (as set forth in the table
below, the "Strike Rate"), and (ii) a notional amount equal to the lesser of (1)
the scheduled notional balance for such Distribution Date (as set forth in the
table below) and (2) the Class A Certificate Principal Balance immediately prior
to such Payment Date and (iii) the actual number of days in the related Accrual
Period, divided by 360.
The scheduled notional balance of the Corridor will amortize according
to its schedule set forth below. The table below is an approximation of the
schedule for the Corridor the Trust intends to purchase.
- ---------------------- ----------- ------------------------- --------------------- ----------- ---------------------------
STRIKE APPROXIMATE NOTIONAL STRIKE APPROXIMATE NOTIONAL
MONTH RATE BALANCE ($) MONTH RATE BALANCE ($)
- ---------------------- ----------- ------------------------- --------------------- ----------- ---------------------------
1 8.70060 170,000,000.00 20 7.31860 97,825,685.00
2 6.06224 166,688,509.00 21 7.86615 94,933,785.00
3 6.03927 162,353,255.00 22 8.07629 92,136,677.00
4 7.65568 158,145,752.00 23 8.35301 89,424,262.00
5 6.91457 153,471,798.00 24 8.08237 86,791,602.00
6 7.14482 148,935,575.00 25 8.38721 84,236,167.00
7 6.91411 144,533,029.00 26 8.56306 81,756,451.00
8 7.14434 140,260,228.00 27 8.92229 79,354,918.00
9 6.91364 136,113,354.00 28 9.88482 77,026,572.00
10 6.91340 132,088,702.00 29 9.24850 74,769,657.00
11 7.14360 128,182,675.00 30 9.55440 72,578,693.00
12 6.91292 124,391,782.00 31 9.30202 70,451,691.00
13 7.14655 120,712,636.00 32 9.84487 68,387,612.00
14 6.91577 117,142,017.00 33 9.88693 66,385,771.00
15 6.91552 113,676,661.00 34 10.08699 64,444,444.00
16 7.65619 110,313,469.00 35 10.42997 62,561,056.00
17 6.91501 107,049,434.00 36 10.09039 60,732,608.00
18 7.14525 103,881,639.00 37 10.46845 58,957,389.00
19 6.99306 100,807,250.00 38 10.36537 57,234,388.00
- ---------------------- ----------- ------------------------- --------------------- ----------- ---------------------------
Unless terminated earlier, the Corridor Contract will terminate
immediately after the Distribution Date in January 2009. The Corridor Contract
is terminable by the Trust or the Corridor Contract Counterparty following the
occurrence of certain specified events of default, including failure of the
Corridor Contract Counterparty to make required payments, and certain standard
events under the 1992 International Swaps and Derivatives Association, Inc.
Master Agreement (Multicurrency Cross Border).
It is intended that payments under the Corridor Contract provide
protection against interest rate risk from upward movements in One-Month LIBOR
and diminish the basis risk associated with the Mortgage Loans. However, there
can be no assurance that amounts payable to the Trust under the Corridor will be
sufficient to cover such shortfalls. On each Distribution Date during the term
of the Corridor Contract, the Trustee will deposit any amount received under the
Corridor Contract into the Basis Risk Reserve Fund up to any Class A Available
Funds Cap Carryover Amount for such Distribution Date. Any amounts received in
respect of the Corridor Contract on any Corridor Payment Date will be available
only to pay any Class A Available Funds Cap Carryover Amount or to fund the
Basis Risk
S-62
Reserve Fund to its required level and will not cover any shortfalls on the
Mortgage Loans. To the extent that such amounts are not needed on the related
Distribution Date for the purposes described in the preceding sentence, such
amounts will be withdrawn from the Basis Risk Reserve Fund and distributed to
the holders of the Class C Certificates.
THE CERTIFICATE INTEREST RATE
The "Certificate Interest Rate" on any Distribution Date with respect
to the related Class A Certificates will be a per annum rate equal to the lesser
of (a) the Formula Rate and (b) the Available Funds Cap Rate for such Payment
Date.
The "Formula Rate" (1) for the Class A-1 Certificates is the lesser of
(a) One-Month LIBOR plus (i) on or prior to the optional termination date, 0.10%
or (ii) after the optional termination date, 0.20% and (b) 14.00%; (2) for the
Class A-2 Certificates is the lesser of (a) One-Month LIBOR plus (i) on or prior
to the optional termination date, 0.25% or (ii) after the optional termination
date 0.50% and (b) 14.00%; and (3) for the Class A-3 Certificates is the lesser
of (a) One-Month LIBOR plus (i) on or prior to the optional termination date,
0.36% or (ii) after the optional termination date, 0.72% and (b) 14.00%.
The "Accrual Period" for the Class A Certificates for each Distribution
Date will be the actual number of days included in the period commencing on the
immediately preceding Distribution Date (or, in the case of the first Accrual
Period, commencing on the Closing Date) and ending on the day immediately
preceding such Distribution Date (on an actual/360 basis).
With respect to each Distribution Date, "One-Month LIBOR" will equal
the interbank offered rate for one month United States dollar deposits in the
London market as quoted on Telerate Page 3750 as of 11:00 A.M., London time, on
the second LIBOR business day prior to the first day of the related Accrual
Period. Telerate Page 3750 means the display designated as page 3750 on the
Bridge Telerate, or any other page as may replace page 3750 on that service for
the purpose of displaying London interbank offered rates of major banks. If the
rate does not appear on the page, or any other page as may replace that page on
that service, or if the service is no longer offered, any other service for
displaying LIBOR or comparable rates as may be selected by the Trustee after
consultation with the Seller and the Certificate Insurer, the rate will be the
reference bank rate.
The reference bank rate will be determined on the basis of the rates at
which deposits in U.S. Dollars are offered by the reference banks, which shall
be three major banks that are engaged in transactions in the London interbank
market, selected by the Trustee after consultation with the Seller and the
Certificate Insurer, as of 11:00 A.M., London time, on the day that is two LIBOR
business days prior to the immediately preceding distribution date to prime
banks in the London interbank market for a period of one month in amounts
approximately equal to the aggregate Class A Certificate Principal Balance. The
Trustee will request the principal London office of each of the reference banks
to provide a quotation of its rate. If at least two quotations are provided, the
rate will be the arithmetic mean of the quotations. If on the related date fewer
than two quotations are provided as requested, the rate will be the arithmetic
mean of the rates quoted by one or more major banks in New York City, selected
by the Trustee after consultation with the Seller and the Certificate Insurer,
as of 11:00 A.M., New York City time, on the date for loans in U.S. Dollars to
leading European banks for a period of one month in amounts approximately equal
to the aggregate Class A Certificate Principal Balance. If no quotations can be
obtained, the rate will be One-Month LIBOR for the prior Distribution Date.
LIBOR business day means any day other than a Saturday or a Sunday or a
day on which banking institutions in the State of New York or in the city of
London, England are required or authorized by law to be closed.
S-63
The "Available Funds Cap Rate" for any Distribution Date is a per annum
rate equal to the product of (a) a fraction, expressed as a percentage, the
numerator of which is (i) the amount of interest which accrued on the Mortgage
Loans in the prior calendar month minus (ii) the sum of the Servicing Fee, the
Trustee Fee and the Certificate Insurer premium for such Distribution Date and
the denominator of which is the sum of (i) the aggregate Principal Balance of
the Mortgage Loans as of the last day of the immediately preceding Due Period
(or as of the Cut-off Date with respect to the first Distribution Date) and (ii)
any amounts on deposit in the Pre-Funding Account and (b) a fraction whose
numerator is 360 and whose denominator is the actual number of days in the
related Accrual Period.
If the interest accrued on the Class A Certificates is calculated at
the Available Funds Cap Rate, holders of the Class A Certificates will be
entitled to payments of Class A Available Funds Cap Carryover Amount from the
Basis Risk Reserve Fund (including amounts, if any, received under the Corridor
Contract) on future Distribution Dates to the extent funds are available
therefor as described below. The Policy does not cover any Class A Available
Funds Cap Carryover Amount.
The "Class A Available Funds Cap Carryover Amount" for any Distribution
Date is the sum of (a) the excess, if any, of (i) the amount of interest that
would have accrued on the Class A Certificates on such Distribution Date had
such Certificate Interest Rate been the Formula Rate, over (ii) the amount of
interest the Class A Certificates accrued for such Distribution Date at the
Available Funds Cap Rate and (b) the unpaid portion of the Class A Available
Funds Cap Carryover Amount from the prior Distribution Date together with
interest accrued on such unpaid portion for the most recently ended Accrual
Period at the Formula Rate applicable for such Accrual Period.
BASIS RISK RESERVE FUND
The Agreement requires the Trustee to establish on the Closing Date and
maintain thereafter a reserve fund (the "Basis Risk Reserve Fund") held by the
Trustee on behalf of the holders of the Class A Certificates. All amounts
received from the Corridor Contract Counterparty pursuant to the Corridor
Contract will be deposited into the Basis Risk Reserve Fund on each Corridor
Payment Date. On each Distribution Date, holders of the Class A Certificates
will be entitled to receive payments from the Basis Risk Reserve Fund equal to
any Class A Available Funds Cap Carryover Amount. Any amounts in excess of such
amount not used to pay Class A Available Funds Cap Carryover Amount will be paid
to the holders of the Class C Certificates. The Basis Risk Reserve Fund will not
be included as an asset of any REMIC.
INTEREST
On each Distribution Date, to the extent of funds available therefor in
accordance with the priorities described above under "--Priority of
Distributions", interest will be distributed to the Class A Certificates in an
amount equal to the Interest Distribution Amount. For each Distribution Date,
the "Interest Distribution Amount" is the sum of (a) interest at the Certificate
Interest Rate that accrued during the related Accrual Period on the Class A
Certificate Principal Balance immediately prior to such Distribution Date less
any shortfalls in interest due to (i) the application of the Servicemembers
Civil Relief Act of 2003 (the "Relief Act", and any such shortfall, a "Relief
Act Interest Shortfall") and (ii) Net Prepayment Interest Shortfalls in excess
of the Servicing Fee for the related Distribution Date (the "Class Monthly
Interest Amount"), and (b) any Class Interest Carryover Shortfall. As to any
Distribution Date, the "Class Interest Carryover Shortfall" is the sum of (a)
the excess of the sum of (A) the Class Monthly Interest Amount for the preceding
Distribution Date and (B) any outstanding Class Interest Carryover Shortfall on
such preceding Distribution Date, over the amount in respect of interest that is
actually distributed on such preceding Distribution Date plus (b) interest on
such excess, to the extent permitted by law, at the Certificate Interest Rate
for the related Accrual Period.
S-64
PRINCIPAL
On each Distribution Date, to the extent of funds available therefor,
in accordance with the priorities described above under "--Priority of
Distributions", principal will be distributed to the holders of Class A-1
Certificates, Class A-2 Certificates and Class A-3 Certificates in an amount
equal to the lesser of (A) the Class A Certificate Principal Balance immediately
prior to such Distribution Date and (B) the sum of the Monthly Principal Amount
for such Distribution Date and any Principal Shortfall Amount for such
Distribution Date (the "Class Principal Distribution Amount").
"Monthly Principal Amount" means, with respect to any Distribution Date
and the Class A Certificates, to the extent of funds available therefor as
described herein, the amount equal to the sum of the following amounts (without
duplication) with respect to the immediately preceding Due Period (as defined
below): (i) each payment of principal on a Mortgage Loan received by the
Servicer during the related Due Period, including all full and partial principal
prepayments, (ii) the Principal Balance as of the end of the related Due Period
of each Mortgage Loan that became a Liquidated Mortgage Loan during the related
Due Period, (iii) the principal portion of all Insurance Proceeds and Net
Liquidation Proceeds allocable to recoveries of principal of Mortgage Loans that
are not yet Liquidated Mortgage Loans received during the related Due Period and
any amount received in connection with the termination of the Trust during the
related Due Period, (iv) the portion of the Purchase Price allocable to
principal of all repurchased Defective Mortgage Loans with respect to such Due
Period, (v) any Substitution Adjustment Amounts received on or prior to the
previous Determination Date and not yet distributed, (vi) the remaining Class A
Certificate Principal Balance required to be deposited by the Certificate
Insurer on the last scheduled Distribution Date and (vii) any principal amounts
remaining in the Pre-Funding Account after the Funding Period.
"Principal Shortfall Amount" means for any Distribution Date, the
excess of the sum of the Monthly Principal Amount for the preceding Distribution
Date and any outstanding Principal Shortfall Amount on any preceding
Distribution Date, over the amount in respect of principal that is actually
distributed to the holders of the Class A Certificates on the preceding
Distribution Date.
On each Distribution Date, net losses realized in respect of Liquidated
Mortgage Loans (to the extent such amount is not covered by Available Funds)
will reduce the amount, if any, in the Spread Account.
"Due Period" means, with respect to any Determination Date or
Distribution Date, the calendar month immediately preceding such Determination
Date or Distribution Date, as the case may be.
"Determination Date" means, with respect to any Distribution Date, the
third Business Day prior to such Distribution Date.
A "Liquidated Mortgage Loan" means, as to any Distribution Date, a
Mortgage Loan with respect to which the Servicer has determined, in accordance
with the servicing procedures specified in the Agreement, as of the end of the
preceding Due Period, that all Liquidation Proceeds which it expects to recover
with respect to such Mortgage Loan have been recovered.
THE POLICY
On or before the Closing Date, the Policy will be issued by the
Certificate Insurer pursuant to the provisions of the Insurance and Indemnity
Agreement (the "Insurance Agreement") to be dated as of the Closing Date, among
the Seller, the Depositor, the Servicer and the Certificate Insurer.
S-65
Pursuant to the Policy, on each Distribution Date the Certificate
Insurer will make available to the Trustee funds in the amount, if any,
necessary to distribute to the holders of the Class A Certificates the full
amount of the Remittance Amount due to such Certificateholders (other than the
Certificate Insurer pursuant to its subrogation rights) on such Distribution
Date after application of the Available Funds (excluding any payments by the
Certificate Insurer) for the Class A Certificates. See "DESCRIPTION OF THE
CERTIFICATES--Priority of Distributions".
The Policy will irrevocably and unconditionally guarantee payment on
each Distribution Date to the Trustee for the benefit of the Class A
Certificateholders a maximum amount equal to the Remittance Amount for such
Distribution Date calculated in accordance with the original terms of the Class
A Certificates when issued and without regard to any amendment or modification
of the Class A Certificates or the Agreement, except amendments or modifications
to which the Certificate Insurer has given its prior written consent. Relief Act
Interest Shortfalls will not be covered by payments by the Depositor, the
Servicer or any other persons, or from the Spread Account or the Policy. The
Policy does not cover Prepayment Interest Shortfalls. The amount of the actual
payment (the "Insured Amount"), if any, paid by the Certificate Insurer under
the Policy on each Distribution Date with respect to the Class A Certificates
will be equal to the excess, if any, of (1) the Remittance Amount for the Class
A Certificates with respect to such Distribution Date over (2) the aggregate
amount on deposit (or scheduled to be on deposit) in the Distribution Account
that will be available for distribution to the Class A Certificateholders on
such Distribution Date, without giving effect to any payments to be made under
the Policy. The Policy does not cover any Class A Available Funds Cap Carryover
Amounts.
So long as there does not exist a failure by the Certificate Insurer to
make a required payment under the Policy (such event, a "Certificate Insurer
Default"), the Certificate Insurer will have the right to exercise all rights of
the holders of the Class A Certificates under the Agreement without any consent
of such holders, and such holders may exercise such rights only with the prior
written consent of the Certificate Insurer except as provided in the Agreement.
In addition, to the extent of unreimbursed payments under the Policy, the
Certificate Insurer will be subrogated to the rights of the holders of the Class
A Certificates to which such Insured Amounts were paid. In connection with each
Insured Amount paid on a Class A Certificate, the Trustee as attorney-in-fact
for the holder thereof will be required to assign to the Certificate Insurer the
rights of such holder with respect to the Class A Certificates, as applicable,
to the extent of such Insured Amount.
The effect of the Policy is to guarantee the timely distribution of
interest on the Class A Certificates on each Distribution Date, and the ultimate
distribution of the Class A Certificate Principal Balance of the Class A
Certificates by the last scheduled Distribution Date. In the absence of payments
under the Policy, Certificateholders may bear directly the credit and other
risks associated with their undivided interest in the Trust.
Under the Policy, "Business Day" means any day other than (i) Saturday
or Sunday, or (ii) a day on which banking institutions in the City of New York,
the State of New York, the State of Rhode Island, the State of California or the
city in which the corporate trust office of the Trustee or the Certificate
Insurer is located, are authorized or obligated by law or executive order to be
closed.
IN THE EVENT THAT THE CERTIFICATE INSURER WERE TO BECOME INSOLVENT, ANY
CLAIMS ARISING UNDER THE POLICY WOULD BE EXCLUDED FROM COVERAGE BY THE
CALIFORNIA INSURANCE GUARANTY ASSOCIATION.
S-66
REPORTS TO CERTIFICATEHOLDERS
Concurrently with each distribution to the Certificateholders, the
Trustee will make available on its website a statement (the "Trustee Remittance
Report"), based upon information furnished by the Servicer, setting forth among
other items with respect to each Distribution Date, including but not limited
to:
(i) the Available Funds for the Class A Certificates for the
related Distribution Date;
(ii) the Interest Distribution Amount for the Class A
Certificates, stating the Class Monthly Interest Amount, the Class
Interest Carryover Shortfall, if any, the Relief Act Interest
Shortfall, the Prepayment Interest Shortfall and the Certificate
Interest Rate thereof;
(iii) the Class Principal Distribution Amount;
(iv) the amount of the Monthly Advances, and the Compensating
Interest Payments;
(v) the Servicing Fee for such Distribution Date;
(vi) the Class A Certificate Principal Balances, after giving
effect to the related distribution;
(vii) the Pool Balance as of the end of the preceding Due
Period;
(viii) the number and aggregate Principal Balances of the
Mortgage Loans as to which the minimum monthly payment is delinquent
for 30-59 days, 60-89 days and 90 or more days, respectively, as of the
end of the preceding Due Period;
(ix) the book value of any real estate which is acquired by
the Trust through foreclosure or grant of deed in lieu of foreclosure;
(x) the amount of any Insured Amounts for such Distribution
Date;
(xi) during the Funding Period, the remaining Pre-Funded
Amount and the portion of the Pre-Funded Amount used to acquire
Subsequent Mortgage Loans since the preceding Distribution Date;
(xii) during the Funding Period, the amount, if any, required
to be withdrawn from the Capitalized Interest Account and deposited
into the Distribution Account for such Distribution Date and the amount
on deposit in the Capitalized Interest Account after giving effect to
any withdrawals for such Distribution Date;
(xii) the amount on deposit in the Spread Account as of such
Distribution Date (after giving effect to any amounts described in
clause (xiii) below);
(xiii) the amount, if any, required to be withdrawn from the
Spread Account and deposited into the Distribution Account for such
Distribution Date; and
(xiv) any payments made by the Corridor Contract Counterparty.
In the case of information furnished pursuant to clauses (ii) and (iii)
above, the amounts shall also be expressed as a dollar amount per Certificate
with a $1,000 denomination.
S-67
"Pre-Funded Amount" means, as to any Determination Date, the Original
Pre-Funded Amount minus the aggregate Principal Balance of Subsequent Mortgage
Loans purchased by the Trust prior to such date.
Within 60 days after the end of each calendar year, the Trustee will
forward to each Person, if requested in writing by such Person, who was a
Certificateholder during the prior calendar year a statement containing the
information set forth in clauses (ii) and (iii) above aggregated for such
calendar year.
The Trustee will make available the monthly Trustee's Remittance Report
through its internet website. Assistance in using the website can be obtained by
calling the Trustee's investor relations desk at (800) 735-7777. In addition, if
the Depositor so directs the Trustee, and on terms acceptable to the Trustee,
the Trustee may make certain other information and reports related to the
Mortgage Loans and the Trust available through its internet website. Parties
that are unable to use the internet-based distribution method are entitled to
have a paper copy mailed to them by calling the Trustee's investor relations
desk and indicating such.
PRE-FUNDING ACCOUNT
On the Closing Date, the Original Pre-Funded Amount will be deposited
into the Pre-Funding Account. See "DESCRIPTION OF THE MORTGAGE LOANS--Conveyance
of Subsequent Mortgage Loans". Amounts in the Pre-Funding Account may be used
only (a) to acquire Subsequent Mortgage Loans and (b) to make accelerated
distributions of principal on the Class A Certificates at the end of the Funding
Period. During the Funding Period, amounts will, from time to time, be withdrawn
from the Pre-Funding Account to purchase Subsequent Mortgage Loans in accordance
with the Agreement. Any Pre-Funded Amount remaining at the end of the Funding
Period will be distributed as a distribution of principal to the holders of the
Class A Certificates in the same manner as described in this Prospectus
Supplement under "DESCRIPTION OF THE CERTIFICATES--Priority of Distributions".
Amounts on deposit in the Pre-Funding Account will be invested in
eligible investments. Any investment earnings on funds in the Pre-Funding
Account will be transferred to the Seller on the Distribution Date following the
end of the Funding Period. The Pre-Funding Account will not be an asset of any
REMIC.
CAPITALIZED INTEREST ACCOUNT
The Trustee may establish a segregated account for the benefit of the
Certificateholders and the Certificate Insurer (the "Capitalized Interest
Account"), as required in the Pooling and Servicing Agreement and on the Closing
Date, the Depositor may deliver to the Trustee for deposit in the Capitalized
Interest Account cash amounts as specified in the Pooling and Servicing
Agreement. The amount on deposit in the Capitalized Interest Account will be
specifically allocated to cover shortfalls in interest on the Class A
Certificates that may arise as a result of the use of the pre-funding feature.
Any amounts remaining in the Capitalized Interest Account after the Funding
Period (including investment earnings) and not needed for such purpose will be
paid to the Seller and will not thereafter be available for distribution to the
Class A Certificateholders. Amounts on deposit in the Capitalized Interest
Account will be invested in eligible investments. All such eligible investments
are required to mature no later than the Business Day prior to the next
Distribution Date as specified in the Agreement. The Capitalized Interest
Account will not be an asset of any REMIC.
S-68
LAST SCHEDULED DISTRIBUTION DATE
The last scheduled Distribution Date for the Class A Certificates is
expected to be the Distribution Date in April 2036.
It is expected that the actual last Distribution Date for the Class A
Certificates will occur significantly earlier than such last scheduled
Distribution Date. See "PREPAYMENT AND YIELD CONSIDERATIONS".
COLLECTION AND OTHER SERVICING PROCEDURES ON MORTGAGE LOANS
The Servicer will make reasonable efforts to collect all payments
called for under the Mortgage Loans and will, consistent with the Agreement,
follow such collection procedures as it follows from time to time with respect
to the home equity loans in its servicing portfolio comparable to the Mortgage
Loans. Consistent with the above, the Servicer may in its discretion waive any
late payment charge or any assumption or other fee or charge that may be
collected in the ordinary course of servicing the Mortgage Loans.
With respect to the Mortgage Loans, the Servicer may arrange with a
borrower a schedule for the payment of interest due and unpaid for a period,
provided that any such arrangement is consistent with the Servicer's policies
with respect to the home equity mortgage loans it owns or services. With respect
to Mortgage Loans that are junior in priority to a first lien on a Mortgaged
Property, the Servicer has the power under certain circumstances to consent to a
new mortgage lien on such Mortgaged Property having priority over such Mortgage
Loan in connection with the refinancing of such first lien.
HAZARD INSURANCE
The Servicer will cause to be maintained fire and hazard insurance with
extended coverage customary in the area where the Mortgaged Property is located,
in an amount which is at least equal to the lesser of (i) the outstanding
Principal Balance on the Mortgage Loan and any related senior lien(s), (ii) the
full insurable value of the premises securing the Mortgage Loan and (iii) the
minimum amount required to compensate for damage or loss on a replacement cost
basis in each case in an amount not less than such amount as is necessary to
avoid the application of any co-insurance clause contained in the related hazard
insurance policy. Generally, if the Mortgaged Property is in an area identified
in the Federal Register by the Flood Emergency Management Agency as FLOOD ZONE
"A", such flood insurance has been made available and the Servicer determines
that such insurance is necessary in accordance with accepted second mortgage
servicing practices of prudent lending institutions, the Servicer will cause to
be purchased a flood insurance policy with a generally acceptable insurance
carrier, in an amount representing coverage not less than the least of (a) the
outstanding Principal Balance of the Mortgage Loan and the first lien, (b) the
full insurable value of the Mortgaged Property, or (c) the maximum amount of
insurance available under the National Flood Insurance Reform Act of 1994, as
amended. The Servicer will also maintain on REO Property, to the extent such
insurance is available, fire and hazard insurance in the applicable amounts
described above, liability insurance and, to the extent required and available
under the National Flood Insurance Reform Act of 1994, as amended, and the
Servicer determines that such insurance is necessary in accordance with accepted
second mortgage servicing practices of prudent lending institutions, flood
insurance in an amount equal to that required above.
Any amounts collected by the Servicer under any such policies (other
than amounts to be applied to the restoration or repair of the Mortgaged
Property, or to be released to the Mortgagor in accordance with customary second
mortgage servicing procedures) will be deposited in the Collection Account,
S-69
subject to retention by the Servicer to the extent such amounts constitute
servicing compensation or to withdrawal pursuant to the Agreement.
In the event that the Servicer obtains and maintains a blanket policy
as provided in the Agreement insuring against fire and hazards of extended
coverage on all of the Mortgage Loans, then, to the extent such policy names the
Servicer as loss payee and provides coverage in an amount equal to the aggregate
unpaid Principal Balance of the Mortgage Loans without coinsurance, and
otherwise complies with the requirements of the first paragraph of this
subsection, the Servicer will be deemed conclusively to have satisfied its
obligations with respect to fire and hazard insurance coverage.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The Servicer will foreclose upon or otherwise comparably convert to
ownership Mortgaged Properties securing such of the Mortgage Loans as come into
default when, in accordance with applicable servicing procedures under the
Agreement, no satisfactory arrangements can be made for the collection of
delinquent payments. In connection with such foreclosure or other conversion,
the Servicer will follow such practices as it deems necessary or advisable and
as are in keeping with its general mortgage servicing activities, provided the
Servicer will not be required to expend its own funds in connection with
foreclosure or other conversion, correction of default on a related first lien
mortgage loan or restoration of any property unless, in its sole judgment, such
foreclosure, correction or restoration will increase Net Liquidation Proceeds.
The Servicer will be reimbursed out of Liquidation Proceeds for advances of its
own funds as liquidation expenses before any Net Liquidation Proceeds are
distributed to related Certificateholders.
SERVICING COMPENSATION, PAYMENT OF EXPENSES AND COMPENSATING INTEREST
With respect to each Due Period, the Servicer will receive from
interest payments in respect of the Mortgage Loans a portion of such interest
payments as a monthly servicing fee (the "Servicing Fee") in the amount equal to
0.50% per annum (the "Servicing Fee Rate") on the Principal Balance of each
Mortgage Loan as of the first day of each such Due Period as to which such
payment was made. All assumption fees, late payment charges, prepayment
penalties and other fees and charges, to the extent collected from Mortgagors,
will be retained by the Servicer as additional servicing compensation. The
Servicer will pay certain ongoing expenses associated with the Trust and
incurred by it in connection with its responsibilities under the Agreement,
including, without limitation, payment of the disbursements of the Trustee, any
custodian appointed by the Trustee, the Certificate Registrar and any paying
agent.
With respect to each Due Period, the Trustee will receive from interest
payments in respect of the Mortgage Loans a monthly fee (the "Trustee Fee") in
the amount equal to 0.012% per annum (the "Trustee Fee Rate") on the Principal
Balance of each Mortgage Loan as of the first day of each such Due Period as to
which such payment was made in connection with its responsibilities under the
Agreement.
Not later than each Determination Date, the Servicer is required to
remit to the Trustee, without any right of reimbursement, an amount (the
"Compensating Interest") equal to the lesser of (a) any Prepayment Interest
Shortfall for the related Due Period and (b) the aggregate Servicing Fee
received by the Servicer in the most recently ended Due Period.
Prepayment Interest Shortfalls in excess of Compensating Interest paid
by the Servicer is the "Net Prepayment Interest Shortfall", which will be
deducted from the current interest amount due with respect to the Class A
Certificates on the related Distribution Date. The Policy will not cover Net
Prepayment Interest Shortfalls.
S-70
EVIDENCE AS TO COMPLIANCE
The Agreement provides for delivery on or before March 15th of each
applicable year, beginning in 2006 and covering the Servicer's fiscal year
ending in 2005, to the Trustee, the Depositor, the Certificate Insurer and the
Rating Agencies of an annual statement signed by an officer of the Servicer to
the effect that the Servicer has fulfilled its material obligations under the
Agreement throughout the preceding fiscal year, except as specified in such
statement.
On or before March 15th of each applicable year, beginning in 2006 and
covering the Servicer's fiscal year ending in 2005, the Servicer will furnish a
report prepared by a firm of nationally recognized independent public
accountants (who may also render other services to the Servicer or the
Depositor) to the Trustee, the Depositor, the Certificate Insurer and the Rating
Agencies to the effect that such firm has examined certain documents and the
records relating to servicing of the Mortgage Loans under the Uniform Single
Attestation Program for Mortgage Bankers and such firm's conclusion with respect
thereto.
The Servicer's fiscal year is the calendar year.
CERTAIN MATTERS REGARDING THE DEPOSITOR, SELLER AND SERVICER
The Agreement provides that the Servicer may not resign from its
obligations and duties thereunder, except in connection with a permitted
transfer of servicing, unless (i) such duties and obligations are no longer
permissible under applicable law as evidenced by an opinion of counsel delivered
to the Certificate Insurer or (ii) upon the satisfaction of the following
conditions: (a) the Servicer has proposed a successor servicer to the Trustee in
writing; (b) the Rating Agencies have confirmed to the Trustee that the
appointment of such proposed successor servicer as the Servicer will not result
in the reduction or withdrawal of the then current rating of the Certificates
(without taking the Policy into account); and (c) such proposed successor
servicer is reasonably acceptable to the Certificate Insurer. No such
resignation will become effective until the Trustee or a successor servicer has
assumed the Servicer's obligations and duties under the Agreement.
The Servicer may perform any of its duties and obligations under the
Agreement through one or more subservicers or delegates, which may be affiliates
of the Servicer. Notwithstanding any such arrangement, the Servicer will remain
liable and obligated to the Trustee, the Certificate Insurer and the
Certificateholders for the Servicer's duties and obligations under the
Agreement, without any diminution of such duties and obligations and as if the
Servicer itself were performing such duties and obligations.
The Agreement provides that the Servicer will indemnify the Trust and
the Trustee from and against any loss, liability, expense, damage or injury
suffered or sustained as a result of the Servicer's actions or omissions in
connection with the servicing and administration of the Mortgage Loans which are
not in accordance with the provisions of the Agreement. The Agreement provides
that neither the Depositor nor the Servicer nor their directors, officers,
employees or agents will be under any other liability to the Trust, the Trustee,
the Certificateholders or any other person for any action taken or for
refraining from taking any action pursuant to the Agreement. However, neither
the Depositor nor the Servicer will be protected against any liability which
would otherwise be imposed by reason of willful misconduct, bad faith or gross
negligence of the Depositor or the Servicer in the performance of its duties
under the Agreement or by reason of reckless disregard of its obligations
thereunder. In addition, the Agreement provides that the Servicer will not be
under any obligation to appear in, prosecute or defend any legal action which is
not incidental to its servicing responsibilities under the Agreement. The
Servicer may, in its sole discretion, undertake any such legal action which it
may deem necessary or desirable with respect to the Agreement and the rights and
duties of the parties thereto and the interest of the Certificateholders
thereunder.
S-71
Any corporation into which the Servicer may be merged or consolidated,
or any corporation resulting from any merger, conversion or consolidation to
which the Servicer shall be a party, or any corporation succeeding to the
business of the Servicer shall be the successor of the Servicer hereunder,
without the execution or filing of any paper or any further act on the part of
any of the parties hereto, anything in the Agreement to the contrary
notwithstanding.
EVENTS OF SERVICING TERMINATION
"Events of Servicing Termination" will consist of: (i) (A) any failure
by the Servicer to make any required Monthly Advance or (B) any other failure of
the Servicer to deposit in the Collection Account or Distribution Account any
deposit required to be made under the Agreement, which other failure continues
unremedied for one Business Day after the giving of written notice of such
failure to the Servicer by the Trustee, or to the Servicer and the Trustee by
the Certificate Insurer or Certificateholders holding Certificates evidencing
Voting Rights in the Trust of at least 25%; (ii) any failure by the Servicer
duly to observe or perform in any material respect any other of its covenants or
agreements in the Agreement which continues unremedied for 60 days after the
giving of written notice of such failure to the Servicer by the Trustee, or to
the Servicer and the Trustee by the Certificate Insurer or any
Certificateholders holding Certificates evidencing Voting Rights in the Trust of
at least 25%; (iii) any failure by the Servicer to make any required Servicing
Advance, which failure continues unremedied for a period of 30 days after the
giving of written notice of such failure to the Servicer by the Trustee, or to
the Servicer and the Trustee by the Certificate Insurer or any
Certificateholders holding Certificates evidencing Voting Rights in the Trust of
at least 25%; (iv) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings relating to the
Servicer and certain actions by the Servicer indicating insolvency,
reorganization or inability to pay its obligations (an "Insolvency Event"); (v)
so long as the Seller is an affiliate of the Servicer, any failure of the Seller
to repurchase or substitute Eligible Substitute Mortgage Loans for Defective
Mortgage Loans as required pursuant to the Purchase Agreement or the Agreement;
and (vi) the loss and delinquency performance of the Mortgage Loans exceeding
certain specified levels.
Upon the occurrence and continuation beyond the applicable date of the
event described in clause (i)(A) above, if any Monthly Advance is not made by
12:00 Noon New York Time on the applicable Distribution Date, the Trustee or a
successor Servicer will immediately assume the duties of the Servicer.
Upon removal or resignation of the Servicer as described in the
preceding paragraph, the Trustee will be the successor Servicer (the "Successor
Servicer") as described below under "--Rights Upon an Event of Servicing
Termination". The Trustee, as Successor Servicer, will be obligated to make
Monthly Advances and Servicing Advances and certain other advances unless it
determines reasonably and in good faith that such advances would not be
recoverable.
Notwithstanding the foregoing, a delay in or failure of performance
referred to under clause (i) above for a period of ten Business Days or referred
to under clause (iii) above for a period of 60 Business Days, shall not
constitute an Event of Servicing Termination if such delay or failure could not
be prevented by the exercise of reasonable diligence by the Servicer and such
delay or failure was caused by an act of God, an act of war or other similar
occurrence. Upon the occurrence of any such event the Servicer shall not be
relieved from using its best efforts to perform its obligations in a timely
manner in accordance with the terms of the Agreement and the Servicer shall
provide the Trustee, the Depositor, the Certificate Insurer and the
Certificateholders prompt notice of such failure or delay by it, together with a
description of its efforts to so perform its obligations.
S-72
AMENDMENT
The Agreement may be amended from time to time by the Seller, the
Servicer, the Depositor and the Trustee and with the consent of the Certificate
Insurer, but without the consent of the Certificateholders, to cure any
ambiguity, to correct or supplement any provisions therein which may be
inconsistent with any other provisions of the Agreement, to add to the duties of
the Depositor or the Servicer, to comply with any requirements imposed by the
Internal Revenue Code or any regulation thereunder, or to add or amend any
provisions of the Agreement as required by the Rating Agencies in order to
maintain or improve any rating of the Class A Certificates (it being understood
that, after obtaining the ratings in effect on the Closing Date, neither the
Depositor, the Seller, the Trustee, the Certificate Insurer nor the Servicer is
obligated to obtain, maintain, or improve any such rating) or to add any other
provisions with respect to matters or questions arising under the Agreement
which shall not be inconsistent with the provisions of the Agreement, provided
that such action will not, as evidenced by an opinion of counsel, materially and
adversely affect the interests of any Certificateholder or the Certificate
Insurer; provided, that any such amendment will not be deemed to materially and
adversely affect the Certificateholders and no such opinion will be required to
be delivered if the person requesting such amendment obtains a letter from the
Rating Agencies stating that such amendment would not result in a downgrading of
the then current rating of the Class A Certificates (without taking the Policy
into account). The Agreement may also be amended from time to time by the
Seller, the Servicer, the Depositor, and the Trustee, with the consent of
Certificateholders evidencing at least 51% of the Voting Rights in the Trust and
the Certificate Insurer for the purpose of adding any provisions to or changing
in any manner or eliminating any of the provisions of the Agreement or of
modifying in any manner the rights of the Certificateholders, provided that no
such amendment will (i) reduce in any manner the amount of, or delay the timing
of, collections of payments on the Certificates or distributions or payments
under the Policy which are required to be made on any Certificate without the
consent of the Certificateholder or (ii) reduce the aforesaid percentage
required to consent to any such amendment, without the consent of the holders of
all Class A Certificates then outstanding.
RIGHTS UPON AN EVENT OF SERVICING TERMINATION
So long as an Event of Servicing Termination remains unremedied, either
the Trustee, Certificateholders holding Certificates evidencing at least 51% of
the Voting Rights in the Trust, with the consent of the Certificate Insurer, or
the Certificate Insurer may terminate all of the rights and obligations of the
Servicer under the Agreement and in and to the Mortgage Loans, whereupon the
Trustee will succeed to all the responsibilities, duties and liabilities of the
Servicer under the Agreement and will be entitled to similar compensation
arrangements. In the event that the Trustee would be obligated to succeed the
Servicer but is unwilling or unable so to act, it may appoint, or petition a
court of competent jurisdiction for the appointment of, a housing and home
finance institution or other mortgage loan or home equity loan servicer with all
licenses and permits required to perform its obligations under the Agreement and
having a net worth of at least $25,000,000 and acceptable to the Certificate
Insurer to act as successor to the Servicer under the Agreement. Pending such
appointment, the Trustee will be obligated to act in such capacity unless
prohibited by law. Such successor will be entitled to receive the same
compensation that the Servicer would otherwise have received (or such lesser
compensation as the Trustee and such successor may agree). A receiver or
conservator for the Servicer may be empowered to prevent the termination and
replacement of the Servicer if the only Event of Servicing Termination that has
occurred is an Insolvency Event.
TERMINATION; PURCHASE OF MORTGAGE LOANS
The Trust will terminate on the Distribution Date following the later
of (A) payment in full of all amounts owing to the Certificate Insurer unless
the Certificate Insurer shall otherwise consent and (B) the
S-73
earliest of (i) the Distribution Date on which the Class A Certificate Principal
Balance has been reduced to zero, (ii) the final payment or other liquidation of
the last Mortgage Loan in the Trust, (iii) the optional purchase by the Servicer
of the Mortgage Loans, as described below, and (iv) the Distribution Date on
which the Policy will be available to pay the outstanding Class A Certificate
Principal Balance.
Subject to provisions in the Agreement concerning adopting a plan of
complete liquidation, the Servicer may, at its option, terminate the Agreement
on any date on which the Pool Balance is less than or equal to 10% of the sum of
the Cut-Off Date Principal Balance of all the Initial Mortgage Loans and the
Original Pre-Funded Amount (the "Optional Termination Date") by purchasing, on
the next succeeding Distribution Date, all of the outstanding Mortgage Loans at
a price equal to the outstanding Pool Balance (subject to reduction as provided
in the Agreement if the purchase price is based in part on the appraised value
of any REO Property included in the Trust and such appraised value is less than
the Principal Balance of the related Mortgage Loan) and accrued and unpaid
interest thereon at the weighted average of the related Loan Rates through the
end of the related Due Period preceding the final Distribution Date together
with all amounts due and owing to the Certificate Insurer (such amount, the
"Termination Price"). If the Termination Price is reduced because it is based in
part on the appraised value of REO Property in the Trust and the Certificate
Insurer fails to perform its obligation under the Policy, the Termination Price
to be distributed to Certificateholders on the final Distribution Date may be
insufficient to pay the outstanding Class A Certificate Principal Balance and
accrued and unpaid interest on the Class A Certificates. Prior to exercising its
option to terminate the Agreement described in this paragraph, the Servicer will
be required to obtain the Certificate Insurer's consent, if such termination
would result in a draw under the Policy.
The Servicer may elect to purchase the Mortgage Loans and REO Property
following the Optional Termination Date pursuant to the preceding paragraph only
if the Termination Price is equal to or less than the aggregate fair market
value of all of the assets in the Trust and will result in distributions on the
Certificates sufficient to pay the Certificateholders the outstanding Class A
Certificate Principal Balance and unpaid interest on the Class A Certificates
and to pay all amounts owed to the Certificate Insurer.
VOTING RIGHTS
Under the Agreement, the portion of the Voting Rights allocated to the
Class A Certificates will equal 100% (the "Voting Rights"). Provided that there
does not exist a Certificate Insurer Default, the Certificate Insurer shall
control the Voting Rights.
THE TRUSTEE
Deutsche Bank National Trust Company has been named Trustee pursuant to
the Agreement. The Trustee may have normal banking relationships with the
Depositor, the Seller and the Servicer.
The Trustee may resign at any time, in which event the Depositor will
be obligated to appoint a successor Trustee, as approved by the Certificate
Insurer and the Servicer. The Depositor and, in certain instances, the Servicer
may also remove the Trustee if the Trustee ceases to be eligible to continue as
such under the Agreement or if the Trustee becomes insolvent. Upon becoming
aware of such circumstances, the Depositor will be obligated to appoint a
successor Trustee, as approved by the Certificate Insurer and the Servicer (such
Servicer approval not to be unreasonably withheld). Any resignation or removal
of the Trustee and appointment of a successor Trustee will not become effective
until acceptance of the appointment by the successor Trustee.
S-74
No holder of a Certificate will have any right under the Agreement to
institute any proceeding with respect to the Agreement unless such holder
previously has given to the Trustee written notice of default and unless
Certificateholders holding Certificates evidencing at least 51% of the Voting
Rights in the Trust, have made written requests upon the Trustee to institute
such proceeding in its own name as Trustee thereunder and have offered to the
Trustee reasonable indemnity and the Trustee for 60 days has neglected or
refused to institute any such proceeding. The Trustee will be under no
obligation to exercise any of the trusts or powers vested in it by the Agreement
or to make any investigation of matters arising thereunder or to institute,
conduct or defend any litigation thereunder or in relation thereto at the
request, order or direction of any of the Certificateholders, unless such
Certificateholders have offered to the Trustee reasonable security or indemnity
against the cost, expenses and liabilities which may be incurred therein or
thereby.
DESCRIPTION OF THE PURCHASE AGREEMENT
The Mortgage Loans to be transferred to the Trust by the Depositor will
be purchased by the Depositor from the Seller, as seller of the Mortgage Loans,
pursuant to the mortgage loan purchase agreement to be entered into between the
Depositor, as purchaser of the Mortgage Loans (in such capacity, the
"Purchaser"), and the Seller (the "Purchase Agreement"). Under the Purchase
Agreement, the Seller will agree to transfer the Mortgage Loans to the
Depositor. Pursuant to the Agreement, the Mortgage Loans will be immediately
transferred by the Depositor to the Trust, and the Depositor will assign its
rights in, to and under the Purchase Agreement, to the Trust.
In the Purchase Agreement the Seller will make representations and
warranties similar to those representations and warranties made by the Seller in
the Agreement. In the event of a breach of any such representations and
warranties which has a material adverse effect on the interests of the Trust,
the Certificateholders or the Certificate Insurer, the Seller will be required
to repurchase or substitute for the Mortgage Loans as described herein under
"DESCRIPTION OF THE CERTIFICATES--Assignment of Mortgage Loans".
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Trustee or the Servicer may file reports or other documents, on
behalf of the Trust, pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended. Those reports or documents filed
after the date of this Prospectus and Prospectus Supplement and prior to the
termination of the offering of the Class A Certificates are deemed incorporated
by reference into and a part of this Prospectus and Prospectus Supplement. You
should read each of this Prospectus Supplement and the Prospectus. Any statement
in this document or in a document deemed to be incorporated by reference shall
be deemed to be modified or superseded for purposes of this Prospectus and
Prospectus Supplement to the extent that a statement contained in any other
subsequently filed document which is also deemed to be incorporated by reference
herein modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as modified or superseded, to constitute
part of this Prospectus Supplement and the Prospectus.
USE OF PROCEEDS
The Seller will transfer the Mortgage Loans to the Depositor and the
Depositor will convey the Mortgage Loans to the Trustee, in exchange for and
concurrently with the delivery of the Certificates. The net proceeds to be
received from the sale of the Class A Certificates, along with delivery to the
Seller of the Class C and Class R Certificates will represent the purchase price
to be paid by the Depositor towards the purchase of the Initial Mortgage Loans
from the Seller and to fund the Pre-Funding Account.
S-75
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
One or more elections will be made to treat designated portions of the
Trust (exclusive of the basis risk reserve fund, the spread account, the
pre-funding account, the interest rate corridor contract and the capitalized
interest account) as a real estate mortgage investment conduit (a "REMIC") for
federal income tax purposes. Upon the issuance of the Class A Certificates,
Thacher Proffitt & Wood LLP, counsel to the Depositor, will deliver its opinion
generally to the effect that, assuming compliance with all provisions of the
Pooling Agreement, for federal income tax purposes, each REMIC elected by the
Trust will qualify as a REMIC under Sections 860A through 860G of the Internal
Revenue Code of 1986, as amended (the "Code").
For federal income tax purposes, (i) the Class R Certificates will
consist of components, each of which will represent the sole class of "residual
interests" in each REMIC elected by the Trust and (ii) the Class A Certificates
and the Class C Certificates (exclusive of any right of the holder of any such
Certificates to receive distributions from or obligations to make payments to
the basis risk reserve fund in respect of the Class A Available Funds Cap
Carryover Amount and the interest rate corridor contract) will represent the
"regular interests" in, and which generally will be treated as debt instruments
of, a REMIC.
Each holder of a Class A Certificate is deemed to own an undivided
beneficial ownership interest in two assets, a REMIC regular interest and the
right to receive distributions from the basis risk reserve fund in respect of
the Class A Available Funds Cap Carryover Amount. The basis risk reserve fund is
not an asset of any REMIC. The treatment of amounts received by a holder of a
Class A Certificate under such Certificateholder's right to receive the Class A
Available Funds Cap Carryover Amount will depend on the portion, if any, of such
Certificateholder's purchase price allocable thereto. Under the REMIC
Regulations, each holder of a Class A Certificate must allocate its purchase
price for such Certificate between its undivided interest in the regular
interest of the related REMIC and its undivided interest in the right to receive
distributions from the basis risk reserve fund in respect of the Class A
Available Funds Cap Carryover Amount in accordance with the relative fair market
values of each property right. The Trust intends to treat distributions made to
the holders of the Class A Certificates with respect to the Class A Available
Funds Cap Carryover Amount as includible in income based on the regulations
relating to notional principal contracts (the "Notional Principal Contract
Regulations"). The OID Regulations provide that the Trust's allocation of the
issue price is binding on all holders of the applicable class unless the holder
explicitly discloses on its tax return that its allocation is different from the
Trust's allocation. For tax reporting purposes, the right to receive
distributions from the basis risk reserve fund in respect of Class A Available
Funds Cap Carryover Amounts may have more than a de minimis value. The value of
such amount, if any, may be obtained from the Trustee upon written request,
provided that the Trustee has received such information from the Underwriters.
Under the REMIC Regulations, the Trust is required to account for the REMIC
regular interest and the right to receive distributions from the basis risk
reserve fund in respect of the Class A Available Funds Cap Carryover Amount as
discrete property rights. Holders of the Class A Certificates are advised to
consult their own tax advisors regarding the allocation of issue price, timing,
character and source of income and deductions resulting from the ownership of
such Certificates. Treasury regulations have been promulgated under Section 1275
of the Code generally providing for the integration of a "qualifying debt
instrument" with a hedge if the combined cash flows of the components are
substantially equivalent to the cash flows on a variable rate debt instrument.
However, such regulations specifically disallow integration of debt instruments
subject to Section 1272(a)(6) of the Code. Therefore, holders of the Class A
Certificates will be unable to use the integration method provided for under
such regulations with respect to those Certificates. If the Trust's treatment of
distributions of the Class A Available Funds Cap Carryover Amount is respected,
ownership of the right to the Class A Available Funds Cap Carryover Amount will
entitle the owner to amortize the separate price paid for the right to the Class
A Available Funds Cap Carryover Amount under the Notional Principal Contract
Regulations.
S-76
Upon the sale of a Class A Certificate, the amount of the sale
allocated to the selling Certificateholder's right to receive distributions from
the basis risk reserve fund in respect of the Class A Available Funds Cap
Carryover Amount would be considered a "termination payment" under the Notional
Principal Contract Regulations allocable to the related Class A Certificate, as
the case may be. A holder of a Class A Certificate will have gain or loss from
such a termination of the right to receive distributions from the basis risk
reserve fund in respect of the Class A Available Funds Cap Carryover Amount
equal to (i) any termination payment it received or is deemed to have received
minus (ii) the unamortized portion of any amount paid (or deemed paid) by the
Certificateholder upon entering into or acquiring its interest in the right to
receive payments from the basis risk reserve fund in respect of the Class A
Available Funds Cap Carryover Amount. Gain or loss realized upon the termination
of the right to receive payments from the basis risk reserve fund in respect of
the Class A Available Funds Cap Carryover Amount will generally be treated as
capital gain or loss. Moreover, in the case of a bank or thrift institution,
Code Section 582(c) would likely not apply to treat such gain or loss as
ordinary.
For federal income tax reporting purposes, no Class of Certificates
will be treated as having been issued with original issue discount. The
prepayment assumption that will be used in determining the rate of accrual of
original issue discount, premium and market discount, if any, for federal income
tax purposes will be based on the assumption that subsequent to the date of any
determination the Mortgage Loans will prepay at the Prepayment Assumption. No
representation is made that the Mortgage Loans will prepay at such rate or at
any other rate.
The Internal Revenue Service (the "IRS") has issued regulations (the
"OID Regulations") under Sections 1271 to 1275 of the Code generally addressing
the treatment of debt instruments issued with original issue discount.
Purchasers of the Class A Certificates should be aware that the OID Regulations
do not adequately address certain issues relevant to, or are not applicable to,
prepayable securities such as the Class A Certificates. In addition, there is
considerable uncertainty concerning the application of the OID Regulations to
REMIC Regular Certificates that provide for payments based on an adjustable rate
such as the Class A Certificates. Because of the uncertainty concerning the
application of Section 1272(a)(6) of the Code to such Certificates and because
the rules of the OID Regulations relating to debt instruments having an
adjustable rate of interest are limited in their application in ways that could
preclude their application to such Certificates even in the absence of Section
1272(a)(6) of the Code, the IRS could assert that the Class A Certificates
should be treated as issued with original issue discount or should be governed
by the rules applicable to debt instruments having contingent payments or by
some other method not yet set forth in regulations. Prospective purchasers of
the Class A Certificates are advised to consult their tax advisors concerning
the tax treatment of such Certificates.
It appears that a reasonable method of reporting original issue
discount with respect to the Class A Certificates, if such Certificates are
required to be treated as issued with original issue discount, generally would
be to report all income with respect to such Certificates as original issue
discount for each period, computing such original issue discount (i) by assuming
that the value of the applicable index will remain constant for purposes of
determining the original yield to maturity of, and projecting future
distributions on such Certificates, thereby treating such Certificates as fixed
rate instruments to which the original issue discount computation rules
described in the prospectus can be applied, and (ii) by accounting for any
positive or negative variation in the actual value of the applicable index in
any period from its assumed value as a current adjustment to original issue
discount with respect to such period.
Certain of the Certificates may be treated for federal income tax
purposes as having been issued at a premium. Whether any holder of a Certificate
will be treated as holding such Certificate with amortizable bond premium will
depend on such Certificateholder's purchase price and the distributions
remaining to be made on such Certificate at the time of its acquisition by such
Certificateholder. Holders
S-77
of such Certificates should consult their own tax advisors regarding the
possibility of making an election to amortize such premium.
With respect to the Class A Certificates, this paragraph is relevant to
such Certificates exclusive of the rights of the holders of such Certificates to
receive certain distributions in respect of the Class A Available Funds Cap
Carryover Amount. The Class A Certificates will be treated as assets described
in Section 7701(a)(19)(C) of the Code and "real estate assets" under Section
856(c)(4)(A) of the Code, generally in the same proportion that the assets in
the Trust would be so treated. In addition, interest on the Class A Certificates
will be treated as "interest on obligations secured by mortgages on real
property" under Section 856(c)(3)(B) of the Code, generally to the extent that
such Certificates are treated as "real estate assets" under Section 856(c)(4)(A)
of the Code. The amount held in the Pre-Funding Account and the Capitalized
Interest Account, if any, may not be treated as assets described in the
foregoing sections of the Code. The Class A Certificates will also be treated as
"qualified mortgages" under Section 860G(a)(3) of the Code.
The holders of the Class A Certificates will be required to include in
income interest on such Certificates in accordance with the accrual method of
accounting. As noted above, each holder of a Class A Certificate will be
required to allocate a portion of the purchase price paid for the Certificates
to the right to receive distributions from the basis risk reserve fund in
respect of the Class A Available Funds Cap Carryover Amount. The value of the
right to receive any such Class A Available Funds Cap Carryover Amount is a
question of fact which could be subject to differing interpretations. Because
the Class A Available Funds Cap Carryover Amount is treated as a separate right
of the Class A Certificates not distributable by any REMIC elected by the Trust,
such right will not be treated as a qualifying asset for any Certificateholder
that is a mutual savings bank, domestic building and loan association, real
estate investment trust, or real estate mortgage investment conduit and any
amounts received from the basis risk reserve fund will not be qualifying real
estate income for real estate investment trusts.
It is not anticipated that any REMIC elected by the Trust will engage
in any transactions that would subject it to the prohibited transactions tax as
defined in Section 860F(a)(2) of the Code, the contributions tax as defined in
Section 860G(d) of the Code or the tax on net income from foreclosure property
as defined in Section 860G(c) of the Code. However, in the event that any such
tax is imposed on any REMIC elected by the Trust, such tax will be borne (i) by
the Trustee, if the Trustee has breached its obligations with respect to REMIC
compliance under the Pooling Agreement, (ii) by the Servicer, if the Servicer
has breached its obligations with respect to REMIC compliance under the Pooling
Agreement and (iii) otherwise by the Trust, with a resulting reduction in
amounts otherwise distributable to the holders of the Class A Certificates.
The responsibility for filing annual federal information returns and
other reports will be borne by the Trustee or the Servicer, as specified in the
Pooling Agreement.
For further information regarding the federal income tax consequences
of investing in the Class A Certificates, see "Material Federal Income Tax
Consequences" in the prospectus.
STATE TAXES
The Depositor makes no representations regarding the tax consequences
of purchase, ownership or disposition of the Class A Certificates under the tax
laws of any state. Investors considering an investment in the Class A
Certificates should consult their own tax advisors regarding such tax
consequences.
S-78
All investors should consult their own tax advisors regarding the
Federal, state, local or foreign income tax consequences of the purchase,
ownership and disposition of the Class A Certificates.
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or other plan or arrangement
subject to ERISA or Section 4975 of the Code (a "Plan"), or any insurance
company, whether through its general or separate accounts, or any other person
investing plan assets of a Plan, should carefully review with its legal advisors
whether the purchase or holding of Class A Certificates could give rise to a
transaction prohibited or not otherwise permissible under ERISA or Section 4975
of the Code. The purchase or holding of the Class A Certificates by or on behalf
of, or with plan assets of, a Plan may qualify for exemptive relief under the
Underwriter's Exemption, as currently in effect and as described under "ERISA
Considerations" in the prospectus. The Underwriter's Exemption relevant to the
Class A Certificates was granted by the Department of Labor on September 6, 1990
as Prohibited Transaction Exemption ("PTE") 90-59 at 55 F.R. 36724, and amended
on July 21, 1997 at PTE 97-34 at 62 F.R. 39021 and further amended on November
13, 2000 by PTE 2000-58 at 65 F.R. 67765. The Department of Labor issued a final
administrative exemption, PTE 2002-41, at 67 Fed. Reg. 54487 (August 22, 2002),
which amended the Underwriter's Exemption and similar exemptions issued to other
underwriters. This amendment allows the Trustee to be affiliated with the
underwriter despite the restriction in PTE 2000-58 to the contrary. However, the
Underwriter's Exemption contains a number of conditions which must be met for
the exemption to apply, including the requirements that the Class A Certificates
be rated at least "BBB-" (or its equivalent) by S&P, Fitch or Moody's at the
time of the Plan's purchase and that the investing Plan must be an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Securities and
Exchange Commission under the Securities Act. As noted in the Prospectus, one
requirement for eligibility under the Underwriter's Exemption is that all of the
Mortgage Loans must have a loan-to-value ratio of not more than 100%, based on
the outstanding Principal Balance of each Mortgage Loan and the fair market
value of the Mortgaged Property as of the Closing Date. It is possible that, if
the fair market value of any of the Mortgage Loans has declined substantially
since origination, this requirement may not be satisfied. This possibility is
greater for the seasoned loans than it is for the other mortgage loans. A
fiduciary of a Plan contemplating purchasing a Class A Certificate must make its
own determination that the conditions set forth in the Underwriter's Exemption
will be satisfied with respect to the those Certificates.
Any fiduciary or other investor of Plan assets that proposes to acquire
or hold the Class A Certificates on behalf of or with Plan assets of any Plan
should consult with its counsel with respect to: (i) whether, with respect to
the Class A Certificates, the specific and general conditions and the other
requirements in the Underwriter's Exemption would be satisfied and (ii) the
potential applicability of the general fiduciary responsibility provisions of
ERISA and the prohibited transaction provisions of ERISA and Section 4975 of the
Internal Revenue Code to the proposed investment. See "ERISA Considerations" in
the prospectus.
The sale of any of the Class A Certificates to a Plan is in no respect
a representation by the Depositor or the related underwriter that an investment
in the Class A Certificates meets all relevant legal requirements relating to
investments by Plans generally or any particular Plan, or that an investment in
the Class A Certificates is appropriate for Plans generally or any particular
Plan.
The Depositor makes no representation that the sale of any of the Class
A Certificates to a Plan or other purchaser acting on its behalf meets any
relevant legal requirement for investments by Plans generally or any particular
Plan, or that the investment is appropriate for Plans generally or any
particular Plan.
S-79
LEGAL INVESTMENT CONSIDERATIONS
The Certificates will not constitute "mortgage related securities" for
purposes of SMMEA.
The Depositor makes no representations as to the proper
characterization of any class of Certificates for legal investment or other
purposes, or as to the ability of particular investors to purchase any class of
Certificates under applicable legal investment restrictions. These uncertainties
may adversely affect the liquidity of any class of Certificates. Accordingly,
all institutions whose investment activities are subject to legal investment
laws and regulations, regulatory capital requirements or review by regulatory
authorities should consult with their legal advisors in determining whether and
to what extent any class of Certificates constitutes a legal investment or is
subject to investment, capital or other restrictions. See "LEGAL INVESTMENT
CONSIDERATIONS" in the Prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement, dated November 22, 2005 (the "Underwriting Agreement"), between the
Depositor and Greenwich Capital Markets, Inc. as Underwriter (the
"Underwriter"), the Depositor has agreed to sell to the Underwriter and the
Underwriter has agreed to purchase from the Depositor the Class A Certificates.
The Depositor has been advised that the Underwriter proposes initially
to offer the Class A Certificates to the public at the offering price set forth
on the cover hereof.
Until the distribution of the Class A Certificates is completed, the
rules of the Commission may limit the ability of the Underwriter and certain
selling group members to bid for and purchase such Certificates. As an exception
to these rules, the Underwriter is permitted to engage in certain transactions
that stabilize the prices of such Certificates. Such transactions consist of
bids of purchase for the purpose of pegging, fixing or maintaining the price of
such Certificates.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases.
Neither the Depositor nor the Underwriter makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the prices of the Class A Certificates.
In addition, neither the Depositor nor the Underwriter makes any
representation that the Underwriter will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
The Depositor has been advised by the Underwriter that it intends to
make a market in the Class A Certificates; however, it is not obligated to do
so, any market-making may be discontinued at any time, and there can be no
assurance that an active public market for the Class A Certificates will
develop.
The Depositor is an affiliate of the Underwriter.
The Underwriting Agreement provides that the Depositor will indemnify
the Underwriter against certain civil liabilities, including liabilities under
the Act.
If you initially receive an electronic copy of the Prospectus and
Prospectus Supplement from the Underwriter, you will receive a paper copy of the
Prospectus and Prospectus Supplement upon request to
S-80
the Underwriter. Upon receipt of a qualifying request, the Underwriter will
promptly deliver a paper copy of the Prospectus and Prospectus Supplement to you
free of charge.
EXPERTS
The consolidated financial statements of Ambac Assurance Corporation
and subsidiaries as of December 31, 2004 and 2003, and for each of the years in
the three-year period ended December 31, 2004, are incorporated by reference in
this Prospectus Supplement and in the registration statement in reliance upon
the report of KPMG LLP, independent registered public accounting firm,
incorporated by reference in this Prospectus Supplement and in the registration
statement upon the authority of that firm as experts in accounting and auditing.
The report of KPMG LLP refers to changes, in 2003, in Ambac Assurance
Corporation's methods of accounting for variable interest entities and
stock-based compensation.
LEGAL MATTERS
Certain legal matters with respect to the Class A Certificates will be
passed upon for the Depositor and the Underwriter by Thacher Proffitt & Wood
LLP, New York, New York.
RATINGS
It is a condition to the issuance of the Class A Certificates that they
each receive ratings of "AAA" by S&P and "Aaa" by Moody's (collectively, the
"Rating Agencies").
A securities rating addresses the likelihood of the receipt by
Certificateholders of distributions on the Mortgage Loans. The rating takes into
consideration the characteristics of the Mortgage Loans and the structural,
legal and tax aspects associated with the Class A Certificates. The ratings on
the Class A Certificates do not, however, constitute statements regarding the
likelihood or frequency of prepayments on the Mortgage Loans or the possibility
that Certificateholders might realize a lower than anticipated yield.
The ratings assigned to the Class A Certificates will depend primarily
upon the creditworthiness of the Certificate Insurer. Any reduction in a rating
assigned to the financial strength of the Certificate Insurer below the ratings
initially assigned to the Class A Certificates may result in a reduction of one
or more of the ratings assigned to the Class A Certificates.
A securities rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each securities rating should be evaluated
independently of similar ratings on different securities.
S-81
INDEX OF DEFINED TERMS
Accrual Period.............................................................S-63
Additional Mortgage Loans..................................................S-24
Adjustment Date............................................................S-25
Agreement..................................................................S-19
Available Funds............................................................S-59
Base Spread Account Requirement............................................S-60
Basis Risk Reserve Fund....................................................S-64
BIF........................................................................S-57
Book-Entry Certificates....................................................S-51
Business Day...............................................................S-66
Ceiling Rate...............................................................S-62
Certificate Insurer........................................................S-17
Certificate Insurer Default................................................S-66
Certificate Register.......................................................S-59
Certificate Registrar......................................................S-59
Certificates...............................................................S-50
Class A Available Funds Cap Carryover Amount...............................S-64
Class A Principal Balance............................................S-50, S-51
Class Interest Carryover Shortfall.........................................S-64
Class Monthly Interest Amount..............................................S-64
Class Principal Payment Amount.............................................S-65
Class R Certificates.......................................................S-50
Clearstream................................................................S-51
Clearstream Participants...................................................S-53
Closing Date...............................................................S-50
CLTV.......................................................................S-29
Code:......................................................................S-76
Collection Account.........................................................S-57
Compensating Interest......................................................S-70
Corridor...................................................................S-61
Corridor Contract..........................................................S-61
Corridor Contract Counterparty.............................................S-61
Corridor Payment Date......................................................S-61
CPR........................................................................S-42
Cut-Off Date...............................................................S-24
Cut-Off Date Principal Balance.............................................S-24
Defective Mortgage Loans...................................................S-57
Definitive Note............................................................S-51
Depositor..................................................................S-19
Distribution Account.......................................................S-57
Distribution Date..........................................................S-57
DTC........................................................................S-51
S-82
DTC Participants...........................................................S-51
Due Date...................................................................S-55
Due Period.................................................................S-65
Eligible Account...........................................................S-57
Eligible Substitute Mortgage Loan..........................................S-56
Euroclear..................................................................S-51
Euroclear Operator.........................................................S-53
Euroclear Participants.....................................................S-53
European Depositaries......................................................S-51
Events of Servicing Termination............................................S-72
Excess Spread..............................................................S-60
Fannie Mae.................................................................S-21
Financial Intermediary.....................................................S-51
Formula Rate...............................................................S-63
Freddie Mac................................................................S-21
Funding Period.............................................................S-37
Global Securities...........................................................A-1
Home Loan..................................................................S-19
I and I Payments...........................................................S-61
Initial Cap................................................................S-25
Initial Mortgage Loans.....................................................S-24
Insolvency Event...........................................................S-72
Insurance Agreement........................................................S-65
Insurance Proceeds.........................................................S-59
Insured Amount.............................................................S-66
Interest Coverage Accounts.................................................S-68
Interest Distribution Amount...............................................S-64
IRS:.......................................................................S-77
Liquidated Mortgage Loan...................................................S-65
Liquidation Proceeds.......................................................S-59
Loan Rates.................................................................S-24
Margin.....................................................................S-25
Maximum Rate...............................................................S-25
Minimum Rate...............................................................S-25
Monthly Advance............................................................S-58
Monthly Principal Amount...................................................S-65
Mortgage...................................................................S-55
Mortgage File..............................................................S-56
Mortgage Loan Schedule.....................................................S-55
Mortgage Loans.............................................................S-24
Mortgage Note..............................................................S-55
Mortgage Pool..............................................................S-24
Mortgaged Properties.......................................................S-24
Mortgagors.................................................................S-40
Net Liquidation Proceeds...................................................S-59
Net Prepayment Interest Shortfall..........................................S-70
S-83
Nonrecoverable Advance.....................................................S-58
Note Interest Rate.........................................................S-63
Note Owners................................................................S-51
Notional Principal Contract Regulations:...................................S-76
OID Regulations:...........................................................S-77
One-Month LIBOR............................................................S-63
Optional Termination Date..................................................S-74
Original Pre-Funded Amount.................................................S-37
Percentage Interest........................................................S-51
Periodic Cap...............................................................S-25
Plan.......................................................................S-79
Policy.....................................................................S-50
Pool Balance...............................................................S-24
Pre-Funded Amount..........................................................S-68
Pre-Funding Account........................................................S-37
Principal Balance..........................................................S-24
Principal Shortfall Amount.................................................S-65
Prospectus.................................................................S-50
PTE........................................................................S-79
Purchase Agreement.........................................................S-75
Purchase Price.............................................................S-56
Purchaser..................................................................S-75
Rating Agencies............................................................S-81
Related Documents..........................................................S-55
Relevant Depositary........................................................S-51
Relevant Implementation Date................................................S-i
Relevant Member State.......................................................S-i
Relief Act.................................................................S-64
Relief Act Interest Shortfall..............................................S-64
REMIC:.....................................................................S-76
Remittance Amount..........................................................S-60
Rules......................................................................S-52
SAIF.......................................................................S-57
Seller.....................................................................S-19
Servicer...................................................................S-19
Servicing Advance..........................................................S-58
Servicing Fee..............................................................S-70
Servicing Fee Rate.........................................................S-70
Six-Month LIBOR............................................................S-26
Spread Account.............................................................S-59
Statistic Calculation Mortgage Loans.......................................S-24
Statistic Calculation Mortgage Pool........................................S-24
Strike Rate................................................................S-62
Subsequent Mortgage Loans..................................................S-24
Subsequent Transfer Date...................................................S-37
Substitution Adjustment....................................................S-56
S-84
Successor Servicer.........................................................S-72
Termination Price..........................................................S-74
Terms and Conditions.......................................................S-54
TIN.........................................................................A-5
Trust......................................................................S-19
Trustee....................................................................S-19
Trustee Fee................................................................S-70
Underwriter................................................................S-80
Underwriting Agreement.....................................................S-80
Voting Rights..............................................................S-74
Weighted Average Life......................................................S-41
S-85
[This page intentionally left blank]
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Home
Equity Loan Asset-Backed Certificates, Series 2005-1 (the "Global Securities")
will be available only in book-entry form. Investors in the Global Securities
may hold such Global Securities through any of DTC, or upon request through
Clearstream or Euroclear. The Global Securities will be tradeable as home market
instruments in both the European and U.S. domestic markets. Initial settlement
and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Clearstream and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior Home Equity Loan Asset-Backed
Certificates issues.
Secondary cross-market trading between Clearstream or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Clearstream and Euroclear (in such
capacity) and as DTC Participants.
Although DTC, Euroclear and Clearstream are expected to follow the
procedures described below in order to facilitate transfers of interests in the
Global Securities among participants of DTC, Euroclear and Clearstream, they are
under no obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. Neither the Issuer nor the Trustee
will have any responsibility for the performance by DTC, Euroclear and
Clearstream or their respective participants or indirect participants of their
respective obligations under the rules and procedures governing their
obligations.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, Clearstream and
Euroclear will hold positions on behalf of their participants through their
respective Depositaries, which in turn will hold such positions in accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to prior Home Equity Loan
Asset-Backed Certificates issues. Investor securities custody accounts will be
credited with their holdings against payment in same-day funds on the settlement
date.
A-1
Investors electing to hold their Global Securities through Clearstream
or Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior Home
Equity Loan Asset-Backed Certificates issued in same-day funds.
Trading between Clearstream and/or Euroclear Participants. Secondary
market trading between Clearstream Participants or Euroclear Participants will
be settled using the procedures applicable to conventional eurobonds in same-day
funds.
Trading between DTC Seller and Clearstream or Euroclear Purchaser. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a Clearstream Participant or a Euroclear Participant, the
purchaser will send instructions to Clearstream or Euroclear through a
Clearstream Participant or Euroclear Participant at least one business day prior
to settlement. Clearstream or Euroclear will instruct the respective Depositary,
as the case may be, to receive the Global Securities against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment date to and excluding the settlement date, on the basis of
either the actual number of days in such 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 Clearstream Participant's or Euroclear Participant's
account. The securities credit will appear the next day (European time) and the
cash debt will be back-valued to, and the interest on the Global Securities will
accrue from, the value date (which would be the preceding day when settlement
occurred in New York). If settlement is not completed on the intended value date
(i.e., the trade fails), the Clearstream or Euroclear cash debt will be valued
instead as of the actual settlement date.
Clearstream Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Clearstream or Euroclear. Under
this approach, they may take on credit exposure to Clearstream or Euroclear
until the Global Securities are credited to their accounts one day later.
As an alternative, if Clearstream or Euroclear has extended a line of
credit to them, Clearstream Participants or Euroclear Participants can elect not
to preposition funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, Clearstream Participants or Euroclear
Participants purchasing Global Securities would incur overdraft charges for one
day, assuming they cleared the overdraft when the Global Securities were
credited to their accounts. However, interest on the Global Securities would
accrue from the value date. Therefore, in many cases the investment income on
A-2
the Global Securities earned during that one-day period may substantially reduce
or offset the amount of such overdraft charges, although this result will depend
on each Clearstream Participant's or Euroclear Participant's particular cost of
funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for sending Global Securities
to the respective European Depositary for the benefit of Clearstream
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
Trading between Clearstream or Euroclear Seller and DTC Purchaser. Due
to time zone differences in their favor, Clearstream Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to Clearstream or Euroclear through a Clearstream Participant or
Euroclear Participant at least one business day prior to settlement. In these
cases Clearstream or Euroclear will instruct the respective Depositary, as
appropriate, to deliver the Global Securities to the DTC Participant's account
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment to and excluding the settlement date
on the basis of either the actual number of days in such 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 Clearstream Participant or Euroclear Participant the following
day, and receipt of the cash proceeds in the Clearstream Participant's or
Euroclear Participant's account would be back-valued to the value date (which
would be the preceding day, when settlement occurred in New York). Should the
Clearstream Participant or Euroclear Participant have a line of credit with its
respective clearing system and elect to be in debt in anticipation of receipt of
the sale proceeds in its account, the back-valuation will extinguish any
overdraft incurred over that one-day period. If settlement is not completed on
the intended value date (i.e., the trade fails), receipt of the cash proceeds in
the Clearstream Participant's or Euroclear Participant's account would instead
be valued as of the actual settlement date.
Finally, day traders that use Clearstream or Euroclear and that
purchase Global Securities from DTC Participants for delivery to Clearstream
Participants or Euroclear Participants should note that these trades would
automatically fail on the sale side unless affirmative action were taken. At
least three techniques should be readily available to eliminate this potential
problem:
(a) borrowing through Clearstream or Euroclear for one day (until
the purchase side of the day trade is reflected in their
Clearstream or Euroclear accounts) in accordance with the
clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC
Participant no later than one day prior to settlement, which
would give the Global Securities sufficient time to be
reflected in their Clearstream or Euroclear account in order
to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the
trade so that the value date for the purchase from the DTC
Participant is at least one day prior to the value date for
the sale to the Clearstream Participant or Euroclear
Participant.
A-3
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner that is not a "United States" person within the
meaning of Section 7701(a)(30) of the Internal Revenue Code of 1986 holding a
book-entry certificate through Clearstream, Euroclear or DTC may be subject to
U.S. withholding tax at a rate of 30% unless such beneficial owner provides
certain documentation to the Trustee or to the U.S. entity required to withhold
tax (the "U.S. withholding agent") establishing an exemption from withholding. A
beneficial owner that is not a United States person may be subject to 30%
withholding unless:
I. the Trustee or the U.S. withholding agent receives a statement --
(a) from the beneficial owner on Internal Revenue Service
("IRS") Form W-8BEN (or any successor form) that --
(i) is signed by the beneficial owner under penalties
of perjury,
(ii) certifies that such beneficial owner is not a
United States person, and
(iii) provides the name and address of the beneficial
owner, or
(b) from a securities clearing organization, a bank or other
financial institution that holds customers' securities in the ordinary
course of its trade or business that --
(i) is signed under penalties of perjury by an
authorized representative of the financial institution,
(ii) states that the financial institution has
received an IRS Form W-8BEN (or any successor form) from the
beneficial owner or that another financial institution acting
on behalf of the beneficial owner has received such IRS Form
W-8BEN (or any successor form),
(iii) provides the name and address of the beneficial
owner, and
(iv) attaches the IRS Form W-8BEN (or any successor
form) provided by the beneficial owner;
II. the beneficial owner claims an exemption or reduced rate based
on a treaty and provides a properly executed IRS Form W-8BEN (or any successor
form) to the Trustee or the U.S. withholding agent;
III. the beneficial owner claims an exemption stating that the
income is effectively connected to a U.S. trade or business and provides a
properly executed IRS Form W-8ECI (or any successor form) to the Trustee or the
U.S. withholding agent; or
IV. the beneficial owner is a "nonwithholding partnership" and
provides a properly executed IRS Form W-8IMY (or any successor form) with all
necessary attachments to the Trustee or the U.S. withholding agent. Certain
pass-through entities that have entered into agreements with the Internal
Revenue Service (for example "qualified intermediaries") may be subject to
different documentation requirements; it is recommended that such beneficial
owners consult with their tax advisors when purchasing the Certificates.
A-4
A beneficial owner of book-entry certificates through Clearstream or
Euroclear provides the forms and statements referred to above by submitting them
to the person through which he owns an interest in the book-entry certificates,
which is the clearing agency, in the case of persons holding directly on the
books of the clearing agency. Under certain circumstances a Form W-8BEN, if
furnished with a taxpayer identification number, ("TIN"), will remain in effect
until the status of the beneficial owner changes, or a change in circumstances
makes any information on the form incorrect. A Form W-8BEN, if furnished without
a TIN, and a Form W-8ECI will remain in effect for a period starting on the date
the form is signed and ending on the last day of the third succeeding calendar
year, unless a change in circumstances makes any information on the form
incorrect.
In addition, all beneficial owners of book-entry certificates through
Clearstream, Euroclear or DTC may be subject to backup withholding at a rate of
up to 31% unless the beneficial owner:
I. provides a properly executed IRS Form W-8BEN, Form W-8ECI or
Form W-8IMY (or any successor forms) if that person is not a United States
person;
II. provides a properly executed IRS Form W-9 (or any substitute
form) if that person is a United States person; or
III. is a corporation, within the meaning of Section 7701(a) of the
Internal Revenue Code of 1986, or otherwise establishes that it is a recipient
exempt from United States backup withholding.
This summary does not deal with all aspects of federal income tax
withholding or backup withholding that may be relevant to investors that are not
"United States persons" within the meaning of Section 7701(a)(30) of the
Internal Revenue Code. Such investors are advised to consult their own tax
advisors for specific tax advice concerning their owning and disposing of the
book-entry certificates.
The term "United States person" means (1) a citizen or resident of the
United States, (2) a corporation or partnership organized in or under the laws
of the United States or any state or the District of Columbia (other than a
partnership that is not treated as a United States person under any applicable
Treasury regulations), (3) an estate the income of which is includible in gross
income for United States tax purposes, regardless of its source, (4) a trust if
a court within the United States is able to exercise primary supervision over
the administration of the trust and one or more United States persons have
authority to control all substantial decisions of the trust, and (5) to the
extent provided in regulations, certain trusts in existence on August 20, 1996
that are treated as United States persons prior to such date and that elect to
continue to be treated as United States persons.
A-5
[This page intentionally left blank]
PROSPECTUS
MORTGAGE-BACKED/ASSET-BACKED SECURITIES
(ISSUABLE IN SERIES)
GREENWICH CAPITAL ACCEPTANCE, INC. OR FINANCIAL ASSET SECURITIES CORP.
DEPOSITOR
THE SECURITIES
Each issue of securities will have its own series designation and will
evidence either the ownership of assets in the related trust or debt obligations
secured by trust assets.
o Each series of securities will consist of one or more classes.
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 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.
THE TRUST AND ITS ASSETS
As specified in the related prospectus supplement, the assets of a
trust will include one or more of the following:
o mortgage loans secured generally by senior liens on one- to
four-family residential properties,
o closed-end and/or revolving home equity loans generally secured
by junior liens on one- to four-family residential properties,
o mortgage loans secured by senior liens on multifamily residential
properties,
o conditional sales contracts, installment sales agreements or loan
agreements secured by manufactured housing,
o home improvement installment sales contracts and loan agreements
that are either unsecured or secured generally by junior liens on
one- to four-family residential properties or by purchase money
security interests in the related home improvements,
o mortgage pass-through securities issued or guaranteed by Ginnie
Mae, Fannie Mae or Freddie Mac, or
o private label mortgage-backed or asset-backed securities.
OFFERS OF THE SECURITIES
Offers of the securities may be made through one or more different
methods. All securities will be distributed by, or sold through underwriters
managed by, Greenwich Capital Markets, Inc.
- --------------------------------------------------------------------------------
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 6 OF THIS PROSPECTUS.
The securities represent obligations of the trust only and do not
represent an interest in or obligation of the applicable depositor, seller,
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.
- --------------------------------------------------------------------------------
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.
SEPTEMBER 26, 2005
TABLE OF CONTENTS
PAGE
----
Important Notice About Information in This Prospectus and Each Accompanying Prospectus Supplement.................5
Risk Factors......................................................................................................6
The Trust Fund...................................................................................................17
The Mortgage Loans--General........................................................................18
Single Family Loans................................................................................22
Home Equity Loans..................................................................................23
Multifamily Loans..................................................................................23
Manufactured Housing Contracts.....................................................................24
Home Improvement Contracts.........................................................................25
Agency Securities..................................................................................25
Private Label Securities...........................................................................31
Incorporation of Certain Information by Reference..................................................34
Use of Proceeds..................................................................................................34
The Depositors...................................................................................................35
Loan Program.....................................................................................................35
Underwriting Standards.............................................................................35
Qualifications of Sellers..........................................................................37
Representations by Sellers; Repurchases or Substitutions...........................................37
Description of the Securities....................................................................................39
General............................................................................................40
Distributions on Securities........................................................................42
Advances...........................................................................................46
Reports to Securityholders.........................................................................47
Credit Enhancement...............................................................................................49
General............................................................................................49
Subordination......................................................................................49
Pool Insurance Policies............................................................................51
FHA Insurance; VA Guarantees.......................................................................53
Special Hazard Insurance Policies..................................................................55
Bankruptcy Bonds...................................................................................56
FHA Insurance on Multifamily Loans.................................................................57
Reserve Accounts...................................................................................57
Cross Support......................................................................................58
Other Insurance, Surety Bonds, Guaranties, Letters of Credit and Similar Instruments or Agreements.58
Financial Instruments..............................................................................59
Yield and Prepayment Considerations..............................................................................59
2
Operative Agreements.............................................................................................63
Assignment of Trust Fund Assets....................................................................63
Payments on Loans; Deposits to Security Account....................................................66
Pre-Funding Account................................................................................68
Sub-Servicing of Loans.............................................................................68
Collection Procedures..............................................................................70
Hazard Insurance...................................................................................72
Realization upon Defaulted Mortgage Loans..........................................................73
Servicing and Other Compensation and Payment of Expenses...........................................76
Evidence as to Compliance..........................................................................77
Certain Matters Regarding the Master Servicer and the Depositors...................................77
Events of Default; Rights upon Event of Default....................................................78
Amendment..........................................................................................81
Termination; Optional Termination; Calls...........................................................82
The Trustee........................................................................................84
Material Legal Aspects of the Loans..............................................................................84
General............................................................................................84
Foreclosure........................................................................................87
Repossession of Manufactured Homes.................................................................90
Rights of Redemption...............................................................................91
Equitable Limitations on Remedies..................................................................92
Anti-Deficiency Legislation and Other Limitations on Lenders.......................................92
Homeownership Act and Similar State Laws...........................................................93
Due-on-Sale Clauses................................................................................95
Prepayment Charges; Late Fees......................................................................96
Applicability of Usury Laws........................................................................97
Servicemembers Civil Relief Act....................................................................97
Environmental Risks................................................................................98
The Home Improvement Contracts....................................................................100
Installment Contracts.............................................................................101
Junior Mortgages; Rights of Senior Mortgagees.....................................................102
The Title I Program...............................................................................103
Material Federal Income Tax Consequences........................................................................107
General...........................................................................................108
Taxation of Debt Securities.......................................................................109
Non-REMIC Certificates............................................................................117
REMIC Certificates................................................................................129
State Tax Considerations........................................................................................154
ERISA Considerations............................................................................................154
Insurance Company General Accounts................................................................156
Prohibited Transaction Class Exemption 83-1.......................................................156
Underwriter Exemption.............................................................................157
Legal Investment Considerations.................................................................................160
Method of Distribution..........................................................................................162
Legal Matters...................................................................................................163
Financial Information...........................................................................................163
3
Available Information...........................................................................................163
Ratings.........................................................................................................164
Glossary of Terms...............................................................................................165
4
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 for a particular series
of securities cannot contradict the information contained in this prospectus,
insofar as the prospectus supplement contains specific information about the
series 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.
We include cross-references in this prospectus and each accompanying
prospectus supplement to captions in these materials where you can find further
related discussions. There is a Glossary of Terms beginning on page 165 where
you will find definitions of certain capitalized terms used in this prospectus.
The preceding Table of Contents and the Table of Contents included in each
accompanying prospectus supplement provide the pages on which these captions are
located.
- ---------------------
If you require additional information, the mailing address of the depositor's
principal executive offices is either Greenwich Capital Acceptance, Inc. or
Financial Acceptance Securities Corp., at 600 Steamboat Road, Greenwich,
Connecticut 06830 and the telephone number is (203) 625- 2700. For other means
of acquiring additional information about us or a series of securities, see "The
Trust Fund -- Incorporation of Certain Information by Reference" on page 33 of
this prospectus.
- --------------------
5
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING INFORMATION, TOGETHER WITH
THE INFORMATION SET FORTH UNDER "RISK FACTORS" IN THE RELATED PROSPECTUS
SUPPLEMENT, SINCE IT IDENTIFIES THE PRINCIPAL RISK FACTORS ASSOCIATED WITH AN
INVESTMENT IN THE SECURITIES.
PRINCIPAL PREPAYMENTS 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 at least 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 loans in the trust or, if the trust is
comprised of underlying securities, on the loans backing the underlying
securities;
o how payments of principal are allocated among the classes of securities of
the series as specified in the related prospectus supplement;
o if any party has an option to terminate the related trust early or to call
your securities, the effect of the exercise of the option;
o the rate and timing of defaults and losses on the assets in the related
trust; and
o repurchases of assets in the related trust as a result of material breaches
of representations and warranties made by the depositor or master servicer.
The rate of prepayment of the loans included in, or underlying the assets held
in, each trust may affect the average life of the securities.
ONLY THE ASSETS OF THE RELATED
TRUST ARE AVAILABLE TO PAY YOUR
SECURITIES................................ Unless the applicable prospectus supplement provides otherwise, the securities of
each series will be payable solely from the assets of the related trust, including
any applicable credit enhancement, and will not have a claim against the assets of
any other trust. If the assets of the related trust are not sufficient, you may
suffer a
6
loss on your securities. Moreover, at the times specified in the related
prospectus supplement, assets of the trust may be released to the applicable
depositor, master servicer, any servicer, credit enhancement provider or other
specified person, if all payments then due on the securities have been made and
adequate provision for future payments on the remaining securities has been made.
Once released, these assets will no longer be available to make payments on your
securities There will be no recourse against the depositor, the master servicer,
any servicer or any of their affiliates if a required distribution on the
securities is not made. The securities will not represent an interest in, or an
obligation of, the depositor, the master servicer, any servicer or any of their
affiliates.
The depositor's obligations are limited to its representations and warranties
concerning the trust assets. Because the depositor has no significant assets, if
it is required to repurchase trust assets due to the breach of a representation
or warranty, the depositor's source of funds for the repurchase would be limited
to:
o moneys obtained from enforcing any similar obligation of the seller or
originator of the asset, or
o funds from a reserve account or other credit enhancement established to pay
for asset repurchases.
CREDIT ENHANCEMENT MAY NOT BE
ADEQUATE TO PREVENT LOSSES ON
YOUR SECURITIES........................... Credit enhancement is intended to reduce the effect of delinquent payments or loan
losses on those classes of securities that have the benefit of the credit
enhancement. Nevertheless, the amount of any credit enhancement is subject to the
limits described in the related prospectus supplement. Moreover, the amount of
credit enhancement may decline or be depleted under certain circumstances before
the securities are paid in full. As a result, securityholders may suffer losses.
In addition, credit enhancement may not cover all potential sources of risk of
loss, such as fraud or negligence by a loan originator or other parties.
7
THE INTEREST ACCRUAL PERIOD MAY
REDUCE THE EFFECTIVE YIELD
ON YOUR SECURITIES........................ Interest payable on the securities on any distribution date will include all
interest accrued during the related interest accrual period. The interest accrual
period for the securities of each series will be specified in the applicable
prospectus supplement. If the interest accrual period ends two or more days 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 would be less than the indicated coupon rate.
ECONOMIC, LEGAL AND OTHER
FACTORS COULD REDUCE THE AMOUNT
AND DELAY THE TIMING OF RECOVERIES
ON DEFAULTED LOANS........................ The following factors, among others, could adversely affect property values in
such a way that the outstanding balance of the related loans 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 are not necessarily covered by hazard insurance,
such as earthquakes and floods.
If property values decline, actual rates of delinquencies, foreclosures and
losses on the loans could be higher than those currently experienced by the
mortgage lending industry in general.
Even if you assume that the mortgaged properties provide adequate security for
the loans, substantial delays could occur before defaulted loans are liquidated
and the proceeds forwarded to investors. Property foreclosure actions are
regulated by state statutes and rules and are subject to many of the delays and
expenses that characterize other types of lawsuits if defenses or counterclaims
are made. As a result, foreclosure actions can sometimes take several years to
complete. Moreover, some states prohibit a mortgage
8
lender from obtaining a judgment against the borrower for amounts not covered by
property proceeds if the property is sold outside of a judicial proceeding. As a
result, if a borrower defaults, these restrictions may impede the servicer's
ability to dispose of the borrower's property and obtain sufficient proceeds to
repay the loan in full. In addition, the servicer is entitled to deduct from
liquidation proceeds all the expenses it reasonably incurs in trying to recover
on the defaulted loan, including legal fees and costs, real estate taxes, and
property preservation and maintenance expenses.
State laws generally regulate interest rates and other loan charges, require
certain disclosures, and often require licensing of loan originators and
servicers. In addition, most states have other laws and public policies for the
protection of consumers that prohibit unfair and deceptive practices in the
origination, servicing and collection of loans. Depending on the provisions of
the particular law or policy and the specific facts and circumstances involved,
violations may limit the ability of the servicer to collect interest or principal
on the loans. Also, the borrower may be entitled to a refund of amounts
previously paid and the servicer may be subject to damage claims and
administrative sanctions.
LOANS SECURED BY JUNIOR LIENS ARE
SUBJECT TO ADDITIONAL RISKS............... If a loan is in a junior lien position, a decline in property values could
extinguish the value of the junior lien loan before having any effect on the
related senior lien loan or loans. In general, the expenses of liquidating
defaulted loans do not vary directly with the unpaid amount. So, assuming that a
servicer would take the same steps to recover a defaulted loan with a small unpaid
balance as it would a loan with a large unpaid balance, the net amount realized
after paying liquidation expenses would be a smaller percentage of the balance of
the small loan than of the large loan. Since the mortgages securing home equity
loans typically will be in a junior lien position, the proceeds from any
liquidation will be applied first to the claims of the related senior
mortgageholders, including foreclosure costs. In addition, a junior mortgage
lender may only foreclose subject to any related senior mortgage. As a result, the
junior mortgage lender generally must either pay each related senior mortgage
9
lender in full at or before the foreclosure sale or agree to make the regular
payments on each senior mortgage. Since the trust will not have any source of
funds to satisfy any senior mortgages or to continue making payments on them, the
trust's ability as a practical matter to foreclose on any junior lien will be
limited.
LOANS TO LOWER CREDIT QUALITY
BORROWERS ARE MORE LIKELY
TO EXPERIENCE LATE PAYMENTS
AND DEFAULTS AND INCREASE YOUR
RISK OF LOSS.............................. Trust assets may have been made to lower credit quality borrowers who fall into
one of two categories:
o customers with moderate income, limited assets and other income characteristics
that cause difficulty in borrowing from banks and other traditional lenders; or
o customers with a history of irregular employment, previous bankruptcy filings,
repossession of property, charged-off loans or garnishment of wages.
The average interest rate charged on loans made to these types of borrowers is
generally higher than that charged by lenders that typically impose more
stringent credit requirements. There is a greater likelihood of late payments on
loans made to these types of borrowers than on loans to borrowers with a higher
credit quality. In particular, payments from borrowers with a lower credit
quality are more likely to be sensitive to changes in the economic climate in the
areas in which they reside.
As much as 20% (by principal balance) of the trust assets for any particular
series of securities may be contractually delinquent as of the related cut-off
date.
FAILURE TO PERFECT SECURITY
INTERESTS IN MANUFACTURED
HOMES MAY RESULT IN LOSSES
ON YOUR SECURITIES........................ Each manufactured housing conditional sales contract or installment loan agreement
that is included in a trust fund will be secured by a security interest in the
related manufactured home. The steps necessary to perfect the security interest in
a manufactured home will vary from
10
state-to-state. If, as a result of clerical error or otherwise, the master
servicer fails to take the appropriate steps to perfect the security interest in
a manufactured home that secures a conditional sales contract or installment loan
agreement included in the trust, the trustee may not have a first priority
security interest in that manufactured home. Moreover, the master servicer will
not amend the certificate of title to a manufactured home to name the trustee as
lienholder, note the trustee's interest on the certificate of title or deliver
the certificate of title to the trustee. As a result, in some states the
assignment of the security interest in the manufactured home to the trustee may
not be perfected or may not be effective against creditors of the master servicer
or a bankruptcy trustee in the event of a bankruptcy of the master servicer.
In addition, courts in many states have held that manufactured homes may, in
certain circumstances, become subject to real estate title and recording laws. As
a result, the security interest in each manufactured home could be rendered
subordinate to the interests of other parties claiming an interest in that
manufactured home under applicable state real estate law.
The failure to properly perfect a valid, first priority security interest in a
manufactured home that secures a conditional sales contract or installment loan
agreement included in the trust could lead to losses that, to the extent not
covered by any credit enhancement, could adversely affect the yield to maturity
of the related securities.
MULTIFAMILY LOANS GENERALLY
ARE RISKIER THAN SINGLE FAMILY
LOANS..................................... Loans that are secured by first liens on rental apartment buildings or projects
containing five or more residential units, together with loans that are secured by
first liens on mixed-use properties, shall not in the aggregate constitute 10% or
more of any pool by principal balance. Multifamily loans are generally considered
riskier than single-family loans for the following reasons:
o Multifamily loans typically are much larger in amount, which increases the
risk represented by the default of a single borrower.
11
o Repayment of a multifamily loan usually depends upon successful management
of the related mortgaged property.
o Changing economic conditions in particular markets can affect the supply
and demand of rental units and the rents that those markets will bear.
o Government regulations, including rental control laws, may adversely affect
future income from mortgaged properties that are subject to those
regulations.
In addition, because individual multifamily loans often are relatively large in
amount, principal prepayments resulting from defaults, casualties, condemnations
or breaches of representations and warranties may adversely affect your yield.
LOANS WITH BALLOON PAYMENTS
MAY INCREASE YOUR RISK OF LOSS............ Certain loans may not be fully amortizing 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 must generally 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.
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 transfer a
specified amount into a pre-funding account on the date the securities are issued.
In this case, the transferred funds may be used only to acquire additional assets
for the trust during a set period after the issuance. Any amounts remaining in
the account at the end of the period will be distributed as a prepayment of
principal to the holders of the related
12
securities. The resulting prepayment could adversely affect the yield on
those securities.
VIOLATIONS OF APPLICABLE FEDERAL
LAWS MAY REDUCE OR DELAY
MORTGAGE LOAN COLLECTIONS................. The loans may also be subject to federal laws relating to the 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 for nonpurchase money loans with high interest rates or
high upfront fees and charges. These laws can impose specific statutory
liabilities upon creditors that fail to comply and may affect the enforceability
of the related loans. In addition, any assignee of the creditor (including the
trust) would generally be subject to all claims and defenses that the borrower
could assert against the creditor, including the right to rescind the loan.
Loans relating to 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 any assignee of the seller
(including the trust) to all claims and defenses
13
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 master servicer may
be unable to collect all or part of the principal or interest on the loans. The
trust also could be subject to damages and administrative enforcement.
PROCEEDS OF LIQUIDATED LOANS
GENERALLY ARE PAID FIRST TO
PROVIDERS OF TRUST SERVICES............... There is no assurance that the value of the trust assets for any series of
securities at any time will equal or exceed the principal amount of the
outstanding securities of that series. If trust assets have to be sold because of
an event of default or otherwise, providers of services to the trust (including
the trustee, the master servicer and the credit enhancer, if any) generally will
be entitled to receive the proceeds of the sale to the extent of their unpaid fees
and other amounts due them before any proceeds are paid to investors. As a result,
the proceeds of such a sale may be insufficient to pay the full amount of interest
and principal of the related securities.
MORTGAGED PROPERTIES MAY BE
SUBJECT TO ENVIRONMENTAL RISKS
THAT COULD RESULT IN LOSSES............... 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 included
in a trust. Failure to comply with these laws and regulations can result in fines
and penalties that could be assessed against the trust as owner of the related
property.
In some states, a lien on the property due to contamination has priority over the
lien of an existing mortgage. 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 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.
14
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,
there can be no assurance that a secondary market will develop following the
issuance and sale of the securities. Even if a secondary market does develop, you
may not be able to sell your securities when you wish to or at the price you want.
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 generic rating
categories of a nationally recognized rating agency. A rating is based on the
adequacy of the value of the trust assets and any credit enhancement for that
class and reflects the rating agency's assessment of how likely it is that holders
of the class of securities will receive the payments to which they are entitled. A
rating does not constitute an assessment of how likely it is that principal
prepayments on the 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. You must 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
of time or that the rating agency will not lower or withdraw it entirely 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 assets or any
related credit enhancement,
o an adverse change in the financial or other condition of a credit
enhancement provider, or
o a change in the rating of the credit enhancement provider's long-term debt.
15
BOOK-ENTRY REGISTRATION MAY LIMIT
YOUR ABILITY TO SELL SECURITIES
AND DELAY YOUR RECEIPT OF
PAYMENTS ................................. Limit on Liquidity of Securities. Securities issued in bookentry form may have
only limited liquidity in the resale market, since investors may be unwilling to
purchase securities for which they cannot obtain physical instruments.
Limit on Ability to Transfer or Pledge. Transactions in book-entry securities can
be effected only through The Depository Trust Company, its participating
organizations, its indirect participants and certain banks. As a result, your
ability to transfer or pledge securities issued in book-entry form may be
limited.
Delays in Distributions. You may experience some delay in the receipt of
distributions on book-entry securities since the distributions will be forwarded
by the trustee to DTC for DTC to credit the accounts of its participants. In
turn, these participants will thereafter credit the distributions to your account
either directly or indirectly through indirect participants.
There is a Glossary of Terms beginning on page 165 of this prospectus
where you will find definitions of the capitalized terms used in this
prospectus.
16
THE TRUST FUND
The trust fund for each series of certificates will be held by the
trustee named in the related prospectus supplement for the benefit of the
related securityholders. Each trust fund will consist of one or more pools of
the following asset types:
o Single Family Loans,
o Home Equity Loans,
o Multifamily Loans,
o Manufactured Housing Contracts,
o Home Improvement Contracts,
o Agency Securities or
o Private Label Securities,
in each case as specified in the related prospectus supplement, as well
as payments relating to the assets and other accounts, obligations or
agreements, as specified in the related prospectus supplement.
Whenever the terms "pool," "certificates" and "notes" are used in this
prospectus, these terms are intended to apply, unless the context indicates
otherwise, to a discrete asset pool and the certificates representing undivided
interests in, or the notes secured by the assets of, a particular trust fund
consisting primarily of the loans in that pool. Similarly, the term
"pass-through rate" refers to the pass-through rate borne by the certificates of
a particular series, the term "interest rate" refers to the coupon borne by
notes of a particular series and the term "trust fund" refers to the related
trust fund.
Unless the context indicates otherwise, the term "loan" includes Single
Family Loans, Home Equity Loans, Multifamily Loans, Manufactured Housing
Contracts and Home Improvement Contracts. Unless the context indicates
otherwise, the term "underlying loan" refers to the Single Family Loans, Home
Equity Loans, Multifamily Loans, Manufactured Housing Contracts or Home
Improvement Contracts backing or securing Agency Securities or Private Label
Securities.
The securities will be entitled to payment from the assets of the
related trust fund or other assets pledged for the benefit of the
securityholders as specified in the related prospectus supplement. The
securities will not be entitled to payments from the assets of any other trust
fund established by the depositor.
The loans, Agency Securities and Private Label Securities will be
acquired by the applicable depositor, either directly or through affiliates,
from sellers and conveyed by that depositor to the trustee named in the related
prospectus supplement for the benefit of the holders of the securities of the
related series. Sellers may have originated or purchased the assets. Loans
17
acquired by the applicable depositor will have been originated principally in
accordance with the general underwriting criteria specified in this prospectus
under the heading "Loan Program-- Underwriting Standards" and as more
specifically provided in a related prospectus supplement.
Because the securities issued by a trust will be secured by assets
transferred to that trust by one of the depositors you should construe all
references in this prospectus to the "depositor" as referring to the applicable
depositor that transfers assets to your trust under the applicable operative
documents.
The master servicer named in the related prospectus supplement will
service the trust fund assets, either directly or through sub-servicers, under a
servicing agreement for the related series of securities. If the securities are
certificates, the servicing agreement will be in the form of a pooling and
servicing agreement among the depositor, the master servicer and the trustee. If
the securities are notes, the servicing agreement generally will be between the
trustee and the master servicer.
The following sections contain a brief description of the assets
expected to be included in the trust funds. If specific information respecting
the assets is not known at the time the related series of securities initially
is offered, more general information of the nature described below will be
provided in the related prospectus supplement, and specific information will be
set forth in a report on Form 8-K to be filed with the SEC within 15 days after
the initial issuance of the securities. A copy of the operative agreements with
respect to the related series of securities will be attached to the Form 8-K and
will be available for inspection at the corporate trust office of the trustee
specified in the related prospectus supplement. A schedule of the assets
relating to the series will be attached to the related servicing agreement
delivered to the trustee upon issuance of the securities.
THE MORTGAGE LOANS--GENERAL
The loans in each trust fund are secured by the related mortgaged
properties. Except in the case of Multifamily Loans, the related mortgaged
properties generally consist of detached or semi-detached one- to four-family
dwellings, town houses, rowhouses, individual units in condominiums, individual
units in planned unit developments and certain other dwelling units. In
addition, if the related prospectus supplement so provides, the mortgaged
properties may include mixed-use properties. Mixed-use properties consist of
structures principally containing residential units but also including other
space used for retail, professional and other commercial uses. Loans that are
secured by multifamily and mixed-use properties shall not in the aggregate
constitute 10% or more of any pool by principal balance.
The mortgaged properties may include vacation and second homes,
investment properties and leasehold interests as specified in the related
prospectus supplement. The mortgaged 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. If a loan has a loan-to-value ratio or principal balance
in excess of a particular benchmark, it may be covered in whole or in part by a
primary mortgage insurance policy. If the loans in a pool are covered by this
type of policy, the related prospectus supplement will describe the existence,
extent and duration of the coverage.
18
Unless otherwise specified in the related prospectus supplement, all of
the loans in a pool will have monthly payments due on the first day of each
month. The payment terms of the mortgage loans to be included in a trust fund
will be described in the related prospectus supplement and may include one or
more of the following features or other features described in the related
prospectus supplement:
o Interest may be payable at
o a fixed rate,
o a rate that adjusts from time to time in relation to an
index that will be specified in the related prospectus
supplement,
o a rate that is fixed for a period of time or under certain
circumstances and is followed by an adjustable rate,
o a rate that otherwise varies from time to time, or
o 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.
Accrued interest may be deferred and added to the principal of a loan
for the periods and under the circumstances specified in the related
prospectus supplement. A mortgage loan may provide for the payment of
interest at a rate lower than the specified interest rate borne by the
loan 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 related mortgaged property or another source.
o Principal may be
o payable on a level debt service basis to fully amortize the
loan over its term,
o 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
o nonamortizing during all or a portion of the original term.
Payment of all or a substantial portion of the principal may be due on
maturity in the form of a "balloon" payment. Principal may include
interest that has been deferred and added to the principal balance of
the loan.
o Monthly payments of principal and interest may
o be fixed for the life of the loan,
o increase over a specified period of time, or
19
o 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.
o Prepayments of principal may be subject to a prepayment fee,
which may be fixed for the life of the loan or may decline over
time, and may be prohibited for the life of the loan or during
any 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
lender to demand payment of the entire loan in connection with
the sale or certain transfers of the related mortgaged property.
Other loans may be assumable by persons meeting the then
applicable underwriting standards of the related seller.
Each prospectus supplement will contain information, as of the date of
the prospectus supplement and to the extent then specifically known to the
depositor, with respect to the loans contained in the related pool, including
o the aggregate outstanding principal balance and the average
outstanding principal balance of the loans as of the applicable
cut-off date,
o the type of mortgaged property securing each loan,
o the original terms to maturity of the loans,
o the largest principal balance and the smallest principal balance
of the loans,
o the earliest origination date and latest maturity date of the
loans,
o the aggregate principal balance of loans having loan-to-value
ratios at origination exceeding 80%,
o the loan rates or fixed percentage rates (APRs) or range of loan
rates or APRs borne by the loans, and
o the geographical location of the related mortgaged properties on
a state-by-state basis.
If specific information respecting the loans is not known to the
depositor at the time the related securities are initially offered, more general
information of the nature described in the immediately preceding sentence will
be provided in the related prospectus supplement, and specific information will
be set forth in the Form 8-K to be filed with the SEC within 15 days after
issuance.
The loan-to-value ratio of a loan at any given time is the ratio,
expressed as a percentage, of the then outstanding principal balance of the loan
to the collateral value of the related
20
mortgaged property. Unless otherwise specified in the related prospectus
supplement, the collateral value of a mortgaged property, other than with
respect to loans used to refinance an existing loan, is the lesser of (a) the
appraised value determined in an appraisal obtained by the originator at
origination of the loan and (b) the sales price for the property. In the case of
refinance loans, the collateral value of the related mortgaged property is the
appraised value of the property determined in an appraisal obtained at the time
of refinancing. Unless otherwise specified in the related prospectus supplement,
for purposes of calculating the loan-to-value ratio of a Manufactured Housing
Contract relating to a new manufactured home, the collateral value is no greater
than the sum of
o a fixed percentage of the list price of the unit actually billed
by the manufacturer to the dealer, net of freight to the dealer
site but including any accessories identified in the invoice
(i.e., the "manufacturer invoice price"),
o the actual cost of any accessories depending on the size of the
unit, and
o the cost of state and local taxes, filing fees and up to three
years' prepaid hazard insurance premiums.
Unless otherwise specified in the related prospectus supplement, the
collateral value of a used manufactured home is the least of the sales price,
appraised value, and National Automobile Dealers' Association book value plus
prepaid taxes and hazard insurance premiums. The appraised value of a
manufactured home is based upon the age and condition of the manufactured
housing unit and the quality and condition of the mobile home park in which it
is situated, if applicable.
The loan-to-value ratio of a Home Improvement Contract will be computed
in the manner described in the related prospectus supplement.
No assurance can be given that values of the mortgaged properties have
remained or will remain at their levels on the dates of origination of the
related loans. If the residential real estate market should experience an
overall decline in property values such that the outstanding principal balances
of the loans in a particular pool, and any secondary financing on the mortgaged
properties, become equal to or greater than the value of the mortgaged
properties, the actual rates of delinquencies, foreclosures and losses could be
higher than those now generally experienced in the mortgage lending industry. In
addition, adverse economic conditions and other factors which may or may not
affect real property values may affect the timely payment by borrowers of
scheduled payments of principal and interest on the loans and, accordingly, the
actual rates of delinquencies, foreclosures and losses with respect to any pool.
In the case of Multifamily Loans, these other factors could include
o excessive building resulting in an oversupply of rental housing
stock,
o a decrease in employment reducing the demand for rental units in
an area,
o federal, state or local regulations and controls affecting rents,
prices of goods and energy,
21
o environmental restrictions,
o increasing labor and material costs, and
o the relative attractiveness to tenants of the mortgaged
properties.
To the extent that losses are not covered by subordination provisions
or alternative arrangements, losses will be borne, at least in part, by the
securityholders of the securities of the related series.
Unless otherwise specified in the related prospectus supplement, the
only obligations of the depositor with respect to a series of certificates will
be to obtain certain representations and warranties from the related seller and
to assign to the trustee for that series of certificates the depositor's rights
with respect to those representations and warranties. See "Operative
Agreements--Assignment of Trust Fund Assets" in this prospectus.
The obligations of the master servicer with respect to the mortgage
loans will consist principally of:
o its contractual servicing obligations under the related servicing
agreement, including its obligation to enforce the obligations of
the sub-servicers or sellers, or both, as more fully described in
this prospectus under the headings "Mortgage Loan
Program--Representations by Sellers; Repurchases" and "Operative
Agreements-- Sub-Servicing by Sellers" and "--Assignment of Trust
Fund Assets"; and
o its obligation to make certain cash advances in the event of
delinquencies in payments with respect to the mortgage loans in
the amounts described in this prospectus under the heading
"Description of the Certificates--Advances".
The obligations of the master servicer to make advances may be subject
to limitations, to the extent provided in this prospectus and in the related
prospectus supplement.
SINGLE FAMILY LOANS
Unless otherwise specified in the related prospectus supplement, Single
Family Loans will consist of loans or participations or other beneficial
interests in loans secured by mortgages or deeds of trust that create first
liens on one- to four-family residential properties. If specified in the related
prospectus supplement, Single Family Loans may include cooperative 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. If specified in the related prospectus supplement, the
assets of the related trust fund may include mortgage participation certificates
evidencing interests in Single Family Loans. Single Family Loans may be
conventional loans (loans that are not insured or guaranteed by any governmental
agency), loans insured by the Federal Housing Administration (FHA) or partially
guaranteed by the Veterans Administration (VA), as specified in the related
prospectus supplement. Unless otherwise specified in the related prospectus
supplement, Single Family Loans will have individual principal balances at
22
origination of not less than $25,000 and not more than $1,000,000, and original
terms to stated maturity of from ten to 40 years.
If specified in the related prospectus supplement, the mortgaged
properties securing Single Family Loans may include five- to eight-family
residential properties and small mixed-use properties. In the case of leasehold
interests, the term of the leasehold will exceed the scheduled maturity of the
related mortgage loan by at least five years, unless otherwise specified in the
related prospectus supplement.
HOME EQUITY LOANS
Unless otherwise specified in the related prospectus supplement, Home
Equity Loans will consist of closed-end and/or revolving home equity loans
generally secured by junior liens on one- to four-family residential properties.
As more fully described in the related prospectus supplement, interest
on each revolving credit line loan, excluding introductory rates offered from
time to time during promotional periods, is computed and payable monthly on the
average daily outstanding principal balance of the loan. Principal amounts on a
revolving credit line loan may be drawn down (up to the maximum amount specified
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. The full
amount of a closed-end loan is advanced at the inception of the loan and
generally is repayable in equal (or substantially equal) installments in an
amount necessary to fully amortize such loan at its stated maturity. Except to
the extent provided in the related prospectus supplement, the original terms to
stated maturity of closed-end loans will not exceed 360 months. Under certain
circumstances, under either a revolving credit line loan or a closed-end loan, a
borrower may choose an interest only payment option, in which event the borrower
is obligated to pay only the amount of interest which accrued on the loan during
the billing cycle. An interest only payment option may be available for a
specified period before the borrower must begin paying at least the minimum
monthly payment of a specified percentage of the average outstanding balance of
the loan.
MULTIFAMILY LOANS
Multifamily Loans will consist of loans or participations or other
beneficial interests in loans secured by mortgages that create first liens on
rental apartment buildings or projects containing five or more residential
units. If specified in the related prospectus supplement, the mortgage assets of
a trust fund may include mortgage participation certificates evidencing
interests in Multifamily Loans. Multifamily Loans may be conventional loans or
FHA-insured loans, as specified in the related prospectus supplement. Unless
otherwise specified in the related prospectus supplement, all Multifamily Loans
will have original terms to stated maturity of not more than 40 years.
23
Multifamily Loans shall not constitute 10% or more of any pool by
principal balance.
Mortgaged properties securing Multifamily Loans may include high-rise,
mid-rise and garden apartments. Multifamily Loans may be secured by apartment
buildings owned by cooperatives. A cooperative owns all the apartment units in
its building and all common areas and is owned by tenant-stockholders who,
through ownership of stock, shares or membership certificates in the
corporation, receive proprietary leases or occupancy agreements which confer
exclusive rights to occupy specific apartments or units. Generally, a
tenant-stockholder of a cooperative must make a monthly payment to the
cooperative representing such tenant-stockholder's pro rata share of the
cooperative's payments for the cooperative's mortgage loan, real property taxes,
maintenance expenses and other capital or ordinary expenses. Those payments are
in addition to any payments of principal and interest the tenant-stockholder
must make on any loans to the tenant-stockholder secured by his shares in the
cooperative. The cooperative will be directly responsible for building
management and, in most cases, payment of real estate taxes and hazard and
liability insurance. A cooperative's ability to meet debt service obligations on
a Multifamily Loan, as well as all other operating expenses, will be dependent
in large part on the receipt of maintenance payments from the
tenant-stockholders, as well as any rental income from units or commercial areas
the cooperative might control. Unanticipated expenditures may in some cases have
to be paid by special assessments on the tenant-stockholders.
MANUFACTURED HOUSING CONTRACTS
Manufactured Housing Contracts will consist of manufactured housing
conditional sales contracts and installment sales or loan agreements, each
secured by a manufactured home. Manufactured Housing Contracts may be
conventional, insured by the FHA or partially guaranteed by the VA, as specified
in the related prospectus supplement. Unless otherwise specified in the related
prospectus supplement, each Manufactured Housing Contract will be fully
amortizing and will bear interest at a fixed percentage rate or APR. Unless
otherwise specified in the related prospectus supplement, Manufactured Housing
Contracts will all have individual principal balances at origination of not less
than $10,000 and not more than $1,000,000 and original terms to stated maturity
of from five to 30 years.
When we use the term "manufactured home" in this prospectus, we mean,
as stated in 42 U.S.C. ss. 5402(6), "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 such 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."
Each prospectus supplement will specify for the Manufactured Housing
Contracts contained in the related trust fund, among other things, the dates of
origination of the Manufactured Housing Contracts, the APRs on the Manufactured
Housing Contracts, the loan-
24
to-value ratios of the Manufactured Housing Contracts, the minimum and maximum
outstanding principal balances as of the cut-off date and the average
outstanding principal balance, the outstanding principal balances of the
Manufactured Housing Contracts included in the related trust fund, and the
original maturities of the Manufactured Housing Contracts and the last maturity
date of any Manufactured Housing Contract.
HOME IMPROVEMENT CONTRACTS
Home Improvement Contracts are originated by home improvement
contractors, thrifts or commercial mortgage bankers in the ordinary course of
business. As specified in the related prospectus supplement, the Home
Improvement Contracts will either be unsecured or secured by mortgages or deeds
of trust generally creating a junior lien on the related mortgaged properties,
or secured by purchase money security interests in the financed home
improvements. Unless otherwise specified in the related 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 in the related prospectus supplement.
Unless otherwise specified in the related prospectus supplement, the
home improvements securing the Home Improvement Contracts will 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.
AGENCY SECURITIES
Government National Mortgage Association or Ginnie Mae. The Government
National Mortgage Association (Ginnie Mae) is a wholly-owned corporate
instrumentality of the United States within the Department of Housing and Urban
Development. Section 306(g) of Title II of the National Housing Act of 1934, as
amended, authorizes Ginnie Mae to guarantee the timely payment of the principal
of and interest on certificates which represent an interest in a pool of FHA
loans, which are mortgage loans insured by the FHA under the National Housing
Act or under Title V of the Housing Act of 1949, or VA loans, which are mortgage
loans partially guaranteed by the VA under the Servicemen's Readjustment Act of
1944, as amended, or Chapter 37 of Title 38 of the United States Code.
Section 306(g) of the National Housing Act 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 guaranty under this subsection." In
order to meet its obligations under any such guarantee, Ginnie Mae may, under
Section 306(d) of the National Housing Act, borrow from the United States
Treasury in an unlimited amount which is at any time sufficient to enable Ginnie
Mae to perform its obligations under its guarantee.
Ginnie Mae Certificates. Each Ginnie Mae Certificate held in a trust
fund will be a "fully modified pass-through" mortgage-backed certificate issued
and serviced by a Ginnie Mae issuer that is 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. The Ginnie Mae Certificates may be
either Ginnie Mae I Certificates issued under the Ginnie Mae I program or Ginnie
Mae II Certificates issued under the Ginnie Mae II program. The mortgage loans
25
underlying the Ginnie Mae Certificates will consist of FHA loans and/or VA
loans. Each such mortgage loan is secured by a one- to four-family or
multifamily residential property. Ginnie Mae will approve the issuance of each
Ginnie Mae Certificate in accordance with a guaranty agreement between Ginnie
Mae and the Ginnie Mae issuer. Pursuant to its guaranty agreement, a Ginnie Mae
issuer will be required to advance its own funds in order to make timely
payments of all amounts due on each Ginnie Mae Certificate, even if the payments
received by the Ginnie Mae issuer on the underlying FHA loans or VA loans are
less than the amounts due on the related Ginnie Mae Certificate.
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 30 years, but may have original
maturities of substantially less than 30 years. Each Ginnie Mae Certificate will
be based on and backed by a pool of FHA loans or VA loans secured by one- to
four-family residential properties and will provide for the payment by or on
behalf of the Ginnie Mae issuer to the registered holder of the Ginnie Mae
Certificate 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 Loan or VA
Loan 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
such FHA loans or VA loans.
If a Ginnie Mae issuer is unable to make the payments on a Ginnie Mae
Certificate as they become due, it must promptly notify Ginnie Mae and request
Ginnie Mae to make the payments. Upon notification and request, Ginnie Mae will
make payments directly to the registered holder of the Ginnie Mae Certificate.
In the event no payment is made by a Ginnie Mae issuer and the Ginnie Mae issuer
fails to notify and request Ginnie Mae to make the payment, the holder of the
Ginnie Mae Certificate will have recourse only against Ginnie Mae to obtain
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 those
Ginnie Mae Certificates for any amounts that are not paid when due.
All mortgage loans underlying a particular Ginnie Mae I Certificate
must have the same interest rate (except for pools of mortgage loans secured by
manufactured homes) over the term of the loan. The interest rate on a Ginnie Mae
I Certificate will equal the interest rate on the mortgage loans included in the
pool of mortgage loans underlying the Ginnie Mae I Certificate, less one-half
percentage point per annum of the unpaid principal balance of the mortgage
loans.
Mortgage loans underlying a particular Ginnie Mae II Certificate may
have per annum interest rates that vary from one another by up to one percentage
point. The interest rate on each Ginnie Mae 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
26
of mortgage loans underlying the Ginnie Mae II Certificate (except for pools of
mortgage loans secured by manufactured homes).
Regular monthly installment payments on each Ginnie Mae Certificate
held in a trust fund will be comprised of interest due as specified on the
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 are
due. Regular monthly installments on each Ginnie Mae Certificate are required to
be paid to the trustee as registered holder by the 15th day of each month in the
case of a Ginnie Mae I Certificate, and are required to be mailed to the trustee
by the 20th day of each month in the case of a Ginnie Mae 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
such loan will be passed through to the trustee 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 such 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 such mortgage loans, will be less than the
amount of stated interest on such mortgage loans. The interest not so paid will
be added to the principal of the graduated payment mortgage loans and, together
with interest thereon, will be paid in subsequent years. The obligations of
Ginnie Mae and of a Ginnie Mae Issuer 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" mortgage loans are available in
respect of graduated payment or "buydown" mortgages. Ginnie Mae Certificates
related to a series of certificates may be held in book-entry form.
If specified in a prospectus supplement, Ginnie Mae Certificates may be
backed by multifamily mortgage loans having the characteristics specified in the
prospectus supplement.
Federal Home Loan Mortgage Corporation or Freddie Mac. The Federal Home
Loan Mortgage Corporation (Freddie Mac) is a shareholder-owned, government
sponsored enterprise created pursuant to Title III of the Emergency Home Finance
Act of 1970, as amended. 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, or participation interests in the mortgage loans, and the sale of the
mortgage 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 such
quality, type and class as to meet generally the purchase standards imposed by
private institutional mortgage investors.
27
Freddie Mac Certificates. Each Freddie Mac Certificate represents 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 its
Guarantor Program.
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 such mortgage loan must meet the applicable standards set
forth in the legislation that established Freddie Mac. The pool of loans backing
a Freddie Mac Certificate may include whole loans, participation interests in
whole loans and undivided interests in whole loans and/or participations
comprising another Freddie Mac pool. Under the Guarantor Program, however, the
pool of loans backing a Freddie Mac Certificate 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 represented by that Freddie Mac Certificate, whether or not
received. Freddie Mac also guarantees to each registered holder of a Freddie Mac
Certificate that the holder will collect all principal on the underlying
mortgage loans, without any offset or deduction, to the extent of such holder's
pro rata share thereof, but does not, except if and to the extent specified in
the related prospectus supplement for a series of certificates, guarantee 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 such 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 guaranty of collection of principal at any time after
default on an underlying mortgage loan, but not later than (i) 30 days following
foreclosure sale, (ii) 30 days following payment of the claim by any mortgage
insurer or (iii) 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 mortgagor, and Freddie Mac has not adopted standards which
require that the demand be made within any specified period.
Freddie Mac Certificates are not guaranteed by the United States or by
any Federal Home Loan Bank and do not constitute debts or obligations of the
United States or any Federal Home Loan Bank. The obligations of Freddie Mac
under its guarantee are obligations solely of Freddie Mac and are not backed by,
or entitled to, the full faith and credit of the United States. If Freddie Mac
were unable to satisfy such obligations, distributions to holders of Freddie Mac
Certificates would consist solely of payments and other recoveries on the
underlying mortgage loans and,
28
accordingly, monthly distributions to holders of Freddie Mac Certificates would
be affected by delinquent payments and defaults on such 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 repayments 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 the seller thereof.
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 such as 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, there is no limitation on the 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.
Under this program, Freddie Mac purchases groups 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 particular Freddie Mac pool under the Cash Program will
vary since mortgage loans and participations are purchased and assigned to a
Freddie Mac pool based upon their yield to Freddie Mac rather than on the
interest rate on the underlying mortgage loans. Under Freddie Mac's Guarantor
Program, the pass-through rate on a Freddie Mac Certificate is established based
upon the lowest interest rate on the underlying mortgage loans, minus a minimum
servicing fee and the amount of Freddie Mac's management and guaranty income as
agreed upon between the related seller and Freddie Mac.
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 becomes a
registered holder of the Freddie Mac Certificates. Thereafter, such remittance
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, and makes payments of principal and interest each month to the
registered Freddie Mac Certificateholders in accordance with the holders'
instructions.
Federal National Mortgage Association or 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, as amended. 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.
29
Fannie Mae provides funds to the mortgage market primarily by
purchasing mortgage loans from lenders, thereby replenishing their funds for
additional lending. Fannie Mae acquires funds to purchase mortgage loans from
many capital market investors that may not ordinarily invest in mortgages,
thereby expanding 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 Guaranteed
Mortgage Pass- Through Certificates representing fractional undivided interests
in a pool of mortgage loans formed by Fannie Mae. Each mortgage loan must meet
the applicable standards of the Fannie Mae purchase program. Mortgage loans
comprising a pool are either provided by Fannie Mae from its own portfolio or
purchased pursuant to the criteria of the Fannie Mae purchase program.
Mortgage loans underlying Fannie Mae Certificates held by a trust fund
will consist of conventional mortgage loans, FHA loans or VA loans. Original
maturities of substantially all of the conventional, level payment mortgage
loans underlying a Fannie Mae Certificate are expected to be from eight to 15
years or from 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 Certificate 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 each
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 25 basis points and 250 basis points greater than is its annual
pass-through rate. 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 30
basis points and 255 basis points greater than the annual Fannie Mae Certificate
pass-through rate. If specified in the related prospectus supplement, Fannie Mae
Certificates may be backed by adjustable rate mortgages.
Fannie Mae guarantees to each registered holder of a Fannie Mae
Certificate that it will distribute 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 such 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. Although the Secretary of the Treasury of
the United States has discretionary authority to lend Fannie Mae up to $2.25
billion outstanding at any time, neither the United States nor any of its
agencies or instrumentalities is obligated to finance Fannie Mae's operations or
to assist Fannie Mae in any other manner. 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
30
distributions to holders of Fannie Mae Certificates would be affected by
delinquent payments and defaults on such mortgage loans.
Fannie Mae Certificates evidencing interests in pools of mortgage loans
formed on or after May 1, 1985 (other than Fannie Mae Certificates backed by
pools containing graduated payment mortgage loans or mortgage loans secured by
multifamily projects) are 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 will be made by wire and, with respect to fully registered Fannie
Mae Certificates, distributions will be made by check.
Stripped Mortgage-Backed Securities. Agency Securities may consist of
one or more stripped mortgage-backed securities 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 the principal distributions -
but not the interest distributions, or the interest distributions - but not the
principal distributions, or in some specified portion of the principal and
interest distributions on certain Freddie Mac, Fannie Mae or Ginnie Mae
Certificates. The underlying securities will be held under a trust agreement by
Freddie Mac, Fannie Mae or Ginnie Mae, each as trustee, or by another trustee
named in the related prospectus supplement. Freddie Mac, Fannie Mae or Ginnie
Mae will guaranty each stripped Agency Security to the same extent as such
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 Freddie Mac, Fannie Mae or Ginnie Mae. The
characteristics of any such mortgage pass-through certificates will be described
in the related prospectus supplement. If specified in the related prospectus
supplement, a combination of different types of Agency Securities may be held in
a trust fund.
PRIVATE LABEL SECURITIES
General. Private Label Securities or PLS (i.e., private mortgage-backed
or asset-backed securities) may consist of
o pass-through certificates or participation certificates
evidencing an undivided interest in a pool of Single Family
Loans, Home Equity Loans, Multifamily Loans, Manufactured Housing
Contracts or Home Improvement Contracts,
o collateralized mortgage obligations secured by Single Family
Loans, Home Equity Loans, Multifamily Loans, Manufactured Housing
Contracts or Home Improvement Contracts, or
o other Private Label Securities.
31
Private Label Securities may include stripped mortgage-backed
securities representing an undivided interest in all or a part of the principal
distributions - but not the interest distributions, or the interest
distributions - but not the principal distributions, or in some specified
portion of the principal and interest distributions on certain mortgage loans.
The Private Label Securities will have been issued pursuant to a pooling and
servicing agreement, an indenture or similar agreement. Unless otherwise
specified in the related prospectus supplement, the seller/servicer of the
underlying loans will have entered into a PLS Agreement with a trustee under
that agreement. The PLS trustee or its agent, or a custodian, will possess the
mortgage loans underlying the Private Label Securities. The loans underlying the
Private Label Securities will be serviced by a PLS servicer directly or by one
or more sub-servicers which may be subject to the supervision of the PLS
servicer. Unless otherwise specified in the related prospectus supplement, the
PLS servicer will be a Fannie Mae- or Freddie Mac-approved servicer and, if FHA
loans underlie the Private Label Securities, approved by HUD as an FHA
mortgagee.
The PLS issuer will be a financial institution or other entity engaged
generally in the business of mortgage lending, a public agency or
instrumentality of a state, local or federal government, or a limited purpose
corporation organized for the purpose of, among other things, establishing
trusts and acquiring and selling housing loans to trusts and selling beneficial
interests in trusts. If specified in the related prospectus supplement, the PLS
issuer may be an affiliate of the depositor. The obligations of the PLS issuer
will generally be limited to certain representations and warranties 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. Additionally, although the loans underlying the
Private Label Securities may be guaranteed by an agency or instrumentality of
the United States, the Private Label Securities themselves will not be so
guaranteed, unless the related prospectus supplement specifies otherwise.
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 assets underlying the Private Label Securities after a particular
date or under other circumstances specified in the related prospectus
supplement.
Underlying Loans. The loans underlying the PMBS may consist of fixed
rate, level payment, fully amortizing loans or graduated payment mortgage loans,
buydown loans, adjustable rate mortgage loans, or loans having balloon or other
special payment features. The loans may be secured by one- to four-family
residential property, small mixed-use property, five-to eight-family residential
property, multifamily property, manufactured homes or by an assignment of the
proprietary lease or occupancy agreement relating to a specific dwelling within
a cooperative and the related shares issued by the cooperative. Except as
otherwise specified in the related prospectus supplement, the loans will have
the following characteristics:
32
o no loan will have had a loan-to-value ratio at origination in
excess of 95%;
o each Single Family Loan secured by a mortgaged property having a
loan-to-value ratio in excess of 80% at origination will be
covered by a primary mortgage insurance policy;
o each loan will have had an original term to stated maturity of
not less than five years and not more than 40 years;
o no loan that was more than 89 days delinquent as to the payment
of principal or interest will have been eligible for inclusion in
the assets under the related PLS agreement;
o each loan (other than a cooperative loan) will be required to be
covered by a standard hazard insurance policy (which may be a
blanket policy); and
o each loan (other than a cooperative loan or a Manufactured
Housing Contract) will be covered by a title insurance policy.
Credit Support Relating to Private Label Securities. Credit support in
the form of reserve funds, subordination of other private label securities
issued under the PLS agreement, letters of credit, surety bonds, insurance
policies or other types of credit support may be provided with respect to the
loans underlying the Private Label Securities or with respect to the Private
Label Securities themselves.
Additional Information. If the trust fund for a series of securities
includes Private Label Securities, the related prospectus supplement will
specify
o the aggregate approximate principal amount and type of Private
Label Securities to be included in the trust fund,
o the maximum original term-to-stated maturity of the PLS,
o the weighted average term-to-stated maturity of the PLS,
o the pass-through or certificate rate of the PLS,
o the weighted average pass-through or interest rate of the PLS,
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, insurance policies, surety bonds, letters of credit or
guaranties relating to the loans underlying the Private Label
Securities themselves,
o the terms on which the loans underlying the PLS may, or are
required to, be purchased prior to their stated maturity or the
stated maturity of the PLS and
33
o the terms on which mortgage loans may be substituted for those
originally underlying the PLS.
In addition, the related prospectus supplement will provide information
about the loans which comprise the underlying assets of the Private Label
Securities, including
o the payment features of the mortgage loans,
o the approximate aggregate principal balance, if known, of
underlying loans insured or guaranteed by a governmental entity,
o the servicing fee or range of servicing fees with respect to the
loans, and
o the minimum and maximum stated maturities of the underlying loans
at origination.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
We incorporate in this prospectus by reference all documents and
reports filed by the applicable depositor, Greenwich Capital Acceptance, Inc.
(GCA) or Financial Acceptance Securities Corp. (FASCO), 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 certificates
evidencing interests in that trust fund. Upon request by any person to whom this
prospectus is delivered in connection with the offering of one or more classes
of certificates, the applicable depositor will provide without charge a copy of
any such documents and/or reports incorporated herein by reference, in each case
to the extent that the documents or reports relate to those classes of
certificates, other than the exhibits to the documents (unless the exhibits are
specifically incorporated by reference in such documents). Requests to the
depositors should be directed in writing to: Paul D. Stevelman, Greenwich
Capital Acceptance, Inc. or Financial Acceptance Securities Corp. as applicable,
600 Steamboat Road, Greenwich, Connecticut 06830, telephone number (203)
625-2700. Each depositor has determined that its financial statements are not
material to the offering of any of the 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, DC 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.
USE OF PROCEEDS
The net proceeds to be received from the sale of the securities will be
applied by the applicable depositor to the purchase of trust fund assets or will
be used by the depositor for general corporate purposes. The depositors expect
to sell securities in series from time to time, but the timing and amount of
offerings of securities will depend on a number of factors, including the volume
of assets acquired by the depositors, prevailing interest rates, availability of
funds and general market conditions.
34
THE DEPOSITORS
Greenwich Capital Acceptance, Inc. is a Delaware corporation organized
on April 23, 1987, and Financial Asset Securities Corp. is a Delaware
corporation organized on August 2, 1995, in each case for the limited purpose of
acquiring, owning and transferring mortgage assets and selling interests in
those assets or bonds secured by those assets. Each of the depositors is a
limited purpose finance subsidiary of Greenwich Capital Holdings, Inc. and an
affiliate of Greenwich Capital Markets, Inc. Greenwich Capital Markets, Inc. is
a registered broker-dealer engaged in the U.S. government securities market and
related capital markets business. Each of the depositors maintains its principal
office at 600 Steamboat Road, Greenwich, Connecticut 06830 and the telephone
number is (203) 625-2700.
Neither the depositors nor any of their affiliates will ensure or
guarantee distributions on the securities of any series.
LOAN PROGRAM
The depositor will have purchased the loans, either directly or through
affiliates, from sellers. Unless otherwise specified in the related prospectus
supplement, the loans acquired by the depositor will have been originated in
accordance with the underwriting criteria specified under the heading
"--Underwriting Standards" below.
UNDERWRITING STANDARDS
Unless otherwise specified in the related prospectus supplement, each
seller will represent and warrant that all the loans that it originated and/or
sold to the depositor or one of the depositor's affiliates will have been
underwritten in accordance with standards consistent with those utilized by
institutional lenders generally during the period of origination for similar
types of loans. As to any loan insured by the FHA or partially guaranteed by the
VA, the related seller will represent that it has complied with the underwriting
policies of the FHA or the VA, as the case may be.
Underwriting standards are applied by or on behalf of a lender to
evaluate a prospective borrower's credit standing and repayment ability, and the
value and adequacy of the mortgaged property as collateral. In general, a
prospective borrower applying for a loan is required to fill out a detailed
application designed to provide to the underwriting officer pertinent credit
information, including the principal balance and payment history of any senior
lien loan on the related mortgaged property. As part of the description of the
borrower's financial condition, the borrower generally is required to provide a
current list of assets and liabilities and a statement of income and expenses,
as well as an authorization to apply for a credit report which summarizes the
borrower's credit history with local merchants and lenders and any record of
bankruptcy. Generally, an employment verification is obtained from an
independent source, which is typically the borrower's employer. The verification
reports the borrower's length of employment with its employer, current salary,
and expectations of continued employment. If a prospective borrower is
self-employed, the borrower may be required to submit copies of signed tax
returns. The borrower may also be required to authorize verification of deposits
at financial institutions where the borrower has demand or savings accounts.
Underwriting standards which pertain to
35
the creditworthiness of borrowers seeking Multifamily Loans will be described
in the related prospectus supplement.
In determining the adequacy of the mortgaged property as collateral, an
appraisal is made of each property considered for financing. The appraiser is
required to inspect the property and verify that it is in good repair and that
construction, if new, has been completed. The appraisal generally is based on
the market value of comparable homes, the estimated rental income (if considered
applicable by the appraiser) and the cost of replacing the subject home. In
connection with a Manufactured Housing Contract, the appraisal is based on
recent sales of comparable manufactured homes and, when deemed applicable, a
replacement cost analysis based on the cost of a comparable manufactured home.
In connection with a Multifamily Loan, the appraisal must specify whether an
income analysis, a market analysis or a cost analysis was used. An appraisal
employing the income approach to value analyzes a multifamily project's
cashflow, expenses, capitalization and other operational information in
determining the property's value. The market approach to value focuses its
analysis on the prices paid for the purchase of similar properties in the
multifamily project's area, with adjustments made for variations between these
other properties and the multifamily project being appraised. The cost approach
calls for the appraiser to make an estimate of land value and then determine the
current cost of reproducing the building less any accrued depreciation. In any
case, the value of the property being financed, as indicated by the appraisal,
must be such that it currently supports, and is anticipated to support in the
future, the outstanding loan balance.
Once all applicable employment, credit and property information is
received, a determination generally is made as to whether the prospective
borrower has sufficient monthly income available
o to meet the borrower's monthly obligations on the proposed loan,
generally determined on the basis of the monthly payments due in
the year of origination, and other expenses related to the
mortgaged property such as property taxes and hazard insurance,
and
o to meet monthly housing expenses and other financial obligations
and monthly living expenses.
The underwriting standards applied by sellers, particularly with
respect to the level of loan documentation and the borrower's income and credit
history, may be varied in appropriate cases where factors such as low
loan-to-value ratios or other favorable credit exist.
In the case of a loan secured by a leasehold interest in real property,
the title to which is held by a third-party lessor, the related seller will
represent and warrant, among other things, that the remaining term of the lease
and any sublease is at least five years longer than the remaining term of the
related mortgage note.
Some types of loans which may be included in the pools may involve
additional uncertainties not present in traditional types of loans. For example,
loans may provide for escalating or variable payments by the borrower. These
types of loans are generally underwritten on the basis of a judgment that
borrowers will have the ability to make the monthly payments
36
required initially. In some instances, however, their incomes may not be
sufficient to permit continued loan payments as payments increase. These types
of loans may also be underwritten primarily upon the basis of loan-to-value
ratios or other favorable credit factors.
QUALIFICATIONS OF SELLERS
Unless otherwise specified in the related prospectus supplement, each
seller will be required to satisfy the qualifications set forth in the following
sentence. Each seller must
o be an institution experienced in originating and servicing loans
of the type contained in the related pool in accordance with
accepted practices and prudent guidelines,
o maintain satisfactory facilities to originate and service the
loans,
o be a seller/servicer approved by either Fannie Mae or Freddie
Mac, and
o be a mortgagee approved by the FHA or an institution the deposit
accounts in which are insured by the Federal Deposit Insurance
Corporation (FDIC).
REPRESENTATIONS BY SELLERS; REPURCHASES OR SUBSTITUTIONS
Each seller will have made representations and warranties in respect of
the loans sold by that seller and evidenced by a series of securities. These
representations and warranties, unless otherwise provided in the related
prospectus supplement, generally include the following:
o Except in the case of a cooperative loan, each Single Family
Loan, Home Equity Loan or Multifamily Loan has a title insurance
policy, required hazard insurance policy and any required primary
mortgage insurance policy, each of which was in effect at the
origination of the loan and remained in effect on the date that
the loan was purchased from the seller by or on behalf of the
depositor. If the related mortgaged property is located in an
area where title insurance policies are generally not available,
an attorney's certificate of title may be substituted.
o The seller had good title to each loan and no loan was subject to
offsets, defenses, counterclaims or rights of rescission except
to the extent that any specified buydown agreement may forgive
certain indebtedness of a borrower.
o Each loan constituted a valid lien on, or a perfected security
interest with respect to, the related mortgaged property, subject
only to permissible title insurance exceptions, if applicable,
and certain other exceptions described in the related servicing
agreement.
o The mortgaged property was free from damage and was in acceptable
condition.
o There were no delinquent tax or assessment liens against the
mortgaged property.
o No required payment on a loan was delinquent more than 30 days.
37
o Each loan was made in compliance with, and is enforceable under,
all applicable local, state and federal laws and regulations, in
all material respects.
If specified in the related prospectus supplement, the representations
and warranties of a seller in respect of a loan will be made not as of the
related cut-off date but as of the date on which the seller sold the loan to the
depositor or one of its affiliates. Under these circumstances, a substantial
period of time may have elapsed between that date and the date of initial
issuance of the series of securities evidencing an interest in, or secured by,
the loan. Since the representations and warranties of a seller do not address
events that may occur following the sale of the loan by that seller, the
repurchase obligation described in the following paragraph will not arise if the
relevant event that would otherwise have given rise to the obligation occurs
after the date when the seller sold the loan to the depositor or one of its
affiliates. However, the depositor will not include any loan in a trust fund if
anything has come to the depositor's attention that would cause it to believe
that the representations and warranties of the related seller regarding that
loan will not be accurate and complete in all material respects as of the date
when the related series of securities is issued. If the master servicer is also
a seller of loans for a particular series, these representations will be in
addition to the representations and warranties made by the master servicer in
its capacity as master servicer.
Unless otherwise specified in the related prospectus supplement, the
seller will make certain representations and warranties in connection with
Manufactured Housing Contracts included in the trust with respect to the
enforceability of coverage under any related insurance policy or hazard
insurance policy. The seller, if required by the rating agencies rating the
related issue of securities, will obtain a surety bond, guaranty, letter of
credit or other acceptable instrument to support its repurchase or substitution
obligation specified in the immediately following paragraph.
The master servicer, or the trustee if the master servicer is the
seller, will promptly notify the relevant seller of any breach of any
representation or warranty made by that seller in respect of a loan which
materially and adversely affects the interests of the securityholders in the
loan. Unless otherwise specified in the related prospectus supplement, if the
seller cannot cure the breach within 90 days after notice from the master
servicer or the trustee, as the case may be, then the seller will be obligated
either
o to repurchase that loan from the trust fund at a purchase price
equal to 100% of the loan's unpaid principal balance as of the
date of the repurchase plus accrued interest thereon to the first
day of the month following the month of repurchase at the related
loan rate, less any advances made by the seller or amount payable
as related servicing compensation if the seller is the master
servicer, or
o substitute for that loan a replacement loan that satisfies the
requirements set forth in the related prospectus supplement.
This repurchase or substitution obligation will constitute the sole
remedy available to the securityholders or the trustee for a breach of
representation or warranty by the seller.
38
Except in those cases in which the master servicer is the seller, the
master servicer will be required under the applicable servicing agreement to
enforce this obligation for the benefit of the trustee and the related
securityholders, following the practices it would employ in its good faith
business judgment were it the owner of the loan.
If a REMIC election is to be made with respect to a trust fund, unless
otherwise provided in the related prospectus supplement, the master servicer or
a holder of the related residual certificate will be obligated to pay any
prohibited transaction tax which may arise in connection with a repurchase or
substitution. Unless otherwise specified in the related prospectus supplement,
the master servicer will be entitled to reimbursement for any such payment from
the assets of the related trust fund or from any holder of the related residual
certificate. See "Description of the Securities--General" in this prospectus.
Neither the depositor nor the master servicer - unless the master
servicer is the seller - will be obligated to purchase a loan if the seller
defaults on its obligation to do so. No assurance can be given that sellers will
carry out their respective repurchase or substitution obligations with respect
to the loans. However, to the extent that a breach of a representation and
warranty of a seller may also constitute a breach of a representation made by
the master servicer, the master servicer may have a repurchase or substitution
obligation as described under the heading "Operative Agreements--Assignment of
Trust Fund Assets" in this prospectus.
DESCRIPTION OF THE SECURITIES
Either Greenwich Capital Acceptance, Inc. or Financial Asset Securities
Corp., as depositor, will establish a trust fund for each series of securities.
A particular series of securities will consist of mortgage-backed or
asset-backed certificates or notes or both certificates and notes.
Each series of certificates will be issued pursuant to a pooling and
servicing agreement or a trust agreement, dated as of the related cut-off date,
among the depositor, the trustee and, if the trust includes loans, the related
master servicer. The provisions of each pooling and servicing agreement or trust
agreement will vary depending upon the nature of the related certificates and
the related trust fund. Forms of pooling and servicing and trust agreements are
exhibits 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. If the trust fund includes loans, the trust fund and the servicer of the
loans will also enter into a servicing agreement. Forms of indenture and
servicing agreement have been filed as an exhibit to the registration statement
of which this prospectus forms a part.
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 operative agreements relating to
that series 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
39
entirety by reference to, all of the provisions of the related agreements and
prospectus supplement. The applicable depositor will provide a copy of the
operative agreements (without exhibits) relating to any series without charge,
upon written request of a holder of record of a certificate or note of the
series, addressed to Greenwich Capital Acceptance, Inc. or Financial Asset
Securities Corp., as applicable, 600 Steamboat Road, Greenwich, Connecticut
06830, Attention: Asset Backed Finance Group.
GENERAL
Unless otherwise specified in the related prospectus supplement, the
securities of each series will
o be issued in fully registered form only, in the authorized
denominations specified in the prospectus supplement,
o evidence specified beneficial ownership interests in the trust
fund assets, in the case of a series of certificates, or be
secured by the pledge of the trust fund assets, in the case of a
series of notes, and
o not be entitled to payments in respect of the assets included in
any other trust fund established by the depositor.
The securities will not represent obligations of the depositor or any
of its affiliates. The loans will not be insured or guaranteed by any
governmental entity or other person, unless otherwise specified in the related
prospectus supplement.
To the extent provided in the related operative agreements, each trust
fund will consist of the following:
o the assets as from time to time are subject to the related
agreement, exclusive of any amounts specified in the related
prospectus supplement as "retained interest";
o those assets as from time to time are required to be deposited in
the related security account as defined under the heading
"Operative Agreements--Payments on Loans; Deposits to Security
Account" in this prospectus;
o property which secured a loan and which is acquired on behalf of
the securityholders by foreclosure or deed in lieu of
foreclosure; and
o primary mortgage insurance policies, FHA insurance and VA
guarantees, if any, and any other insurance policies or other
forms of credit enhancement required to be maintained pursuant to
the related agreement.
If specified in the related prospectus supplement, a trust fund may
also include one or more of the following:
o reinvestment income on payments received on the trust fund
assets,
40
o a reserve fund,
o a pool insurance policy,
o a special hazard insurance policy,
o a bankruptcy bond,
o one or more letters of credit,
o a surety bond,
o guaranties, or
o similar instruments or other agreements.
Each series of securities will be issued in one or more classes. Each
class of securities of a series will evidence beneficial ownership of a
specified portion or percentage - which may be 0% - of future interest payments
and a specified portion or percentage - which may be 0% - of future principal
payments on the assets in the related trust fund. A series of securities may
include one or more classes that are senior in right to payment to one or more
other classes of securities of the series. A series or classes of securities may
be covered by insurance policies, surety bonds or other forms of credit
enhancement, in each case as described in this prospectus and in the related
prospectus supplement. Distributions on one or more classes of a series of
securities may be made prior to being made on one or more other classes, after
the occurrence of specified events, in accordance with a schedule or formula, on
the basis of collections from designated portions of the trust fund assets or on
a different basis, in each case as specified in the related prospectus
supplement. The timing and amounts of distributions may vary among classes or
over time as specified in the related prospectus supplement.
Unless otherwise specified in the related prospectus supplement,
distributions of principal and interest, or, where applicable, of principal only
or interest only, on the related securities will be made by the trustee on each
distribution date. Distributions will be made monthly, quarterly, semi-annually,
or at such other intervals and on the dates as are specified in the related
prospectus supplement, in proportion to the percentages specified in the
prospectus supplement. Distributions will be made to the persons in whose names
the securities are registered at the close of business on the applicable record
date specified in the related prospectus supplement. Distributions will be made
in the manner specified in the related prospectus supplement to the persons
entitled to them at the address appearing in the register maintained for the
securityholders. In the case of the final distribution in retirement of the
securities, payment will be made only upon presentation and surrender of the
securities at the office or agency of the trustee or other person specified in
the notice to securityholders of the final distribution.
The securities will be freely transferable and exchangeable at the
corporate trust office of the trustee named in the related prospectus
supplement. No service charge will be made for any registration of exchange or
transfer of securities of any series but the trustee may require payment of a
sum sufficient to cover any related tax or other governmental charge.
41
Under current law, the purchase and holding of certain classes of
securities by or on behalf of, or with the assets of, an employee benefit plan
or other retirement plan or arrangement subject to the provisions of ERISA or
Section 4975 of the Internal Revenue Code may result in "prohibited
transactions" within the meaning of Section 406 of ERISA or Section 4975 of the
Code. See "ERISA Considerations" in this prospectus.
As to each series of securities, an election may be made to treat the
related trust fund, or designated portion of the trust fund, as a "real estate
mortgage investment conduit" (REMIC) as defined in the Internal Revenue Code.
The related prospectus supplement will specify whether a REMIC election is to be
made. Alternatively, the operative agreement for a series may provide that a
REMIC election may be made at the discretion of the depositor or the master
servicer and may only be made if certain conditions are satisfied. As to any
series of securities for which a REMIC election will be made, the terms and
provisions applicable to the making of the REMIC election, as well as any
material federal income tax consequences to securityholders not otherwise
described in this prospectus, will be set forth in the related prospectus
supplement. If a REMIC election is made with respect to a series, one of the
classes will be designated as evidencing the sole class of "residual interests"
in the related REMIC, as defined in the Code. All other classes of securities in
that series will constitute "regular interests" in the related REMIC, as defined
in the Code. As to each series with respect to which a REMIC election is to be
made, the master servicer or a holder of the related residual certificate will
be obligated to take all actions required in order to comply with applicable
laws and regulations and will be obligated to pay any prohibited transaction
taxes. Unless otherwise specified in the related prospectus supplement, the
master servicer will be entitled to reimbursement for any such payment from the
assets of the trust fund or from any holder of the related residual certificate.
DISTRIBUTIONS ON SECURITIES
General. In general, the method of determining the amount of
distributions on a particular series of securities will depend on the type of
credit support, if any, that is used with respect to that series. See "Credit
Enhancement" in this prospectus. Set forth below are descriptions of various
methods that may be used to determine the amount of distributions on the
securities of a particular series. The prospectus supplement for each series of
securities will describe the method to be used in determining the amount of
distributions on the securities of that series.
The trustee will make distributions allocable to principal and interest
on the securities out of, and only to the extent of, funds in the related
security account, including any funds transferred from any reserve account. As
between securities of different classes and as between distributions of
principal (and, if applicable, between distributions of principal prepayments
and scheduled payments of principal) and interest, distributions made on any
distribution date will be applied as specified in the related prospectus
supplement. Unless otherwise specified in the related prospectus supplement,
distributions to any class of securities will be made pro rata to all
securityholders of that class.
Available Funds. All distributions on the securities of each series on
each distribution date will be made from Available Funds in accordance with the
terms described in the related prospectus supplement and specified in the
related operative agreement. Unless otherwise
42
provided in the related prospectus supplement, the term "Available Funds" for
each distribution date will equal the sum of the following amounts:
(i) the aggregate of all previously undistributed payments on
account of principal, including principal prepayments, if any,
and prepayment penalties, if so provided in the related
prospectus supplement, and interest on the mortgage loans in
the related trust fund (including Liquidation Proceeds and
Insurance Proceeds and amounts drawn under letters of credit
or other credit enhancement instruments as permitted
thereunder and as specified in the related operative
agreement) received by the master servicer after the cut-off
date and on or prior to the related determination date
specified in the prospectus supplement except:
o all payments which were due on or before the cut-off
date;
o all Liquidation Proceeds and all Insurance Proceeds,
all principal prepayments and all other proceeds of any
loan purchased by the depositor, the master servicer,
any sub-servicer or any seller pursuant to the related
operative agreement that were received after the
prepayment period specified in the prospectus
supplement and all related payments of interest
representing interest for any period after the related
collection period;
o all scheduled payments of principal and interest due on
a date or dates subsequent to the first day of the
month of distribution;
o amounts received on particular loans as late payments
of principal or interest or other amounts required to
be paid by borrowers, but only to the extent of any
unreimbursed advance in respect of those loans made by
the master servicer, the related sub-servicers, support
servicers or the trustee;
o amounts representing reimbursement, to the extent
permitted by the related operative agreement and as
described under the heading "--Advances" immediately
below, for advances made by the master servicer,
sub-servicers, support servicers or the trustee that
were deposited into the security account, and amounts
representing reimbursement for certain other losses and
expenses incurred by the master servicer or the
depositor and described below; and
o that portion of each collection of interest on a
particular loan in the trust fund which represents
servicing compensation payable to the master servicer
or retained interest which is to be retained from such
collection or is permitted to be retained from related
Insurance Proceeds, Liquidation Proceeds or proceeds of
loans purchased pursuant to the related operative
agreement;
(ii) the amount of any advance made by the master servicer,
sub-servicer, support servicer or the trustee as described
under "--Advances" immediately below and deposited by it in
the security account;
(iii) if applicable, amounts withdrawn from a reserve account;
43
(iv) any applicable, amounts provided under a letter of credit,
insurance policy, surety bond or other third-party credit
enhancement; and
(v) if applicable, the amount of any prepayment interest
shortfall.
Distributions of Interest. Unless otherwise specified in the related
prospectus supplement, interest will accrue on the aggregate principal balance
of each class of securities or the aggregate notional principal balance of each
class of securities entitled to distributions of interest only at the
pass-through rate (or interest rate) and for the periods specified in the
prospectus supplement. Except in the case of a class of accrual securities that
provides for interest that accrues but is not currently payable, the
pass-through rate may be a fixed rate or an adjustable rate that adjusts as
specified in the prospectus supplement. Interest accrued during each specified
period on each class of securities entitled to interest will be distributable on
the distribution dates specified in the related prospectus supplement, to the
extent that funds are available, until the aggregate principal balance of the
securities of that class has been distributed in full or, in the case of a class
of securities entitled only to distributions allocable to interest, until the
aggregate notional principal balance of that class is reduced to zero or for the
period of time designated in the related prospectus supplement. The original
principal balance of each security will equal the aggregate distributions
allocable to principal to which that security is entitled. Unless otherwise
specified in the related prospectus supplement, distributions allocable to
interest on each security that is not entitled to distributions allocable to
principal will be calculated based on the notional principal balance of that
security. The notional principal balance of a security will not evidence an
interest in or entitlement to distributions allocable to principal but will be
used solely for convenience in expressing the calculation of interest and for
certain other purposes.
With respect to any class of accrual securities, if specified in the
related prospectus supplement, any interest that has accrued but is not paid on
any distribution date will be added to the aggregate principal balance of that
class on that distribution date. Unless otherwise specified in the related
prospectus supplement, distributions of interest on each class of accrual
securities will commence only after the occurrence of the events specified in
the prospectus supplement. Unless otherwise specified in the related prospectus
supplement, the beneficial ownership interest of a class of accrual securities
in the trust fund will increase on each distribution date, as reflected in the
aggregate principal balance of that class, by the amount of interest that
accrued on that class during the preceding interest accrual period but was not
required to be distributed to the class on the distribution date. Each class of
accrual securities will thereafter accrue interest on the outstanding aggregate
principal balance of that class as so increased.
Distributions of Principal. Unless otherwise specified in the related
prospectus supplement, the aggregate principal balance of any class of
securities entitled to distributions of principal will equal
o the original aggregate principal balance of that class as
specified in the related prospectus supplement
44
reduced by
o all distributions reported to securityholders of that class as
allocable to principal
increased by
o in the case of a class of accrual securities, all interest
accrued but not then distributable on that class and
subject to
o in the case of adjustable rate certificates, the effect of any
negative amortization.
The related prospectus supplement will specify the method by which the
amount of principal to be distributed on the securities on each distribution
date will be calculated and the manner in which the amount will be allocated
among the classes of securities entitled to distributions of principal.
If so provided in the related prospectus supplement, one or more
classes of senior securities will be entitled to receive all or a
disproportionate percentage of the payments of principal which are received from
borrowers in advance of their scheduled due dates and are not accompanied by
amounts representing scheduled interest due after the month of such payments in
the percentages and under the circumstances or for the periods specified in the
prospectus supplement. Any allocation of principal prepayments to a class or
classes of senior securities will have the effect of accelerating the
amortization of the senior securities while increasing the interests evidenced
by the subordinated securities in the related trust fund. Increasing the
interests of the subordinated securities relative to that of the senior
securities is intended to preserve the availability of the subordination
provided by the subordinated securities. See "Credit Enhancement--Subordination"
in this prospectus.
Unscheduled Distributions. If specified in the related prospectus
supplement, the securities will be subject to receipt of distributions before
the next scheduled distribution date under the circumstances and in the manner
described in this paragraph and the following paragraph and in the prospectus
supplement. The trustee will be required to make such unscheduled distributions
on the day and in the amount specified in the related prospectus supplement if,
due to substantial payments of principal - including principal prepayments - on
the trust fund assets, the trustee or the master servicer determines that the
funds available or anticipated to be available from the security account and, if
applicable, from any reserve account may be insufficient to make required
distributions on the securities on that distribution date. Unless otherwise
specified in the related prospectus supplement, the amount of any unscheduled
distribution that is allocable to principal will not exceed the amount that
would otherwise have been required to be distributed as principal on the
securities on the next distribution date. Unless otherwise specified in the
related prospectus supplement, all unscheduled distributions will include
interest at the applicable pass-through rate, if any, on the amount of the
unscheduled distribution allocable to principal for the period and to the date
specified in the prospectus supplement.
45
Unless otherwise specified in the related prospectus supplement, all
distributions allocable to principal in any unscheduled distribution will be
made in the same priority and manner as distributions of principal on the
securities would have been made on the next distribution date, and with respect
to securities of the same class, unscheduled distributions of principal will be
made on a pro rata basis. Notice of any unscheduled distribution will be given
by the trustee prior to the date of distribution.
ADVANCES
Unless otherwise provided in the related prospectus supplement, the
master servicer will be required to make advances, from its own funds, from
funds advanced by sub-servicers or support servicers or from funds held in the
security account for future distributions to the securityholders. On each
distribution date, the amount of any advances will be equal to the aggregate of
payments of principal and interest that were delinquent on the related
determination date and were not advanced by any sub-servicer, subject to the
master servicer's determination that these advances will be recoverable from
late payments by borrowers, Liquidation Proceeds, Insurance Proceeds or
otherwise. In the case of cooperative loans, the master servicer also will be
required to advance any unpaid maintenance fees and other charges under the
related proprietary leases as specified in the related prospectus supplement.
In making advances, the master servicer will endeavor to maintain a
regular flow of scheduled interest and principal payments to the securityholders
rather than to guarantee or insure against losses. If advances are made by the
master servicer from cash being held for future distribution to securityholders,
the master servicer will replace those funds on or before any future
distribution date to the extent that funds in the applicable security account on
a distribution date would be less than the amount required to be available for
distributions to securityholders on that date. Any funds advanced by the master
servicer will be reimbursable to the master servicer out of recoveries on the
specific loans with respect to which the advances were made (e.g., late payments
made by the related borrower, any related Insurance Proceeds, Liquidation
Proceeds or proceeds of any loan purchased by a sub-servicer or a seller under
the circumstances described in this prospectus). Advances by the master servicer
and any advances by a sub-servicer or a support servicer also will be
reimbursable to the master servicer or sub-servicer or support servicer, as
applicable, from cash otherwise distributable to securityholders, including the
holders of senior securities, to the extent that the master servicer determines
that any advances previously made are not ultimately recoverable as described in
this paragraph. The master servicer also will be obligated to make advances, to
the extent recoverable out of Insurance Proceeds, Liquidation Proceeds or
otherwise, in respect of certain taxes and insurance premiums not paid by
borrowers on a timely basis. Funds so advanced are reimbursable to the master
servicer to the extent permitted by the related operative agreement. If
specified in the related prospectus supplement, the obligations of the master
servicer to make advances may be supported by a cash advance reserve fund, a
surety bond or other arrangement, in each case as described in the related
prospectus supplement.
The master servicer or sub-servicer may enter into a support agreement
with a support servicer pursuant to which the support servicer agrees to provide
funds on behalf of the master servicer or sub-servicer in connection with the
obligation of the master servicer or sub-servicer, as the case may be, to make
advances. The support agreement will be delivered to the trustee and
46
the trustee will be authorized to accept a substitute support agreement in
exchange for an original support agreement, provided that the substitution of
the support agreement will not adversely affect the rating or ratings assigned
to the securities by each rating agency named in the related prospectus
supplement.
Unless otherwise provided in the prospectus supplement, in the event
the master servicer, a sub-servicer or a support servicer fails to make an
advance, the trustee will be obligated to make the advance in its capacity as
successor servicer. If the trustee makes an advance, it will be entitled to be
reimbursed for that advance to the same extent and degree as the master
servicer, a sub-servicer or a support servicer is entitled to be reimbursed for
advances. See "--Distributions on Securities" above.
REPORTS TO SECURITYHOLDERS
Prior to or concurrently with each distribution on a distribution date
and except as otherwise set forth in the related prospectus supplement, the
master servicer or the trustee will furnish to each securityholder of record of
the related series a statement setting forth, to the extent applicable to that
series of securities, among other things:
o the amount of the distribution that is allocable to principal,
separately identifying the aggregate amount of any principal
prepayments and, if specified in the prospectus supplement, any
prepayment penalties included in the distribution;
o the amount of the distribution allocable to interest;
o the amount of any advances;
o the aggregate amount (a) otherwise allocable to the subordinated
securityholders on that distribution date and (b) withdrawn from
the reserve fund, if any, that is included in the amounts
distributed to the senior securityholders;
o the outstanding aggregate principal balance or notional principal
balance of each class after giving effect to the distribution of
principal on that distribution date;
o the percentage of principal payments on the loans (excluding
prepayments), if any, which each class will be entitled to
receive on the following distribution date;
o the percentage of principal prepayments on the mortgage loans, if
any, which each class will be entitled to receive on the
following distribution date;
o the amount of the servicing compensation retained or withdrawn
from the security account by the master servicer and the amount
of additional servicing compensation received by the master
servicer attributable to penalties, fees, excess Liquidation
Proceeds and other similar charges and items;
o the number and aggregate principal balance of mortgage loans
delinquent, but not in foreclosure, (i) from 30 to 59 days, (ii)
from 60 to 89 days and (iii) 90 days or more,
47
as of the close of business on the last day of the calendar
month preceding that distribution date;
o the number and aggregate principal balance of mortgage loans
delinquent and in foreclosure (i) from 30 to 59 days, (ii) from
60 to 89 days and (iii) 90 days or more, as of the close of
business on the last day of the calendar month preceding that
distribution date;
o the book value of any real estate acquired through foreclosure or
grant of a deed in lieu of foreclosure and, if the real estate
secured a Multifamily Loan, any additional information specified
in the prospectus supplement;
o if a class is entitled only to a specified portion of interest
payments on the loans in the related pool, the pass-through rate,
if adjusted from the date of the last statement, of the loans
expected to be applicable to the next distribution to that class;
o if applicable, the amount remaining in any reserve account at the
close of business on that distribution date;
o the pass-through rate as of the day prior to the immediately
preceding distribution date; and o the amounts remaining under
any letters of credit, pool policies or other forms of credit
enhancement applicable to the certificates.
Where applicable, any amount set forth in the above list may be
expressed as a dollar amount per single security of the relevant class having
the percentage interest specified in the prospectus supplement. The report to
securityholders for any series of securities may include additional or other
information of a similar nature to that specified in the above list.
In addition, within a reasonable period of time after the end of each
calendar year, the master servicer or the trustee will mail, to each
securityholder of record at any time during such calendar year, a report setting
forth:
o the aggregate of the amounts for that calendar year reported
pursuant to the first two bullet points in the immediately
preceding list or, in the event that the recipient was a
securityholder of record only during a portion of the calendar
year, for the applicable portion of the year; and
o other customary information as may be deemed necessary or
desirable for securityholders to have in order to prepare their
tax returns.
48
CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided with respect to one or more classes
of a series of securities or with respect to the assets in the related trust
fund. Credit enhancement may take the form of one or more of the following:
o a limited financial guaranty policy issued by an entity named in
the related prospectus supplement,
o the subordination of one or more classes of the securities of
that series,
o the establishment of one or more reserve accounts,
o the use of a cross-support feature,
o a pool insurance policy, bankruptcy bond, special hazard
insurance policy, surety bond, letter of credit, guaranteed
investment contract, or
o any other method of credit enhancement described in the related
prospectus supplement.
Unless otherwise specified in the related prospectus supplement, any
credit enhancement will not provide protection against all risks of loss and
will not guarantee repayment of the entire principal balance of the securities
and interest. If losses occur which exceed the amount covered by the credit
enhancement or which are not covered by the credit enhancement, securityholders
will bear their allocable share of deficiencies.
SUBORDINATION
If specified in the related prospectus supplement, protection afforded
to holders of one or more classes of the senior securities of a series by means
of the subordination feature will be accomplished by the holders of one or more
other classes of that series having a preferential right to distributions in
respect of scheduled principal, principal prepayments, interest or any
combination thereof that otherwise would have been payable to the holders of one
or more other subordinated classes of securities of that series under the
circumstances and to the extent specified in the prospectus supplement. If
specified in the related prospectus supplement, protection may also be afforded
to the holders of the senior securities of a series by:
o reducing the ownership interest of the holders of the related
subordinated securities,
o a combination of the subordination feature and reducing the
ownership interest of the subordinated securityholders, or
o as otherwise described in the related prospectus supplement.
49
If specified in the related prospectus supplement, delays in receipt of
scheduled payments on the loans and losses on defaulted loans will be borne
first by the various classes of subordinated securities and thereafter by the
various classes of senior securities, in each case under the circumstances and
subject to the limitations specified in that prospectus supplement.
The related prospectus supplement may also limit the following:
o the aggregate distributions in respect of delinquent payments on
the loans over the lives of the securities or at any time,
o the aggregate losses in respect of defaulted loans which must be
borne by the subordinated securities by virtue of their
subordination, and
o the amount of the distributions otherwise distributable to the
subordinated securityholders that will be distributable to senior
securityholders on any distribution date.
If aggregate distributions in respect of delinquent payments on the
loans or aggregate losses in respect of the loans were to exceed the amount
specified in the related prospectus supplement, holders of the senior securities
would experience losses on their securities.
In addition to or in lieu of the foregoing, if specified in the related
prospectus supplement, all or any portion of distributions otherwise payable to
holders of the subordinated securities on any distribution date may instead be
deposited into one or more reserve accounts established with the trustee. The
related prospectus supplement may specify that deposits in any reserve account
may be made
o on each distribution date,
o for specified periods, or
o until the balance in the reserve account has reached a specified
amount and, following payments from the reserve account to
holders of the senior securities or otherwise, thereafter to the
extent necessary to restore the balance in the reserve account to
the specified level.
If specified in the related prospectus supplement, amounts on deposit
in the reserve account may be released to the holders of the class or classes of
securities specified in the prospectus supplement at the times and under the
circumstances specified in the prospectus supplement.
If specified in the related prospectus supplement, various classes of
senior securities and subordinated securities may themselves be subordinate in
their right to receive certain distributions to other classes of senior and
subordinated securities, respectively, through a cross-support mechanism or
otherwise.
As among classes of senior securities and as among classes of
subordinated securities, distributions may be allocated among these classes as
follows:
50
o in the order of their scheduled final distribution dates,
o in accordance with a schedule or formula,
o in relation to the occurrence of events or otherwise,
in each case as specified in the related prospectus supplement. As
among classes of subordinated securities, the related prospectus supplement will
specify the allocation of payments to holders of the related senior securities
on account of delinquencies or losses and the allocation payments to any reserve
account.
POOL INSURANCE POLICIES
The related prospectus supplement may specify that a separate pool
insurance policy will be obtained for the pool. This policy will be issued by
the pool insurer named in the prospectus supplement. Subject to the limits
described in this section, each pool insurance policy will cover loss by reason
of default in payment on loans in the related pool in an amount equal to a
percentage, which is specified in the related prospectus supplement, of the
aggregate principal balances of the loans on the cut-off date which are not
covered as to their entire outstanding principal balances by primary mortgage
insurance policies. As more fully described in the following paragraph, the
master servicer will present claims to the pool insurer on behalf of itself, the
trustee and the securityholders. However, the pool insurance policies are not
blanket policies against loss, since claims under the policies may only be made
respecting particular defaulted loans and only upon satisfaction of the
conditions precedent described in the following paragraph. Unless otherwise
specified in the related prospectus supplement, no pool insurance policy will
cover losses due to a failure to pay or denial of a claim under a primary
mortgage insurance policy.
Unless otherwise specified in the related prospectus supplement, the
pool insurance policy will provide that no claims may be validly presented
unless the following conditions are satisfied:
o any required primary mortgage insurance policy is in effect for
the defaulted loan and a claim under that policy has been
submitted and settled;
o hazard insurance on the related mortgaged property has been kept
in force and real estate taxes and other protection and
preservation expenses have been paid;
o if there has been physical loss or damage to the mortgaged
property, the property has been restored to its physical
condition, reasonable wear and tear excepted, at the time of
issuance of the policy; and
o the insured has acquired good and merchantable title to the
mortgaged property free and clear of liens except certain
permitted encumbrances.
Upon satisfaction of these conditions, the pool insurer will have
the option either
51
o to purchase the property securing the defaulted loan at a price
equal to the loan's principal balance plus accrued and unpaid
interest at the loan rate to the date of purchase plus certain
expenses incurred by the master servicer on behalf of the trustee
and securityholders, or
o to pay the amount by which the sum of the principal balance of
the defaulted loan plus accrued and unpaid interest at the loan
rate to the date of payment of the claim and the aforementioned
expenses exceeds the proceeds received from an approved sale of
the mortgaged property,
in either case net of amounts paid or assumed to have been paid under
the related primary mortgage insurance policy.
If any property securing a defaulted loan is damaged and proceeds, if
any, from the related hazard insurance policy or any applicable special hazard
insurance policy are insufficient to restore the damaged property to a condition
sufficient to permit recovery under the pool insurance policy, the master
servicer will not be required to expend its own funds to restore the damaged
property unless it determines that
o the restoration will increase the proceeds to securityholders on
liquidation of the related loan after reimbursement to the master
servicer of its expenses, and
o the master servicer will be able to recover its expenses from
proceeds of the sale of the property or proceeds of the related
pool insurance policy or any related primary mortgage insurance
policy.
Unless otherwise specified in the related prospectus supplement, no
pool insurance policy will insure against losses sustained by reason of a
default arising, among other things, from
o fraud or negligence in the origination or servicing of a loan,
including misrepresentation by the borrower, the originator or
persons involved in the origination of the loan, or
o failure to construct a mortgaged property in accordance with
plans and specifications.
Many primary mortgage insurance policies also do not insure against
these types of losses. Nevertheless, a failure of coverage attributable to one
of the foregoing events might result in a breach of the related seller's
representations and, in that event, might give rise to an obligation on the part
of the seller to purchase the defaulted loan if the breach cannot be cured. No
pool insurance policy will cover a claim in respect of a defaulted loan that
occurs when the loan's servicer, at the time of default or thereafter, was not
approved by the insurer. Many primary mortgage insurance policies also do not
cover claims in this case.
Unless otherwise specified in the related prospectus supplement, the
original amount of coverage under the pool insurance policy will be reduced over
the life of the related securities by the aggregate dollar amount of claims
paid, less the aggregate of the net amounts realized by the pool insurer upon
disposition of all foreclosed properties. The amount of claims paid will include
52
certain expenses incurred by the master servicer as well as accrued interest on
delinquent loans to the date of payment of the claim, unless otherwise specified
in the related prospectus supplement. Accordingly, if aggregate net claims paid
under any pool insurance policy reach the original policy limit, coverage under
that pool insurance policy will be exhausted and any further losses will be
borne by the securityholders.
The terms of any pool insurance policy relating to a pool of
Manufactured Housing Contracts or Home Improvement Contracts will be described
in the related prospectus supplement.
FHA INSURANCE; VA GUARANTEES
Single Family Loans designated in the related prospectus supplement as
insured by the FHA will be insured by the FHA as authorized under the United
States Housing Act of 1937, as amended. These mortgage loans will be insured
under various FHA programs including the standard FHA 203(b) program to finance
the acquisition of one- to four-family housing units and the FHA 245 graduated
payment mortgage program. These programs generally limit the principal amount
and interest rates of the mortgage loans insured. Single Family 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 Single Family Loan
relating to a series may have an interest rate or original principal amount
exceeding the applicable FHA limits at the time the loan was originated.
The insurance premiums for Single Family Loans insured by the FHA are
collected by lenders approved by the Department of Housing and Urban Development
(HUD), or by the master servicer or any sub-servicer, 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 property to HUD or
upon assignment of the defaulted mortgage loan to HUD. With respect to a
defaulted FHA-insured Single Family Loan, the master servicer or any
sub-servicer is limited in its ability to initiate foreclosure proceedings. When
it is determined by the master servicer or sub-servicer or HUD that the default
was caused by circumstances beyond the mortgagor's control, the master servicer
or such sub-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 mortgagor. These plans may involve the reduction or suspension of
regular mortgage payments for a specified period, with such payments to be made
up on 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 this
type of default is accompanied by certain other criteria, HUD may provide relief
by making payments to the master servicer or sub-servicer in partial or full
satisfaction of amounts due under the mortgage loan or by accepting assignment
of the loan from the master servicer or sub-servicer. Any payments made by HUD
are to be repaid by the mortgagor to HUD. With certain exceptions, at least
three full monthly installments must be due and unpaid under the mortgage loan,
and HUD must have rejected any request for relief from the mortgagor, before the
master servicer or sub-servicer may initiate foreclosure proceedings.
In most cases, HUD has the option to pay insurance claims in cash or in
debentures issued by HUD. Currently, claims are being paid in cash. Claims have
not been paid in
53
debentures since 1965. HUD debentures issued in satisfaction of FHA insurance
claims bear interest at the applicable HUD debentures' interest rate. The master
servicer or sub-servicer of each FHA-insured Single Family Loan will be
obligated to purchase any HUD debenture issued in satisfaction of a mortgage
loan upon default for an amount equal to the debenture's principal amount.
The amount of insurance benefits paid by the FHA generally is equal to
the entire unpaid principal amount of the defaulted mortgage loan adjusted to
reimburse the master servicer or sub-servicer for certain costs and expenses and
to deduct certain amounts received or retained by the master servicer or
sub-servicer after default. When entitlement to insurance benefits results from
foreclosure (or other acquisition of possession) and conveyance of the mortgaged
property to HUD, the master servicer or sub-servicer is compensated for no more
than two-thirds of its foreclosure costs, and is compensated for interest
accrued and unpaid prior to the conveyance date generally only to the extent
allowed pursuant to the related forbearance plan approved by HUD. When
entitlement to insurance benefits results from assignment of the mortgage 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 Single Family Loan, bears interest from the date
which is 30 days after the mortgagor's first uncorrected failure to perform any
obligation to make any payment due under the mortgage 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.
Single Family 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, which permits a veteran, the
spouse of a veteran in certain cases, to obtain a mortgage loan guaranteed by
the VA covering 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. However, no Single Family Loan
guaranteed by the VA will have an original principal amount greater than five
times the partial VA guarantee for that mortgage loan.
The maximum guarantee 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 U.S.C. Section 1803(a), as amended. As
of November 1, 1998 the maximum guarantee that may be issued by the VA under a
VA-guaranteed mortgage loan of more than $144,000 is the lesser of 25% of the
original principal amount of the mortgage loan and $50,570. The liability on the
guarantee is reduced or increased, pro rata, with any reduction or increase in
the amount of indebtedness, but in no event will the amount payable under the
guaranty exceed the amount of the original guaranty. The VA may, at its option
and without regard to the guaranty, make full payment to a mortgage holder of
unsatisfied indebtedness on a mortgage loan upon the loan's assignment to the
VA.
With respect to a defaulted VA-guaranteed Single Family Loan, the
master servicer or sub-servicer is, absent exceptional circumstances, authorized
to announce its intention to foreclose only when the default has continued for
three months. Generally, a claim under the guaranty is submitted after
liquidation of the mortgaged property.
54
The amount payable under the guaranty will be the percentage of the
VA-guaranteed Single Family Loan originally guaranteed applied to indebtedness
outstanding as of the applicable date of computation specified in 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 these 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.
SPECIAL HAZARD INSURANCE POLICIES
If specified in the related prospectus supplement, a separate special
hazard insurance policy will be obtained for the pool and will be issued by the
special hazard insurer named in the prospectus supplement. Subject to the
limitations described in the immediately following sentence, each special hazard
insurance policy will protect holders of the related securities from
o loss by reason of damage to mortgaged properties caused by
certain hazards - including earthquakes and, to a limited extent,
tidal waves and related water damage or as otherwise specified in
the prospectus supplement - not insured against under the
standard form of hazard insurance policy for the respective
states in which the mortgaged properties are located or under a
flood insurance policy if the mortgaged property is located in a
federally designated flood area, and
o loss caused by reason of the application of the coinsurance
clause contained in hazard insurance policies.
See "Operative Agreements--Hazard Insurance" in this prospectus. No
special hazard insurance policy will cover losses occasioned by fraud or
conversion by the trustee or master servicer, war, insurrection, civil war,
certain governmental action, errors in design, faulty workmanship or materials
(except under certain circumstances), nuclear or chemical reaction, flood (if
the mortgaged property is located in a federally designated flood area), nuclear
or chemical contamination and certain other risks. The amount of coverage under
any special hazard insurance policy will be specified in the related prospectus
supplement. Each special hazard insurance policy will provide that no claim may
be paid unless hazard insurance and, if applicable, flood insurance on the
related mortgaged property have been kept in force and other protection and
preservation expenses have been paid.
Subject to the limitations set forth in the immediately preceding
paragraph, and unless otherwise specified in the related prospectus supplement,
each special hazard insurance policy will provide coverage where there has been
damage to property securing a foreclosed mortgage loan, and title to the
mortgaged property has been acquired by the insured, to the extent that the
damage is not covered by the hazard insurance policy or flood insurance policy,
if any, maintained by the borrower or the master servicer. In this circumstance,
the special hazard insurer will pay the lesser of
o the cost to repair or replace the mortgaged property, and
55
o upon transfer of the property to the special hazard insurer, the
unpaid principal balance of the loan at the time the property is
acquired by foreclosure or deed in lieu of foreclosure, plus
accrued interest to the date of claim settlement, together with
certain expenses incurred by the master servicer with respect to
the property.
If the unpaid principal balance of a loan plus accrued interest and
certain servicing expenses are paid by the special hazard insurer, the amount of
further coverage under the related special hazard insurance policy will be
reduced by that amount less any net proceeds from the sale of the property. Any
amount paid as the cost to repair the damaged property will also reduce coverage
by such amount. So long as a pool insurance policy remains in effect, the
payment by the special hazard insurer to cover the unpaid principal balance of a
loan plus accrued interest and certain servicing expenses or to cover the cost
to repair a mortgaged property will not affect the total insurance proceeds paid
to securityholders, but will affect the relative amounts of coverage remaining
under the special hazard insurance policy and the pool insurance policy.
Since each special hazard insurance policy will be designed to permit
full recovery under the mortgage pool insurance policy in circumstances in which
recoveries would otherwise be unavailable because mortgaged properties have been
damaged by a cause not insured against by a standard hazard policy and thus
would not be restored, each operative agreement will provide that, unless
otherwise specified in the related prospectus supplement, the master servicer
will be under no obligation to maintain the special hazard insurance policy once
the related pool insurance policy has been terminated or been exhausted due to
payment of claims.
To the extent specified in the related prospectus supplement, the
master servicer may deposit in a special trust account, cash, an irrevocable
letter of credit or any other instrument acceptable to each rating agency named
in the prospectus supplement, in order to provide protection in lieu of or in
addition to that provided by a special hazard insurance policy. The amount of
any special hazard insurance policy or of the deposit to the special trust
account relating to securities may be reduced so long as the reduction will not
result in a downgrading of the rating of the securities by any rating agency
named in the prospectus supplement.
The terms of any special hazard insurance policy relating to a pool of
Manufactured Housing Contracts or Home Improvement Contracts will be described
in the related prospectus supplement.
BANKRUPTCY BONDS
If specified in the related prospectus supplement, a bankruptcy bond
for proceedings under the federal Bankruptcy Code will be issued by an insurer
named in the prospectus supplement. Each bankruptcy bond will cover certain
losses resulting from a reduction by a bankruptcy court of scheduled payments of
principal and interest on a loan or a reduction by the court of the principal
amount of a loan. The bankruptcy bond will also cover unpaid interest on the
amount of such a principal reduction from the date of the filing of a bankruptcy
petition. The required amount of coverage under any bankruptcy bond will be set
forth in the related prospectus supplement. Coverage under a bankruptcy bond may
be cancelled or reduced by the master servicer if the cancellation or reduction
would not adversely affect the then current rating of the securities by any
rating agency named in the prospectus supplement. See "Material Legal
56
Aspects of the Mortgage Loans--Anti-Deficiency Legislation and Other Limitations
on Lenders" in this prospectus.
To the extent specified in the related prospectus supplement, the
master servicer may deposit in a special trust account, cash, an irrevocable
letter of credit or any other instrument acceptable to each rating agency named
in the prospectus supplement, to provide protection in lieu of or in addition to
that provided by a bankruptcy bond. The amount of any bankruptcy bond or of the
deposit to the special trust account relating to the securities may be reduced
so long as the reduction would not result in a downgrading of the rating of the
securities by any rating agency named in the prospectus supplement.
The terms of any bankruptcy bond relating to a pool of Manufactured
Housing Contracts or Home Improvement Contracts will be described in the related
prospectus supplement.
FHA INSURANCE ON MULTIFAMILY LOANS
There are two primary FHA insurance programs that are available for
Multifamily Loans. Sections 221(d)(3) and (d)(4) of the National Housing Act
allow HUD to insure mortgage loans that are secured by newly constructed and
substantially rehabilitated multifamily rental projects. Section 244 of the
Housing Act provides for co-insurance of mortgage loans made under Sections
221(d)(3) and (d)(4) by HUD/FHA and a HUD-approved co-insurer. Generally the
term of a mortgage loan may be up to 40 years and the ratio of loan amount to
property replacement cost can be up to 90%.
Section 223(f) of the National Housing Act allows HUD to insure
mortgage loans made for the purchase or refinancing of existing apartment
projects which are at least three years old. Section 244 also provides for
co-insurance of mortgage loans made under Section 223(f). Under Section 223(f),
the loan proceeds cannot be used for substantial rehabilitation work but repairs
may be made for, generally up to the greater of 15% of the value of the project
or a dollar amount per apartment unit established from time to time by HUD. In
general the loan term may not exceed 35 years and a loan-to-value ratio of no
more than 85% is required for the purchase of a project and a loan-to-value
ratio of no more than 70% for the refinancing of a project.
FHA insurance is generally payable in cash or, at the option of the
mortgagee, in debentures. The insurance does not cover 100% of the mortgage loan
but is subject to certain deductions and certain losses of interest from the
date of the default.
RESERVE ACCOUNTS
If specified in the related prospectus supplement, credit support with
respect to a series of securities may be provided by the establishment and
maintenance of one or more reserve accounts for that series, in trust, with the
related trustee. The prospectus supplement will specify whether or not a reserve
accounts will be included in the related trust fund.
The reserve account for a series of securities will be funded in one of
the following ways:
o by a deposit of cash, U.S. Treasury securities, instruments
evidencing ownership of principal or interest payments on U.S.
Treasury securities, letters of credit, demand
57
notes, securities of deposit or a combination of these, in the
aggregate amount specified in the related prospectus supplement;
o by deposit from time to time of amounts specified in the related
prospectus supplement to which the subordinated securityholders,
if any, would otherwise be entitled; or
o in such other manner as the prospectus supplement may specify.
Any amounts on deposit in the reserve account and the proceeds of any
other instrument upon maturity will be held in cash or will be invested in
permitted investments. Unless otherwise specified in the related prospectus
supplement, "permitted investments" will include obligations of the United
States and certain of its agencies, certificates of deposit, certain commercial
paper, time deposits and bankers acceptances sold by eligible commercial banks
and certain repurchase agreements of United States government securities with
eligible commercial banks. If a letter of credit is deposited with the trustee,
the letter of credit will be irrevocable. Unless otherwise specified in the
related prospectus supplement, any instrument deposited in a reserve account
will name the trustee, in its capacity as trustee for the securityholders, as
beneficiary and will be issued by an entity acceptable to each rating agency
named in the prospectus supplement. Additional information with respect to
instruments deposited in the reserve account will be set forth in the related
prospectus supplement.
Any amounts deposited, and payments on instruments deposited, in a
reserve account will be available for withdrawal from the reserve account for
distribution to securityholders, for the purposes, in the manner and at the
times specified in the related prospectus supplement.
CROSS SUPPORT
If specified in the related prospectus supplement, the beneficial
ownership of separate groups of assets included in a trust fund may be evidenced
by separate classes of securities. In this case, credit support may be provided
by a cross support feature which requires that distributions be made with
respect to securities evidencing a beneficial ownership interest in, or secured
by, other asset groups within the same trust fund. The related prospectus
supplement for a series which includes a cross support feature will describe the
manner and conditions for applying the cross support feature.
If specified in the related prospectus supplement, the coverage
provided by one or more forms of credit support may apply concurrently to two or
more related trust funds. If applicable, the related prospectus supplement will
identify the trust funds to which the credit support relates and the manner of
determining the amount of the coverage provided and the application of the
coverage to the identified trust funds.
OTHER INSURANCE, SURETY BONDS, GUARANTIES, LETTERS OF CREDIT AND SIMILAR
INSTRUMENTS OR AGREEMENTS
If specified in the related prospectus supplement, a trust fund may
also include insurance, guaranties, surety bonds, letters of credit or similar
arrangements for the following purposes:
58
o to maintain timely payments or provide additional protection
against losses on the assets included in the trust fund,
o to pay administrative expenses, or
o to establish a minimum reinvestment rate on the payments made in
respect of the assets included in the trust fund or principal
payment rate on the assets.
These arrangements may include agreements under which securityholders
are entitled to receive amounts deposited in various accounts held by the
trustee upon the terms specified in the prospectus supplement.
FINANCIAL INSTRUMENTS
If specified in the related prospectus supplement, the trust fund may
include one or more swap arrangements or other financial instruments that are
intended to meet the following goals:
o to convert the payments on some or all of the assets from fixed
to floating payments, or from floating to fixed, or from floating
based on a particular index to floating based on another index;
o to provide payments in the event that any index rises above or
falls below specified levels; or
o to provide protection against interest rate changes, certain
types of losses, including reduced market value, or other payment
shortfalls to one or more classes of the related series.
If a trust fund includes financial instruments of this type, the
instruments may be structured to be exempt from the registration requirements of
the Securities Act of 1933, as amended.
The related prospectus supplement will include, or incorporate by
reference, material financial and other information about the provider of the
financial instruments.
YIELD AND PREPAYMENT CONSIDERATIONS
The yields to maturity and weighted average lives of the certificates
will be affected primarily by the amount and timing of principal payments
received on or in respect of the assets included in the related trust fund. The
original terms to maturity of the loans in a given pool will vary depending upon
the types of loans included. Each prospectus supplement will contain information
with respect to the types and maturities of the loans in the related pool.
Unless otherwise specified in the related prospectus supplement, loans may be
prepaid, without penalty, in full or in part at any time. Multifamily Loans may
prohibit prepayment for a specified period after origination, may prohibit
partial prepayments entirely, and may require the payment of a prepayment
penalty upon prepayment in full or in part. The prepayment experience of the
loans in a pool will affect the life of the related series of securities.
59
The rate of prepayments on the loans cannot be predicted. A number of
factors, including homeowner mobility, economic conditions, the presence and
enforceability of due-on-sale clauses, mortgage market interest rates and the
availability of mortgage funds may affect the prepayment experience of loans.
Some of these factors, as well as other factors including limitations on
prepayment and the relative tax benefits associated with the ownership of
income-producing real property, may affect the prepayment experience of
Multifamily Loans.
Home Equity Loans and Home Improvement Contracts have been originated
in significant volume only during the past few years and neither depositor is
aware of any publicly available studies or statistics on the rate of prepayment
of these types of loans. Generally, Home Equity Loans and Home Improvement
Contracts are not viewed by borrowers as permanent financing. Accordingly, these
loans may experience a higher rate of prepayment than traditional first mortgage
loans. On the other hand, because Home Equity Loans that are 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 mortgages. The prepayment
experience of the related trust fund may also be affected by 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 or Home Improvement Contracts include the amounts of, and interest rates
on, the underlying senior mortgage loans, and the use of first mortgage loans as
long-term financing for home purchase and 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,
these types of loans may experience a higher rate of prepayment than traditional
fixed-rate mortgage loans. In addition, any future limitations on the right of
borrowers to deduct interest payments on Home Equity Loans for federal income
tax purposes may further increase the rate of prepayments of these loans.
Collections on Home Equity Loans that are revolving credit line loans
may vary because, among other things, borrowers may
o make payments during any month as low as the minimum monthly
payment for that month or, during the interest-only period for
revolving credit line loans and, in more limited circumstances,
closed-end loans, as to which an interest-only payment option has
been selected, the interest and the fees and charges for that
month; or
o make payments as high as the entire outstanding principal balance
plus accrued interest and related fees and charges.
It is possible that borrowers may fail to make the required periodic
payments. In addition, collection on these loans may vary due to seasonal
purchasing and the payment habits of borrowers.
Unless otherwise provided in the related prospectus supplement, all
conventional loans other than Multifamily Loans will contain due-on-sale
provisions permitting the mortgagee or holder of the contract to accelerate the
maturity of the related loan upon the sale or certain other transfers of the
related mortgaged property by the borrower. As described in the related
prospectus supplement, conventional Multifamily Loans may contain due-on-sale
provisions,
60
due-on-encumbrance provisions or both. Loans insured by the FHA, and
loans partially guaranteed by the VA, are assumable with the consent of the FHA
and the VA, respectively. Thus, the rate of prepayments of these loans may be
lower than that of conventional mortgage loans bearing comparable interest
rates. Unless otherwise provided in the related prospectus supplement, the
master servicer generally will enforce any due-on-sale or due-on-encumbrance
clause, to the extent it has knowledge of the conveyance or further encumbrance
or the proposed conveyance or proposed further encumbrance of the mortgaged
property and reasonably believes that it is entitled to do so under applicable
law. However, the master servicer will not take any enforcement action that
would impair or threaten to impair any recovery under any related insurance
policy. See "Operative Agreements--Collection Procedures" and "Material Legal
Aspects of the Mortgage Loans" in this prospectus for a description of certain
provisions of each operative agreement and certain legal matters that may affect
the prepayment experience of the loans.
The rate of prepayments of conventional mortgage loans has fluctuated
significantly in recent years. In general, prepayment rates may be influenced by
a variety of economic, geographic, social and other factors, including changes
in housing needs, job transfers, unemployment and servicing decisions. In
general, however, if prevailing rates fall significantly below the loan rate
borne by a loan, that loan is likely to be subject to a higher prepayment rate
than would be the case if prevailing interest rates remain at or above its rate.
Conversely, if prevailing interest rates rise appreciably above the loan rate
borne by a loan, that loan is likely to experience a lower prepayment rate than
would be the case if prevailing rates remain at or below its loan rate. However,
there can be no assurance that these generalities will hold true in particular
cases. The rate of prepayment of Multifamily Loans may also be affected by other
factors including loan terms including the existence of lockout periods,
due-on-sale and due-on-encumbrance clauses and prepayment changes, relative
economic conditions in the area where the mortgaged properties are located, the
quality of management of the mortgaged properties and possible changes in tax
laws.
When a loan is prepaid in full, the borrower is charged interest on the
principal amount of the loan only for the number of days in the month actually
elapsed up to the date of the prepayment rather than for a full month. Unless
otherwise specified in the related prospectus supplement, the effect of a
prepayment in full will be to reduce the amount of interest passed through in
the following month to securityholders, because interest on the principal
balance of the prepaid loan will be paid only to the date of prepayment. Partial
prepayments in a given month may be applied to the outstanding principal
balances of the prepaid loans either on the first day of the month of receipt or
of the month following receipt. In the latter case, partial prepayments will not
reduce the amount of interest passed through in that month. Unless otherwise
specified in the related prospectus supplement, neither prepayments in full nor
partial prepayments will be passed through until the month following receipt.
Prepayment charges collected with respect to Multifamily Loans will be
distributed to securityholders, or to other persons entitled to them, as
described in the related prospectus supplement.
If so specified in the related prospectus supplement, the master
servicer will be required to remit to the trustee, with respect to each loan in
the related trust as to which a principal prepayment in full or a principal
payment which is in excess of the scheduled monthly payment and is not intended
to cure a delinquency was received during any due period, an amount, from
61
and to the extent of amounts otherwise payable to the master servicer as
servicing compensation, equal to the excess, if any, of
o 30 days' interest on the principal balance of the related loan at
the loan rate net of the annual rate at which the master
servicer's servicing fee accrues, over
o the amount of interest actually received on that loan during the
due period, net of the master servicer's servicing fee.
If the rate at which interest is passed through to the holders of
securities of a series is calculated on a loan by loan basis, disproportionate
principal prepayments with respect to loans bearing different loan rates will
affect the yield on the securities. In general, the effective yield to
securityholders will be slightly lower than the yield otherwise produced by the
applicable security pass-through rate and purchase price because, while interest
generally will accrue on each loan from the first day of the month, the
distribution of interest generally will not be made earlier than the month
following the month of accrual.
Under certain circumstances, the master servicer, the holders of the
residual interests in a REMIC or any other person named in the related
prospectus supplement may have the option to purchase the assets of a trust fund
to effect early retirement of the related series of securities. See "Operative
Agreements--Termination; Optional Termination; Optional Calls" in this
prospectus.
Factors other than those identified in this prospectus and in the
related prospectus supplement could significantly affect principal prepayments
at any time and over the lives of the securities. The relative contribution of
the various factors affecting prepayment may also vary from time to time. There
can be no assurance as to the rate of payment of principal of trust fund assets
at any time or over the lives of the securities.
The prospectus supplement relating to a series of securities will
discuss in greater detail the effect of the rate and timing of principal
payments including prepayments, delinquencies and losses on the yield, weighted
average lives and maturities of the securities.
In the event that a receiver, bankruptcy trustee, debtor in possession
or similar entity (each, an "insolvency trustee") is appointed with respect to a
seller due to its insolvency or a seller becomes a debtor under the federal
Bankruptcy Code or any similar insolvency law, the insolvency trustee may
attempt to characterize the transfer of the related mortgage loans from the
seller to the depositor as a pledge to secure a financing rather than as a sale.
In the event that this attempt were successful, the insolvency trustee might
elect, among other remedies, to accelerate payment of the related securities and
liquidate the related loans, with each securityholder being entitled to receive
its allocable share of the principal balance of the loans, together with its
allocable share of interest on the loans at the applicable pass-through rate, or
weighted average "strip rate" as defined in the related prospectus supplement,
as the case may be, to the date of payment. In this event, the related
securityholders might incur reinvestment losses with respect to principal
received and investment losses attendant to the liquidation of the loans and the
resulting early retirement of the related security. In addition, certain delays
in distributions might be experienced by the securityholders in connection with
any such insolvency proceedings.
62
OPERATIVE AGREEMENTS
Set forth below is a summary of the material provisions of each
operative agreement that are not described elsewhere in this prospectus. This
summary does not purport to be complete and is subject to, and qualified in its
entirety by reference to, the provisions of each operative agreement applicable
to a particular series of certificates. Where particular provisions or terms
used in the operative agreements are referred to, those provisions or terms are
as specified in the agreements. Except as otherwise specified, the operative
agreements described in this prospectus contemplate a trust fund that is
comprised of loans. Although an agreement governing a trust fund that consists
of Agency Securities or Private Label Securities may contain provisions that are
similar to those described below, they will be described more fully in the
related prospectus supplement.
ASSIGNMENT OF TRUST FUND ASSETS
Assignment of the Trust Fund Loans. When the securities of a series are
issued, the depositor named in the prospective supplement will cause the loans
comprising the related trust fund to be assigned to the trustee, together with
all principal and interest received by or on behalf of the depositor with
respect to those loans after the cut-off date, other than principal and interest
due on or before the cut-off date and other than any retained interest specified
in the related prospectus supplement. Concurrently with this assignment, the
trustee will deliver the securities to the depositor in exchange for the loans.
Each loan will be identified in a schedule appearing as an exhibit to the
related agreement. The schedule will include information as to the outstanding
principal balance of each loan after application of payments due on the cut-off
date, as well as information regarding the loan rate or APR, the current
scheduled monthly payment of principal and interest, the maturity of the loan,
its loan-to-value ratio or combined loan-to-value ratio at origination and
certain other information.
If so specified in the related prospectus supplement, and in accordance
with the rules of membership of Merscorp, Inc. and/or Mortgage Electronic
Registration Systems, Inc. (MERS), assignments of the mortgages for some or all
of the mortgage loans in the related trust will be registered electronically
through the MERS(R) System. With respect to mortgage loans registered through
the MERS(R) System, MERS shall serve as mortgagee of record solely as a nominee
in an administrative capacity on behalf of the trustee and shall not have any
interest in any of those mortgage loans.
In addition, the depositor will deliver to the trustee or a custodian
the following items in connection with each loan in the related trust fund:
o the original mortgage note or contract, endorsed without recourse
in blank or to the order of the trustee;
o in the case of Single Family Loans, Home Equity Loans or
Multifamily Loans, the mortgage, deed of trust or similar
instrument (each, a "mortgage") with evidence of recording
indicated on the mortgage; however, in the case of any mortgage
not returned from the public recording office, the depositor will
deliver or cause to be
63
delivered a copy of the mortgage together with a certificate
stating that the original mortgage was delivered to the
recording office;
o in the case of a contract, other than an unsecured contract, the
security interest in the mortgaged property securing the
contract;
o an assignment of the mortgage or contract to the trustee, which
assignment will be in recordable form in the case of a mortgage
assignment or evidence that the mortgage is held for the trustee
through the MERS(R) System; and
o any other security documents as may be specified in the related
prospectus supplement, including those relating to any senior
lienholder interests in the related mortgaged property.
Unless otherwise specified in the related prospectus supplement, the
depositor will promptly cause the assignments of any Single Family Loan, Home
Equity Loan and Multifamily Loan (except for mortgages held under the MERS(R)
System) to be recorded in the appropriate public office for real property
records, except in states in which, in the opinion of counsel acceptable to the
trustee, recording is not required to protect the trustee's interest in the
loans against the claim of any subsequent transferee or any successor to, or
creditor of, the depositor or the originator of the loans. Unless otherwise
specified in the related prospectus supplement, the depositor will promptly make
or cause to be made an appropriate filing of a UCC-1 financing statement in the
appropriate states to give notice of the trustee's ownership of the contracts.
With respect to any loans which are cooperative loans, the depositor
will deliver the following items to the trustee:
o the related original cooperative note endorsed, without recourse,
in blank or to the order of the trustee,
o the original security agreement,
o the proprietary lease or occupancy agreement,
o the recognition agreement,
o an executed financing agreement and the relevant stock
certificate,
o related blank stock powers, and
o any other document specified in the related prospectus
supplement.
The depositor will cause to be filed in the appropriate office an
assignment and a financing statement evidencing the trustee's security interest
in each cooperative loan.
The trustee or custodian will review the mortgage loan documents, upon
receipt, within the time period specified in the related prospectus supplement.
The trustee will hold the documents in trust for the benefit of the
securityholders. Unless otherwise specified in the related
64
prospectus supplement, if any of these documents are found to be missing or
defective in any material respect, the trustee or custodian will notify the
master servicer and the depositor, and the master servicer will notify the
related seller. If the seller cannot cure the omission or defect within a
specified member of days after receipt of notice, the seller will be obligated
either to purchase the loan from the trustee or to substitute a qualified
substitute loan for the defective loan. There can be no assurance that a seller
will fulfill this obligation. Although the master servicer may be obligated to
enforce the seller's obligation to the extent described in this prospectus under
"Mortgage Loan Program--Representations by Sellers; Repurchases", neither the
master servicer nor the depositor will be obligated to purchase the mortgage
loan if the seller defaults on its obligation, unless the breach also
constitutes a breach of the representations or warranties of the master servicer
or the depositor, as the case may be. Unless otherwise specified in the related
prospectus supplement, the seller's obligation to cure, purchase or substitute
constitutes the sole remedy available to the securityholders or the trustee for
the omission of, or a material defect in, a constituent loan document.
The trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review the
documents relating to the loans as agent of the trustee.
The master servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the agreement. Upon a breach of any representation of the
master servicer which materially and adversely affects the interests of the
securityholders in a loan, the master servicer will be obligated either to cure
the breach in all material respects or to purchase the loan. Unless otherwise
specified in the related prospectus supplement, this obligation to cure,
purchase or substitute constitutes the sole remedy available to the
securityholders or the trustee for a breach of representation by the master
servicer.
Notwithstanding the provisions of the foregoing two paragraphs, with
respect to a trust fund for which a REMIC election is to be made, unless the
related prospectus supplement otherwise provides, no purchase or substitution of
a loan will be made if the purchase or substitution would result in a prohibited
transaction tax under the Internal Revenue Code.
Assignment of Agency Securities. The applicable depositor will cause
any Agency Securities included in a trust fund to be registered in the name of
the trustee or its nominee, and the trustee concurrently will execute,
countersign and deliver the securities. Each Agency Security will be identified
in a schedule appearing as an exhibit to the related pooling and servicing
agreement, which will specify as to each Agency Security its original principal
amount, outstanding principal balance as of the cut-off date, annual
pass-through rate, if any, and the maturity date.
Assignment of Private Label Securities. The applicable depositor will
cause any Private Label Securities included in a trust fund to be registered in
the name of the trustee. The trustee or custodian will have possession of any
Private Label Securities that are in certificated form. Unless otherwise
specified in the related prospectus supplement, the trustee will not be in
possession, or be assignee of record, of any assets underlying the Private Label
Securities. See "The Trust Fund--Private Label Securities." The Private Label
Securities will be identified in a
65
schedule appearing as an exhibit to the related agreement, which will specify
the original principal amount, the outstanding principal balance as of the
cut-off date, the annual pass-through rate or interest rate, the maturity date
and other pertinent information for the Private Label Securities conveyed to the
trustee.
PAYMENTS ON LOANS; DEPOSITS TO SECURITY ACCOUNT
Each sub-servicer servicing a loan pursuant to a sub-servicing
agreement will establish and maintain a sub-servicing account which meets the
requirements and is otherwise acceptable to the master servicer. A sub-servicing
account must be established with a Federal Home Loan Bank or with a depository
institution (including the sub-servicer if it is a depository institution), the
accounts in which are insured by the Federal Deposit Insurance Corporation
(FDIC). If a sub-servicing account is maintained at an institution that is a
Federal Home Loan Bank or an FDIC-insured institution and, in either case, the
amount on deposit in the sub-servicing account exceeds the FDIC insurance
coverage amount, then such excess amount must be remitted to the master servicer
within one business day after receipt. In addition, the sub-servicer must
maintain a separate account for escrow and impound funds relating to the loans.
Each sub-servicer is required to deposit into its sub-servicing account on a
daily basis all amounts that it receives in respect of the loans described
immediately below under "--Sub-Servicing by Sellers", less its servicing or
other compensation. On or before the date specified in the sub-servicing
agreement, the sub-servicer will remit to the master servicer or the trustee all
funds held in the sub-servicing account with respect to the loans that are
required to be remitted. The sub-servicer is also required to advance, on the
scheduled remittance date, an amount corresponding to any monthly installment of
principal and interest, less its servicing or other compensation, on any loan
the payment of which was not received from the borrower. Unless otherwise
specified in the related prospectus supplement, this obligation of each
sub-servicer to advance continues up to and including the first of the month
following the date on which the related mortgaged property is sold at a
foreclosure sale or is acquired on behalf of the securityholders by deed in lieu
of foreclosure, or until the related loan is liquidated.
The master servicer will establish and maintain with respect to the
related trust fund a security account which is a separate account or accounts
for the collection of payments on the assets in the trust fund. Unless otherwise
specified in the related prospectus supplement, each security account shall meet
one of the requirements listed below.
o It must be maintained with a depository institution the debt
obligations of which (or in the case of a depository institution
that is the principal subsidiary of a holding company, the
obligations of which) are rated in one of the two highest rating
categories by each rating agency rating(s) named in the
prospectus supplement.
o It must be an account the deposits in which are fully insured by
the FDIC.
o It must be an account or accounts the deposits in which are
insured by the FDIC to its established limits and the uninsured
deposits in which are otherwise secured such that, as evidenced
by an opinion of counsel, the securityholders have a claim with
respect to the funds in the security account or a perfected first
priority security interest against any collateral securing those
funds that is superior to the claims of any
66
other depositors or general creditors of the depository
institution with which the security account is maintained.
o It must be an account otherwise acceptable to each rating agency
named in the prospectus supplement.
The collateral eligible to secure amounts in the security account is
limited to United States government securities and other high-quality permitted
investments . A security account may be maintained as an interest-bearing
account or the funds held in the account may be invested pending each succeeding
distribution date in permitted investments. Unless otherwise specified in the
related prospectus supplement, the master servicer or its designee will be
entitled to receive any interest or other income earned on funds in the security
account as additional compensation and will be obligated to deposit in the
security account the amount of any loss immediately as realized. The security
account may be maintained with the master servicer or with a depository
institution that is an affiliate of the master servicer, provided that the
master servicer or its affiliate, as applicable, meets the standards set forth
above.
On a daily basis, the master servicer will deposit in the certificate
account for each trust fund, to the extent applicable and unless otherwise
specified in the related prospectus supplement and provided in the pooling and
servicing agreement, the following payments and collections received, or
advances made, by the master servicer or on its behalf subsequent to the cut-off
date, other than payments due on or before the cut-off date and exclusive of any
amounts representing a retained interest:
o all payments on account of principal, including principal
prepayments and, if specified in the related prospectus
supplement, prepayment penalties, on the loans;
o all payments on account of interest on the loans, net of
applicable servicing compensation;
o Insurance Proceeds;
o Liquidation Proceeds;
o any net proceeds received on a monthly basis with respect to any
properties acquired on behalf of the securityholders by
foreclosure or deed in lieu of foreclosure;
o all proceeds of any loan or mortgaged property purchased by the
master servicer, the depositor, any sub-servicer or any seller as
described in this prospectus under "Loan Program--Representations
by Sellers; Repurchases or Substitutions" or "-- Assignment of
Trust Fund Assets" above and all proceeds of any loan repurchased
as described in this prospectus under "--Termination; Optional
Termination" below;
o all payments required to be deposited in the security account
with respect to any deductible clause in any blanket insurance
policy described in this prospectus under "--Hazard Insurance"
below;
67
o any amount required to be deposited by the master servicer in
connection with losses realized on investments of funds held in
the security account made for the benefit of the master servicer;
and
o all other amounts required to be deposited in the security
account pursuant to the related agreement.
PRE-FUNDING ACCOUNT
If so provided in the related prospectus supplement, the master
servicer will establish and maintain a pre-funding account in the name of the
trustee on behalf of the related securityholders into which the applicable
depositor will deposit the pre-funded amount on the related closing date. The
trustee will use the pre-funded amount to purchase subsequent loans from the
depositor from time to time during the funding period which generally runs from
the closing date to the date specified in the related prospectus supplement. At
the end of the funding period, any amounts remaining in the pre-funding account
will be distributed to the related securityholders in the manner and priority
specified in the related prospectus supplement as a prepayment of principal of
the related securities.
SUB-SERVICING OF LOANS
Each seller of a loan or any other servicing entity may act as the
sub-servicer for that loan pursuant to a sub-servicing agreement which will not
contain any terms inconsistent with the related operative agreement. While each
sub-servicing agreement will be a contract solely between the master servicer
and the related sub-servicer, the operative agreement pursuant to which a series
of securities is issued will provide that, the trustee or any successor master
servicer must recognize the sub-servicer's rights and obligations under the
sub-servicing agreement, if for any reason the master servicer for that series
is no longer the master servicer of the related loans.
With the approval of the master servicer, a sub-servicer may delegate
its servicing obligations to third-party servicers, but the sub-servicer will
remain obligated under its sub-servicing agreement. Each sub-servicer will be
required to perform the customary functions of a servicer of mortgage loans.
These functions generally include
o collecting payments from borrowers and remitting collections to
the master servicer;
o maintaining hazard insurance policies as described in this
prospectus and in any related prospectus supplement, and filing
and settling claims under those policies, subject in certain
cases to the master servicer's right to approve settlements in
advance;
o maintaining borrower escrow or impoundment accounts for payment
of taxes, insurance and other items required to be paid by the
borrower under the related loan;
o processing assumptions or substitutions, although, unless
otherwise specified in the related prospectus supplement, the
master servicer is generally required to enforce
68
due-on-sale clauses to the extent their enforcement is
permitted by law and would not adversely affect insurance
coverage;
o attempting to cure delinquencies;
o supervising foreclosures;
o inspecting and managing mortgaged properties under certain
circumstances;
o maintaining accounting records relating to the loans; and
o to the extent specified in the related prospectus supplement,
maintaining additional insurance policies or credit support
instruments and filing and settling claims under them.
A sub-servicer will also be obligated to make advances in respect of
delinquent installments of principal and interest on loans, as described more
fully in this prospectus under "--Payments on Loans; Deposits to Security
Account" above, and in respect of certain taxes and insurance premiums not paid
on a timely basis by borrowers.
As compensation for its servicing duties, each sub-servicer will be
entitled to a monthly servicing fee, to the extent the scheduled payment on the
related loan has been collected, in the amount set forth in the related
prospectus supplement. Each sub-servicer is also entitled to collect and retain,
as part of its servicing compensation, any prepayment or late charges provided
in the note or related instruments. Each sub-servicer will be reimbursed by the
master servicer for certain expenditures which it makes, generally to the same
extent the master servicer would be reimbursed under the agreement. The master
servicer may purchase the servicing of loans if the sub-servicer elects to
release the servicing of the loans to the master servicer. See "-- Servicing and
Other Compensation and Payment of Expenses" below.
Each sub-servicer may be required to agree to indemnify the master
servicer for any liability or obligation sustained by the master servicer in
connection with any act or failure to act by the sub-servicer in its servicing
capacity. Each sub-servicer will be required to maintain a fidelity bond and an
errors and omissions policy with respect to its officers, employees and other
persons acting on its behalf or on behalf of the master servicer.
Each sub-servicer will be required to service each loan pursuant to the
terms of its sub-servicing agreement for the entire term of the loan, unless the
sub-servicing agreement is earlier terminated by the master servicer or unless
servicing is released to the master servicer. The master servicer may terminate
a sub-servicing agreement without cause, upon written notice to the sub-servicer
in the manner specified in that sub-servicing agreement.
The master servicer may agree with a sub-servicer to amend a
sub-servicing agreement or, upon termination of the sub-servicing agreement, the
master servicer may act as servicer of the related loans or enter into new
sub-servicing agreements with other sub-servicers. If the master servicer acts
as servicer, it will not assume liability for the representations and warranties
of the sub-servicer which it replaces. Each sub-servicer must be a seller or
meet the standards for
69
becoming a seller or have such servicing experience as to be otherwise
satisfactory to the master servicer and the depositor. The master servicer will
make reasonable efforts to have the new sub-servicer assume liability for the
representations and warranties of the terminated sub-servicer, but no assurance
can be given that an assumption of liability will occur. In the event of an
assumption of liability, the master servicer may in the exercise of its business
judgment, release the terminated sub-servicer from liability in respect of such
representations and warranties. Any amendments to a sub-servicing agreement or
new sub-servicing agreements may contain provisions different from those which
are in effect in the original sub-servicing agreement. However, each
sub-servicing agreement will provide that any amendment or new agreement may not
be inconsistent with or violate the original sub-servicing agreement.
COLLECTION PROCEDURES
The master servicer, directly or through one or more sub-servicers,
will make reasonable efforts to collect all payments called for under the loans
and will, consistent with each agreement and any mortgage pool insurance policy,
primary mortgage insurance policy, FHA insurance, VA guaranty and bankruptcy
bond or alternative arrangements, follow such collection procedures as are
customary with respect to loans that are comparable to the loans included in the
related trust fund. Consistent with the preceding sentence, the master servicer
may, in its discretion,
o waive any assumption fee, late payment or other charge in
connection with a loan; and
o to the extent not inconsistent with the coverage of the loan by a
pool insurance policy, primary mortgage insurance policy, FHA
insurance, VA guaranty or bankruptcy bond or alternative
arrangements, arrange with the borrower a schedule for the
liquidation of delinquencies running for no more than 125 days
after the applicable due date for each payment.
Both the sub-servicer and the master servicer remain obligated to make
advances during any period when an arrangement of this type is in effect.
In certain instances in which a mortgage loan is in default (or if
default is reasonably foreseeable), the master servicer may, acting in
accordance with procedures specified in the applicable pooling and servicing
agreement, permit certain modifications of the mortgage loan rather than
proceeding with foreclosure. Modifications of this type may have the effect of
reducing the mortgage rate, forgiving the payment of principal or interest or
extending the final maturity date of the mortgage loan. Any such modified
mortgage loan may remain in the related trust fund, and the reduction in
collections resulting from the modification may result in reduced distributions
of interest (or other amounts) on, or may extend the final maturity of, one or
more classes of the related securities. If no satisfactory arrangement can be
made for the collection of such delinquent payments, the master servicer will
continue to follow procedures specified in the applicable pooling and servicing
agreement. These procedures could result, among other possible outcomes, in the
sale of the delinquent mortgage loan by the master servicer on behalf of the
related trust fund.
70
Unless otherwise specified in the related prospectus supplement, in any
case in which property securing a loan has been, or is about to be, conveyed by
the borrower, the master servicer will, to the extent it has knowledge of the
conveyance or proposed conveyance, exercise its rights to accelerate the
maturity of the loan under any applicable due-on-sale clause, but only if the
exercise of its rights is permitted by applicable law and will not impair or
threaten to impair any recovery under any primary mortgage insurance policy. If
these conditions are not met or if the master servicer reasonably believes it is
unable under applicable law to enforce the due-on-sale clause, or if the loan is
insured by the FHA or partially guaranteed by the VA, the master servicer will
enter into an assumption and modification agreement with the person to whom such
property has been or is about to be conveyed. Pursuant to the assumption
agreement, the transferee of the property becomes liable for repayment of the
loan and, to the extent permitted by applicable law, the original borrower also
remains liable on the loan. Any fee collected by or on behalf of the master
servicer for entering into an assumption agreement will be retained by or on
behalf of the master servicer as additional servicing compensation. In the case
of Multifamily Loans and unless otherwise specified in the related prospectus
supplement, the master servicer will agree to exercise any right it may have to
accelerate the maturity of a Multifamily Loan to the extent it has knowledge of
any further encumbrance of the related mortgaged property effected in violation
of any applicable due-on-encumbrance clause. See "Material Legal Aspects of the
Mortgage Loans--Due-on-Sale Clauses" in this prospectus. In connection with any
assumption, the terms of the original loan may not be changed.
With respect to cooperative loans, any prospective purchaser of a
cooperative unit will generally have to obtain the approval of the board of
directors of the relevant cooperative before purchasing the shares and acquiring
rights under the related proprietary lease or occupancy agreement. See "Material
Legal Aspects of the Loans" in this prospectus. This approval is usually based
on the purchaser's income and net worth and numerous other factors. Although the
cooperative's approval is unlikely to be unreasonably withheld or delayed, the
need to acquire approval could limit the number of potential purchasers for
those shares and otherwise limit the trust fund's ability to sell and realize
the value of those shares.
In general, a "tenant-stockholder," as defined in Section 216(b)(2) of
the Internal Revenue Code, of a corporation that qualifies as a "cooperative
housing corporation" within the meaning of Section 216(b)(1) of the Code is
allowed a deduction for amounts paid or accrued within his taxable year to the
corporation representing his proportionate share of certain interest expenses
and real estate taxes allowable as a deduction under Section 216(a) of the Code
to the cooperative corporation under Sections 163 and 164 of the Code. In order
for a corporation to qualify under Section 216(b)(1) of the Code for the taxable
year in which these items are allowable as a deduction to the corporation,
Section 216(b)(1) requires, among other things, that at least 80% of the gross
income of the cooperative corporation be derived from its tenant-stockholders.
By virtue of this requirement, the status of a corporation for purposes of
Section 216(b)(1) of the Code must be determined on a year-to-year basis.
Consequently, there can be no assurance that cooperatives relating to particular
cooperative loans will qualify under this section for any given year. In the
event that a cooperative fail to qualify for one or more years, the value of the
collateral securing the related cooperative loan could be significantly impaired
because no deduction would be allowable to tenant-stockholders under Section
216(a) of the Code with respect to those years. In view of the significance of
the tax benefits accorded tenant-
71
stockholders of a corporation that qualifies under Section 216(b)(1) of the
Code, the likelihood that such a failure would be permitted to continue over a
period of years appears remote.
HAZARD INSURANCE
The master servicer will require each borrower to maintain a hazard
insurance policy providing for no less than the coverage of the standard form of
fire insurance policy with extended coverage customary for the type of mortgaged
property in the state where the property is located. This coverage will be in an
amount not less than the replacement value of the improvements or manufactured
home securing the loan or the principal balance owing on the loan, whichever is
less. All amounts collected by the master servicer under any hazard policy will
be deposited in the related security account, except for amounts to be applied
to the restoration or repair of the mortgaged property or released to the
borrower in accordance with the master servicer's normal servicing procedures.
In the event that the master servicer maintains a blanket policy insuring
against hazard losses on all the loans comprising part of a trust fund, it will
conclusively be deemed to have satisfied its obligation to maintain hazard
insurance. A blanket policy may contain a deductible clause, in which case the
master servicer will be required to deposit into the related security account
from its own funds the amounts which would have been deposited in the security
account but for the deductible clause. Any additional insurance coverage for
mortgaged properties with respect to a pool of Multifamily Loans will be
specified in the related prospectus supplement.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements or manufactured
home securing a loan by fire, lightning, explosion, smoke, windstorm and hail,
riot, strike and civil commotion, subject to the conditions and exclusions
particularized in each policy. Although the policies relating to the loans may
have been underwritten by different insurers under different state laws in
accordance with different applicable forms and therefore may not contain
identical terms and conditions, the basic policy terms are dictated by
respective state laws. In addition, most 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. The foregoing list is merely indicative of certain kinds of uninsured
risks and is not intended to be all-inclusive. If the mortgaged property
securing a loan is located in a federally designated special flood area at the
time of origination, the master servicer will require the borrower to obtain and
maintain flood insurance.
The hazard insurance policies covering mortgaged properties typically
contain a clause which have the effect of requiring the insured at all times to
carry insurance of a specified percentage - generally 80% to 90% - of the full
replacement value of the mortgaged property in order to recover the full amount
of any partial loss. If the insured's coverage falls below this specified
percentage, then the insurer's liability in the event of partial loss will not
exceed the larger of
o the actual cash value (generally defined as replacement cost at
the time and place of loss, less physical depreciation) of the
improvements damaged or destroyed, generally
72
defined to equal replacement cost at the time and place of the
loss less physical depreciation; and
o such proportion of the loss as the amount of insurance carried
bears to the specified percentage of the full replacement cost of
the improvements.
Since the amount of hazard insurance that the master servicer may cause
to be maintained on the improvements securing the loans will decline as the
principal balances owing on the loans decrease, and since improved real estate
generally has appreciated in value over time in the past, the effect of this
requirement may be that, in the event of a partial loss, hazard insurance
proceeds will be insufficient to restore the damaged property fully. If
specified in the related prospectus supplement, a special hazard insurance
policy will be obtained to insure against certain of the uninsured risks
described. See "Credit Enhancement--Special Hazard Insurance Policies" in this
prospectus.
The master servicer will not require that a standard hazard or flood
insurance policy be maintained on the cooperative dwelling relating to any
cooperative loan. Generally, the cooperative itself is responsible for
maintenance of hazard insurance for the property owned by the cooperative and
the tenant-stockholders of that cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a cooperative and the related
borrower on a cooperative loan do not maintain such insurance or do not maintain
adequate coverage or any insurance proceeds are not applied to the restoration
of damaged property, any damage to the borrower's cooperative dwelling or the
cooperative's building could significantly reduce the value of the collateral
securing the cooperative loan to the extent not covered by other credit support.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
Primary Mortgage Insurance Policies. To the extent specified in the
related prospectus supplement, the master servicer will maintain, or cause each
sub-servicer to maintain, in full force and effect, a primary mortgage insurance
policy with regard to each loan for which coverage is required. The master
servicer will not cancel or refuse to renew any primary mortgage insurance
policy in effect at the time of the initial issuance of a series of securities
that is required to be kept in force under the applicable agreement unless the
primary mortgage insurance policy that replaces the cancelled or nonrenewed
policy is maintained with an insurer whose claims-paying ability is sufficient
to maintain the current rating of the classes of securities of that series by
each rating agency named in the related prospectus supplement.
Although the terms and conditions of primary mortgage insurance vary,
the amount of a claim for benefits under a primary mortgage insurance policy
covering a loan will consist of the insured percentage of the unpaid principal
amount of the covered loan, accrued and unpaid interest thereon and
reimbursement of certain expenses, less the following amounts:
o all rents or other payments collected or received by the insured
other than the proceeds of hazard insurance that are derived from
or in any way related to the mortgaged property,
73
o hazard insurance proceeds in excess of the amount required to
restore the mortgaged property and which have not been applied to
the payment of the loan,
o amounts expended but not approved by the issuer of the related
primary mortgage insurance policy,
o claim payments previously made by the primary insurer, and
o unpaid premiums.
Primary mortgage insurance policies generally reimburse losses
sustained by reason of defaults in payments by borrowers. Primary mortgage
insurance policies do not insure against, and exclude from coverage, a loss
sustained by reason of a default arising from or involving the following
matters, among others:
o fraud or negligence in origination or servicing of the loan,
including misrepresentation by the originator, borrower or other
persons involved in the origination of the loan,
o failure to construct the related mortgaged property in accordance
with specified plans,
o physical damage to the mortgaged property and
o lack of approval by the primary mortgage insurance policy insurer
of the master servicer or sub-servicer to act as servicer of the
loan.
Recoveries Under a Primary Mortgage Insurance Policy. As conditions
precedent to the filing or payment of a claim under a primary mortgage insurance
policy covering a loan, the insured will be required
o to advance or discharge all hazard insurance policy premiums;
o to advance
o real estate property taxes, o all expenses required to
maintain the related mortgaged property in at least as good
a condition as existed at the effective date of the policy,
ordinary wear and tear excepted,
o mortgaged property sales expenses,
o any outstanding liens on the mortgaged property (as defined
in the policy) and
o foreclosure costs, including court costs and reasonable
attorneys' fees,
o in each case as necessary and approved in advance by the
primary mortgage insurance policy insurer;
74
o in the event of any physical loss or damage to the mortgaged
property, to have the mortgaged property restored and repaired to
at least as good a condition as existed at the effective date of
the policy, ordinary wear and tear excepted; and
o to tender to the primary mortgage insurance policy carrier good
and merchantable title to and possession of the mortgaged
property.
In those cases in which a loan is serviced by a sub-servicer, the
sub-servicer, on behalf of itself, the trustee and securityholders, will present
claims to the primary mortgage insurance policy carrier, and all collections
under the policy will be deposited in the sub-servicing account. In all other
cases, the master servicer, on behalf of itself, the trustee and the
securityholders, will present claims to the carrier of each primary mortgage
insurance policy and will take such reasonable steps as are necessary to receive
payment or to permit recovery under the policy with respect to defaulted loans.
As set forth above, all collections by or on behalf of the master servicer under
any primary mortgage insurance policy and, when the mortgaged property has not
been restored, the hazard insurance policy are to be deposited in the security
account, subject to withdrawal as previously described.
If the mortgaged property securing a defaulted loan is damaged and any
proceeds from the related hazard insurance policy are insufficient to restore
the damaged property to a condition sufficient to permit recovery under any
related primary mortgage insurance policy, the master servicer is not required
to expend its own funds to restore the damaged property unless it determines
that
o the restoration will increase the proceeds to securityholders
upon liquidation of the loan after reimbursement of the master
servicer for its expenses, and
o the master servicer will be able to recover its expenses from
related Insurance Proceeds or Liquidation Proceeds.
If recovery on a defaulted loan is not available under the primary
mortgage insurance policy for the reasons set forth in the preceding paragraph,
or if the defaulted loan is not covered by a primary mortgage insurance policy,
the master servicer will be obligated to follow such normal practices and
procedures as it deems necessary or advisable to realize upon the defaulted
loan. If the proceeds of any liquidation of the related mortgaged property are
less than the principal balance of the loan plus accrued interest that is
payable to securityholders, the trust fund will realize a loss in the amount of
that difference plus the amount of expenses that it incurred in connection with
the liquidation and that are reimbursable under the agreement. In the unlikely
event that proceedings result in a total recovery which, after reimbursement to
the master servicer of its expenses, is in excess of the principal balance of
the defaulted loan plus accrued interest that is payable to securityholders, the
master servicer will be entitled to withdraw or retain from the security account
amounts representing its normal servicing compensation with respect to that loan
and, unless otherwise specified in the related prospectus supplement, amounts
representing the balance of the excess amount, exclusive of any amount required
by law to be forwarded to the related borrower , as additional servicing
compensation.
75
If the master servicer or its designee recovers Insurance Proceeds
which, when added to any related Liquidation Proceeds and after deduction of
certain expenses reimbursable to the master servicer, exceed the principal
balance of the related loan plus accrued interest that is payable to
securityholders, the master servicer will be entitled to withdraw or retain from
the security account amounts representing its normal servicing compensation with
respect to that loan. In the event that the master servicer has expended its own
funds to restore the damaged mortgaged property and those funds have not been
reimbursed under the related hazard insurance policy, the master servicer will
be entitled to withdraw from the security account, out of related Liquidation
Proceeds or Insurance Proceeds, an amount equal to the expenses that it
incurred, in which event the trust fund may realize a loss up to the amount of
those expenses. Since Insurance Proceeds cannot exceed deficiency claims and
certain expenses incurred by the master servicer, no payment or recovery will
result in a recovery to the trust fund that exceeds the principal balance of the
defaulted loan together with accrued interest. See "Credit Enhancement" in this
prospectus supplement.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The master servicer's primary servicing compensation with respect to a
series of securities will come from the payment to it each month, out of each
interest payment on a loan, of an amount equal to the annual percentage
specified in the related prospectus supplement of the outstanding principal
balance of that loan. Since the master servicer's primary compensation is a
percentage of the outstanding principal balance of each mortgage loan, this
amount will decrease as the mortgage loans amortize. In addition to this primary
servicing compensation, the master servicer or the sub-servicers will be
entitled to retain all assumption fees and late payment charges to the extent
collected from borrowers and, if so provided in the related prospectus
supplement, any prepayment charges and any interest or other income which may be
earned on funds held in the security account or any sub-servicing account.
Unless otherwise specified in the related prospectus supplement, any
sub-servicer will receive a portion of the master servicer's primary
compensation as its sub-servicing compensation.
Unless otherwise specified in the related prospectus supplement, the
master servicer will pay from its servicing compensation, in addition to amounts
payable to any sub-servicer, certain expenses incurred in connection with its
servicing of the loans, including, without limitation
o payment of any premium for any insurance policy, guaranty, surety
or other form of credit enhancement as specified in the related
prospectus supplement;
o payment of the fees and disbursements of the trustee and
independent accountants;
o payment of expenses incurred in connection with distributions and
reports to securityholders; and
o payment of any other expenses described in the related prospectus
supplement.
76
EVIDENCE AS TO COMPLIANCE
Each operative agreement will provide that a firm of independent public
accountants will furnish a statement to the trustee, on or before a specified
date in each year, to the effect that, on the basis of the examination by the
firm conducted substantially in compliance with the Uniform Single Audit Program
for Mortgage Bankers or the Audit Program for Mortgages Serviced for Freddie
Mac, the servicing by or on behalf of the master servicer of loans, the Agency
Securities or the Private Label Securities, under agreements substantially
similar to one another (including the governing agreement), was conducted in
compliance with those agreements except for any significant exceptions or errors
in records that, in the opinion of the firm, the Uniform Single Audit Program
for Mortgage Bankers or the Audit Program for Mortgages Serviced by Freddie Mac
requires it to report. In rendering this statement the accounting firm may rely,
as to matters relating to the direct servicing of mortgage loans, Agency
Securities or Private Label Securities by sub-servicers, upon comparable
statements of firms of independent public accountants rendered within one year
with respect to the sub-servicers for examinations conducted substantially in
compliance with the Uniform Single Audit Program for Mortgage Bankers or the
Audit Program for Mortgages Serviced for Freddie Mac.
Each operative agreement will also provide for delivery to the related
trustee, on or before a specified date in each year, of an annual statement
signed by two officers of the master servicer to the effect that the master
servicer has fulfilled its obligations under the agreement throughout the
preceding year.
Copies of the annual accountants' statement and the statement of
officers of the master servicer may be obtained by securityholders of the
related series without charge upon written request to the master servicer at the
address set forth in the related prospectus supplement.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE DEPOSITORS
The master servicer under each operative agreement will be named in the
related prospectus supplement. The entity serving as master servicer may have
normal business relationships with the depositor or the depositor's affiliates.
Each operative agreement will provide that the master servicer may not
resign from its obligations and duties under the agreement except (i) upon a
determination that it is no longer permissible to perform them under applicable
law or (ii) if so provided in the related operative agreement, a determination
by the master servicer that it will no longer engage in the business of
servicing mortgage loans. In no event will the master servicer's resignation
become effective until the trustee or a successor servicer has assumed the
master servicer's obligations and duties under the agreement.
Each operative agreement will further provide that none of the master
servicer, the depositor or any director, officer, employee or agent of the
master servicer or of the depositor will be under any liability to the related
trust fund or the securityholders for any action taken, or for refraining from
the taking of any action, in good faith pursuant to the agreement, or for errors
in judgment. However, none of the master servicer, the depositor or any
director, officer, employee or agent of the master servicer or of the depositor
will be protected against any liability
77
which would otherwise be imposed by reason of willful misfeasance, bad faith or
negligence in the performance of duties under the agreement or by reason of
reckless disregard of obligations and duties under the agreement. Each operative
agreement will further provide that the master servicer, the depositor and any
director, officer, employee or agent of the master servicer or of the depositor
will be entitled to indemnification by the related trust fund and will be held
harmless against any loss, liability or expense incurred in connection with (i)
any legal action relating to the agreement or the securities or (ii) a breach of
a representation or warranty regarding the loan or loans, other than
o any loss, liability or expense related to any specific loan in
the trust fund or the loans in general except for any loss,
liability or expense otherwise reimbursable under the agreement,
and
o 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
obligations and duties under the agreement.
In addition to the foregoing, if so provided in the agreement, the
master servicer, the depositor and any director, officer, employee or agent of
the master servicer or of the depositor may be entitled to indemnification by
the related trust fund and may be held harmless against any loss, liability or
expense in connection with any actions taken under the agreement.
In addition, each operative agreement will provide that neither the
master servicer nor the depositor will be under any obligation to appear in,
prosecute or defend any legal action which is not incidental to its
responsibilities under the agreement and which, in its opinion, may involve it
in any expense or liability. However, the master servicer or the depositor may,
in its discretion, undertake any action which it may deem necessary or desirable
with respect to the agreement and the rights and duties of the parties and the
interests of the securityholders. In that event, the legal expenses and costs of
the action and any resulting liability will be expenses, costs and liabilities
of the trust fund, and the master servicer or the depositor, as the case may be,
will be entitled to reimbursement from funds otherwise distributable to
securityholders.
Any entity into which the master servicer may be merged or
consolidated, or any entity resulting from any merger or consolidation to which
the master servicer is a party, or any entity succeeding to the business of the
master servicer, will be the successor of the master servicer under each
agreement, provided that the successor entity is qualified to sell loans to, and
service loans on behalf of, Fannie Mae or Freddie Mac and that the merger,
consolidation or succession does not adversely affect the then current rating of
the securities rated by each rating agency named in the related prospectus
supplement.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
Pooling and Servicing Agreement; Servicing Agreement. Unless otherwise
specified in the related prospectus supplement, the following will be deemed
"events of default" under each agreement:
78
o any failure by the master servicer to distribute to security
holders of any class any required payment - other than an advance
- which failure continues unremedied for five business days after
the giving of written notice to the master servicer by the
trustee or the depositor, or to the master servicer, the
depositor and the trustee by the holders of securities of that
class evidencing not less than 25% of the aggregate percentage
interests evidenced by that class;
o any failure by the master servicer to make an advance as required
under the agreement, unless cured as specified in the agreement;
o any failure by the master servicer duly to observe or perform in
any material respect any of its other covenants or agreements in
the agreement, which failure continues unremedied for a specified
number of days after the giving of written notice of the failure
to the master servicer by the trustee or the depositor, or to the
master servicer, the depositor and the trustee by the holders of
securities of any class evidencing not less than 25% of the
aggregate percentage interests constituting that class; and
o events of insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings and certain actions by or
on behalf of the master servicer indicating its insolvency,
reorganization or inability to pay its obligations.
If specified in the related prospectus supplement, the agreement will
permit the trustee to sell the assets of the trust fund in the event that
payments are insufficient to make the payments required under the agreement. The
assets of the trust fund will be sold only under the circumstances and in the
manner specified in the related prospectus supplement.
So long as an event of default under the related agreement remains
unremedied, the depositor or the trustee may, and, at the direction of holders
of securities of any class evidencing not less than 51% of the aggregate
percentage interests constituting that class and under such other circumstances
as may be specified in the agreement, the trustee shall, terminate all of the
rights and obligations of the master servicer relating to the trust fund and in
and to the related loans. Thereupon the trustee will succeed to all of the
responsibilities, duties and liabilities of the master servicer under the
agreement, including, if specified in the related prospectus supplement, the
obligation to make advances, and the trustee will be entitled to similar
compensation arrangements. In the event that the trustee is unwilling or unable
to act in this way, it may appoint, or petition a court of competent
jurisdiction to appoint, a loan servicing institution with a net worth of at
least $10,000,000 to act as successor to the master servicer under the
agreement. Pending the appointment, the trustee is obligated to act in this
capacity. The trustee and any successor master servicer may agree upon the
servicing compensation to be paid, which in no event may be greater than the
compensation payable to the master servicer under the agreement.
No securityholder, solely by virtue of its status as a securityholder,
will have any right under any agreement to institute any proceeding with respect
to that agreement, unless
o the holder has previously given to the trustee written notice of
default;
79
o the holders of securities of any class evidencing not less than
25% of the aggregate percentage interests constituting that class
have made written request upon the trustee to institute the
proceeding in its own name as trustee and have offered a
reasonable indemnity to the trustee; and
o the trustee for 60 days has neglected or refused to institute any
such proceeding.
Indenture. Unless otherwise specified in the related prospectus
supplement, the following will be deemed "events of default" under the indenture
for each series of notes:
o failure to pay for five days or more any principal or interest on
any note of that series;
o failure by the depositor or the trust to perform any other
covenant in the indenture, which failure continues unremedied for
30 days after notice is given in accordance with the procedures
described in the related prospectus supplement;
o the material breach of any representation or warranty made by the
depositor or the trust in the indenture or in any document
delivered under the indenture, which breach continues uncured for
30 days after notice is given in accordance with the procedures
described in the related prospectus supplement;
o events of bankruptcy insolvency, receivership or liquidation of
the depositor in the trust; or
o any other event of default specified in the indenture.
If an event of default with respect to the notes of a series (other
than principal only notes) occurs and is continuing, either the trustee or the
holders of a majority of the then aggregate outstanding amount of the notes of
that series may declare the principal amount of all the notes of that series to
be due and payable immediately. In the case of principal only notes, the portion
of the principal amount necessary to make such a declaration will be specified
in the related prospective supplement. This declaration may, under certain
circumstances, be rescinded and annulled by the holders of more than 50% of the
percentage ownership interest of the notes of that series.
If, following an event of default with respect to any series of notes,
the notes of that series have been declared to be due and payable, the trustee
may, in its discretion, notwithstanding the acceleration, elect to maintain
possession of the collateral securing the notes of that series and to continue
to apply distributions on the collateral as if there had been no declaration of
acceleration so long as the collateral continues to provide sufficient funds for
the payment of principal and interest on the notes as they would have become due
if there had not been a declaration. In addition, the trustee may not sell or
otherwise liquidate the collateral securing the notes of a series following an
event of default, unless one of the following conditions precedent has occurred:
o the holders of 100% of the percentage ownership interest in the
related notes consent to the sale or liquidation;
80
o the proceeds of the sale or liquidation are sufficient to pay the
full amount of principal and accrued interest, due and unpaid, on
the related notes at the date of the sale or liquidation; or
o the trustee determines that the collateral would not be
sufficient on an ongoing basis to make all payments on the
related notes as they would have become due if the notes had not
been declared due and payable, and the trustee obtains the
consent of the holders of 66% of the percentage ownership
interest of each class of the related notes.
Unless otherwise specified in the related prospectus supplement, in the
event the principal of the notes of a series is declared due and payable as
described above, the holders of any of those 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 unamortized discount.
Subject to the provisions of the indenture relating to the duties of
the trustee, in case an event of default shall occur and be continuing with
respect to a series of notes, the trustee shall be under no obligation to
exercise any of the rights or powers under the indenture at the request or
direction of any of the holder of the related notes, unless the holders offer to
the trustee satisfactory security or indemnity against the trustee's costs,
expenses and liabilities which might be incurred in complying with their request
or direction. Subject to the indemnification provisions and certain limitations
contained in the indenture, the holders of a majority of the then aggregate
outstanding amount of the related notes of the series shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the trustee or exercising any trust or power conferred on the
trustee with respect to the related notes, and holders of a majority of the then
aggregate outstanding amount of the related notes may, in certain cases, waive
any default other than a default in the payment of principal or interest or a
default in respect of a covenant or provision of the indenture that cannot be
modified without the waiver or consent of all the holders of the affected notes.
AMENDMENT
Unless otherwise specified in the related prospectus supplement, each
operative agreement may be amended by the depositor, the master servicer and the
trustee, without the consent of any of the securityholders, for the following
purposes:
o to cure any ambiguity,
o to correct or supplement any provision in the agreement which may
be defective or inconsistent with any other provision, or
o to make any other revisions with respect to matters or questions
arising under the agreement which are not inconsistent with its
other provisions.
In no event, however, shall any amendment adversely affect in any
material respect the interests of any securityholder as evidenced by either (i)
an opinion of counsel or (ii) confirmation by the rating agencies that such
amendment will not result in the downgrading of
81
the securities. No amendment shall be deemed to adversely affect in any material
respect the interests of any securityholder who shall have consented thereto,
and no opinion of counsel or written notice from the rating agencies shall be
required to address the effect of any such amendment on any such consenting
securityholder. In addition, an agreement may be amended without the consent of
any of the securityholders to change the manner in which the security account is
maintained, so long as the amendment does not adversely affect the then current
ratings of the securities rated by each rating agency named in the prospectus
supplement. In addition, if a REMIC election is made with respect to a trust
fund, the related agreement may be amended 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 as a REMIC, but the trustee shall have first received an
opinion of counsel to the effect that the action is necessary or helpful to
maintain the REMIC qualification.
Unless otherwise specified in the related prospectus supplement, each
operative agreement may also be amended by the depositor, the master servicer
and the trustee with consent of holders of securities evidencing not less than
66% of the aggregate percentage ownership interests 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 of modifying in any
manner the rights of the holders of the related securities. In no event,
however, shall any amendment
o reduce in any manner the amount of, or delay the timing of,
payments received on loans which are required to be distributed
on any security without the consent of the holder of that
security, or
o reduce the percentage of the securities of any class the holders
of which are required to consent to any amendment without the
consent of the holders of all securities of that class then
outstanding.
If a REMIC election is made with respect to a trust fund, the trustee
will not be entitled to consent to an amendment to the agreement without having
first received an opinion of counsel to the effect that the amendment will not
cause the trust fund to fail to qualify as a REMIC.
TERMINATION; OPTIONAL TERMINATION; CALLS
Pooling and Servicing Agreement; Trust Agreement. Unless otherwise
specified in the related prospectus supplement, the obligations created by the
pooling and servicing agreement and trust agreement for the related series of
securities will terminate upon the payment to the securityholders of all amounts
held in the security account or held by the master servicer, and required to be
paid to the securityholders under the agreement, following the later to occur of
the following:
o the final payment or other liquidation of the last of the assets
of the trust fund subject to the agreement or the disposition of
all property acquired upon foreclosure of any assets remaining in
the trust fund, and
82
o the purchase from the trust fund by the master servicer, or such
other party as may be specified in the related prospectus
supplement, of all of the remaining trust fund assets and all
property acquired in respect of those assets.
See "Material Federal Income Tax Consequences" in this prospectus.
Unless otherwise specified in the related prospectus supplement, any
purchase of trust fund assets and property acquired in respect of trust fund
assets will be made at the option of the related master servicer or, if
applicable, another designated party, at a price, and in accordance with the
procedures, specified in the related prospectus supplement. The exercise of this
right will effect early retirement of the securities of that series. However,
this right can be exercised only at the times and upon the conditions specified
in the related prospectus supplement. If a REMIC election has been made with
respect to the trust fund, any repurchase pursuant to the second bullet point in
the immediately preceding paragraph will be made only in connection with a
"qualified liquidation" of the REMIC within the meaning of Section 860F(a)(4) of
the Internal Revenue Code.
Indenture. The indenture will be discharged with respect to a series of
notes (except with respect to certain continuing rights specified in the
indenture) upon the delivery to the trustee for cancellation of all the notes of
that series or, with certain limitations, upon deposit with the trustee of funds
sufficient for the payment in full of all of the notes of that series.
If specified for 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, registering the transfer or exchange
notes, replacing stolen, lost or mutilated notes, maintaining paying agencies
and holding monies for payment in trust) upon the deposit with the trustee, in
trust, of money and/or direct obligations of or obligations guaranteed by the
United States which, through the payment of interest and principal in accordance
with their terms, will provide money in an amount sufficient to pay the
principal and each installment of interest on the related notes on the last
scheduled distribution date for the notes and any installment of interest on the
notes in accordance with the terms of the indenture and the notes of that
series. In the event of any such defeasance and discharge of a series of notes,
holders of the related notes would be able to look only to such money and/or
direct obligations for payment of principal and interest, if any, on their notes
until maturity.
Calls. One or more classes of securities may be subject to a mandatory
or optional call at the times and subject to the conditions specified in the
related prospectus supplement. In the case of a mandatory call or in the event
an optional call is exercised with respect to one or more classes of securities,
holders of each affected class of securities will receive the outstanding
principal balance of their securities together with accrued and unpaid interest
at the applicable pass-through rate, subject to the terms specified in the
related prospectus supplement.
83
THE TRUSTEE
The trustee under each agreement will be named in the related
prospectus supplement. The commercial bank or trust company serving as trustee
may have normal banking relationships with the depositor, the master servicer
and any of their respective affiliates.
MATERIAL LEGAL ASPECTS OF THE LOANS
The following discussion contains general summaries of material legal
matters relating to the loans. 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 security
for the loans may be situated. The summaries are qualified in their entirety by
reference to the applicable laws of the states in which loans may be originated.
GENERAL
Single Family Loans, Multifamily Loans and Home Equity Loans. The loans
may be secured by deeds of trust, mortgages, security deeds or deeds to secure
debt, depending upon the prevailing practice in the state in which the property
subject to the loan is located. A mortgage creates a lien upon the real property
encumbered by the mortgage. The mortgage lien generally is not prior to the lien
for real estate taxes and assessments. Priority between mortgages depends on
their terms and generally on the order of recording with a state or county
office. There are two parties to a mortgage: the mortgagor, who is the borrower
and owner of the mortgaged property, and the mortgagee, who is the lender. Under
the mortgage instrument, the mortgagor delivers to the mortgagee a note or bond
and the mortgage. Although a deed of trust is similar to a mortgage, a deed of
trust formally has three parties: the borrower-property owner called the trustor
(similar to a mortgagor), a lender (similar to a mortgagee) called the
beneficiary, and a third-party grantee called the trustee. Under a deed of
trust, the borrower grants the property, irrevocably until the debt is paid, in
trust, generally with a power of sale, to the trustee to secure payment of the
obligation. A security deed and a deed to secure debt are special types of deeds
which indicate on their face that they are granted to secure an underlying debt.
By executing a security deed or deed to secure debt, the grantor conveys to the
grantee title to, as opposed to merely creating a lien upon, the subject
property until such time as the underlying debt is repaid. The trustee's
authority under a deed of trust, the mortgagee's authority under a mortgage and
the grantee's authority under a security deed or deed to secure debt are
governed by law and, with respect to some deeds of trust, the directions of the
beneficiary.
Cooperative Loans. Certain of the loans may be cooperative loans. The
cooperative owns all the real property that comprises the related project,
including the land, separate dwelling units and all common areas. The
cooperative is directly responsible for project management and, in most cases,
payment of real estate taxes and hazard and liability insurance. If, as is
generally the case, there is a blanket mortgage on the cooperative and/or
underlying land, the cooperative, as project mortgagor, is also responsible for
meeting these mortgage obligations. A blanket mortgage is ordinarily incurred by
the cooperative in connection with the construction or purchase of the
cooperative's apartment building. The interest of the occupant under proprietary
leases or occupancy agreements to which the cooperative is a party are generally
subordinate to
84
the interest of the holder of the blanket mortgage in that building. If the
cooperative is unable to meet the payment obligations arising under its blanket
mortgage, the mortgagee holding the blanket mortgage could foreclose on that
mortgage and terminate all subordinate proprietary leases and occupancy
agreements. In addition, the blanket mortgage on a cooperative may provide
financing in the form of a mortgage that does not fully amortize with a
significant portion of principal being due in one lump sum at final maturity.
The inability of the cooperative to refinance this mortgage and its consequent
inability to make such final payment could lead to foreclosure by the mortgagee
providing the financing. A foreclosure in either event by the holder of the
blanket mortgage could eliminate or significantly diminish the value of any
collateral held by the lender who financed the purchase by an individual
tenant-stockholder of cooperative shares or, in the case of a trust fund
including cooperative loans, the collateral securing the cooperative loans.
A cooperative is owned by tenant-stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive proprietary
leases or occupancy agreements which confer exclusive rights to occupy specific
units. Generally, a tenant-stockholder of a cooperative must make a monthly
payment to the cooperative representing such tenant-stockholder's pro rata share
of the cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a cooperative and the accompanying rights are financed through a
cooperative share loan evidenced by a promissory note and secured by a security
interest in the occupancy agreement or proprietary lease and in the related
cooperative shares. The lender takes possession of the share certificate and a
counterpart of the proprietary lease or occupancy agreement and a financing
statement covering the proprietary lease or occupancy agreement and the
cooperative shares is filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or against the
tenant-stockholder as an individual as provided in the security agreement
covering the assignment of the proprietary lease or occupancy agreement and the
pledge of cooperative shares.
Manufactured Housing Contracts. Each Manufactured Housing Contract
evidences both
o the obligation of the borrower to repay the loan it represents,
and
o the grant of a security interest in a manufactured home to secure
repayment of the loan.
The Manufactured Housing Contracts generally are "chattel paper" as
defined in the Uniform Commercial Code in effect in the states in which the
manufactured homes initially were registered. Pursuant to the UCC, the rules
governing the sale of chattel paper are similar to those governing the
perfection of a security interest in chattel paper. Under the related pooling
and servicing agreement, the depositor will transfer physical possession of the
Manufactured Housing Contracts to the trustee or its custodian. In addition the
depositor will file UCC-1 financing statements in the appropriate states to give
notice of the trustee's ownership of the Manufactured Housing Contracts. Under
the laws of most states, manufactured housing constitutes personal property and
is subject to the motor vehicle registration laws of the state or
85
other jurisdiction in which the unit is located. In a few states, where
certificates of title are not required for manufactured homes, security
interests are perfected by the filing of a financing statement under Article 9
of the UCC which has been adopted by all states. The certificate of title laws
adopted by the majority of states provide that ownership of motor vehicles and
manufactured housing shall be evidenced by a certificate of title generally
issued by the motor vehicles department of the state. In states which have
enacted certificate of title laws, a security interest in a unit of manufactured
housing, so long as it is not attached to land in so permanent a fashion as to
become a fixture, is generally perfected by the recording of the interest on the
certificate of title to the unit in the appropriate motor vehicle registration
office or by delivery of the required documents and payment of a fee to that
office, depending on state law.
Unless otherwise specified in the related prospectus supplement, the
master servicer will be required to effect such notation or delivery of the
required documents and fees and to obtain possession of the certificate of
title, as appropriate under the laws of the state in which any manufactured home
is registered. If the master servicer fails to effect such notation or delivery,
due to clerical errors or otherwise, or files the security interest under the
wrong law (for example, under a motor vehicle title statute rather than under
the UCC, in a few states), the trustee may not have a first priority security
interest in the manufactured home securing the affected Manufactured Housing
Contract. As manufactured homes have become larger and have often been attached
to their sites without any apparent intention to move them, courts in many
states have held that manufactured homes may, under certain circumstances,
become subject to real estate title and recording laws. As a result, a security
interest in a manufactured home could be rendered subordinate to the interests
of other parties claiming an interest in the home under applicable state real
estate law. In order to perfect a security interest in a manufactured home under
real estate laws, the holder of the security interest must file either a
"fixture filing" under the provisions of the UCC or a real estate mortgage under
the real estate laws of the state where the manufactured home is located. These
filings must be made in the real estate records office of the county where the
manufactured home is located. Generally, Manufactured Housing Contracts will
contain provisions prohibiting the borrower from permanently attaching the
manufactured home to its site. So long as the borrower does not violate this
agreement, a security interest in the manufactured home will be governed by the
certificate of title laws or the UCC, and the notation of the security interest
on the certificate of title or the filing of a UCC financing statement will be
effective to maintain the priority of the security interest in the manufactured
home. If, however, a manufactured home is permanently attached to its site,
other parties could obtain an interest in the manufactured home which is prior
to the security interest originally retained by the seller and transferred to
the depositor.
The depositor will assign to the trustee, on behalf of the
securityholders, a security interest in the manufactured homes. Unless otherwise
specified in the related prospectus supplement, none of the depositor, the
master servicer or the trustee will amend the certificates of title to identify
the trustee, on behalf of the securityholders, as the new secured party and,
accordingly, the depositor or the seller will continue to be named as the
secured party on the certificates of title relating to the manufactured homes.
In most states, the assignment is an effective conveyance of the security
interest without amendment of any lien noted on the related certificate of title
and the new secured party succeeds to the depositor's rights as the secured
party. However, in some states there exists a risk that, in the absence of an
amendment to the
86
certificate of title, assignment of the security interest might not be held
effective against creditors of the depositor or seller.
In the absence of fraud, forgery or permanent affixation of the
manufactured home to its site by the home owner, or administrative error by
state recording officials, the notation of the lien of the trustee on the
certificate of title or delivery of the required documents and fees will be
sufficient to protect the trustee against the rights of subsequent purchasers of
the manufactured home or subsequent lenders who take a security interest in the
manufactured home. In the case of any manufactured home as to which the security
interest assigned to the depositor and the trustee is not perfected, the
security interest would be subordinate to, among others, subsequent purchasers
for value of the manufactured home and holders of perfected security interests
in the home. There also exists a risk that, in not identifying the trustee, on
behalf of the securityholders, as the new secured party on the certificate of
title, the security interest of the trustee could be released through fraud or
negligence.
If the owner of a manufactured home moves it to a state other than the
state in which it initially is registered, the perfected security interest in
the manufactured home under the laws of most states would continue for four
months after relocation and thereafter until the owner re-registers the
manufactured home in the new state. If the owner were to relocate a manufactured
home to another state and re-register the manufactured home in the new state,
and if steps are not taken to re-perfect the trustee's security interest in the
new 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 trustee 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, the master servicer would receive notice of surrender if
the security interest in the manufactured home is noted on the certificate of
title. Accordingly, the trustee would have the opportunity to re-perfect its
security interest in the manufactured home in the new state. In states which do
not require a certificate of title for registration of a manufactured home,
re-registration could defeat perfection. Similarly, when a borrower under a
Manufactured Housing Contract sells a manufactured home, the lender must
surrender possession of the certificate of title or it will receive notice as a
result of its lien noted thereon and accordingly will have an opportunity to
require satisfaction of the related Manufactured Housing Contract before the
lien is released. The master servicer will be obligated, at its own expense, to
take all steps necessary to maintain perfection of security interests in the
manufactured homes.
Under the laws of most states, liens for repairs performed on a
manufactured home take priority even over a perfected security interest. The
depositor will obtain the representation of the seller that it has no knowledge
of any repair liens with respect to any manufactured home securing a
Manufactured Housing Contract. However, repair liens could arise at any time
during the term of a Manufactured Housing Contract. No notice will be given to
the trustee or securityholders in the event a repair lien arises.
FORECLOSURE
Single Family Loans, Multifamily Loans and Home Equity Loans.
Foreclosure of a deed of trust is generally accomplished by a non-judicial sale
under a specific provision in the deed of
87
trust which authorizes the trustee to sell the mortgaged property at public
auction upon any default by the borrower under the terms of the note or deed of
trust. In some states, such as California, the trustee must record a notice of
default and send a copy to the borrower-trustor, to any person who has recorded
a request for a copy of any notice of default and notice of sale, to any
successor in interest to the borrower-trustor, to the beneficiary of any junior
deed of trust and to certain other persons. Before such non-judicial sale takes
place, typically a notice of sale must be posted in a public place and published
during a specific period of time in one or more newspapers, posted on the
property and sent to parties having an interest of record in the property.
Foreclosure of a mortgage is generally accomplished by judicial action.
The action is initiated by the service of legal pleadings upon all parties
having an interest in the mortgaged property. Delays in completion of the
foreclosure may occasionally result from difficulties in locating necessary
parties. Judicial foreclosure proceedings are often not contested by any of the
parties. When the mortgagee's right to foreclosure is contested, the legal
proceedings necessary to resolve the issue can be time consuming. After the
completion of a judicial foreclosure proceeding, the court generally issues a
judgment of foreclosure and appoints a referee or other court officer to conduct
the sale of the property. In general, the borrower, or any other person having a
junior encumbrance on the real estate, may, during a statutorily prescribed
reinstatement period, cure a monetary default by paying the entire amount in
arrears plus other designated costs and expenses incurred in enforcing the
obligation. Generally, state law controls the amount of foreclosure expenses and
costs, including attorneys' fees, which may be recovered by a lender. After the
reinstatement period has expired without the default having been cured, the
borrower or junior lienholder no longer has the right to reinstate the loan and
must pay the loan in full to prevent the scheduled foreclosure sale. If the deed
of trust is not reinstated, a notice of sale must be posted in a public place
and, in most states, published for a specific period of time in one or more
newspapers. In addition, some state laws require that a copy of the notice of
sale be posted on the property and sent to all parties having an interest in the
real property.
Although foreclosure sales are typically public sales, frequently no
third-party purchaser bids in excess of the lender's lien because of the
difficulty of determining the exact status of title to the property, the
possible deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the trustee
or referee for an amount equal to the principal amount outstanding under the
loan plus accrued and unpaid interest and the expenses of foreclosure.
Thereafter, the lender will assume the burden of ownership, including obtaining
hazard insurance and making such repairs at its own expense as are necessary to
render the property suitable for sale. The lender will commonly obtain the
services of a real estate broker and pay the broker's commission in connection
with the sale of the property. Depending upon market conditions, the ultimate
proceeds of the sale of the property may not equal the lender's investment in
the property.
When the beneficiary under a junior mortgage or deed of trust cures the
default on the related senior mortgage or reinstates or redeems the senior
mortgage by paying it in full, the amount paid by the beneficiary to cure,
reinstate or redeem the senior mortgage becomes part of the indebtedness secured
by the junior mortgage or deed of trust. See "--Junior Mortgages, Rights of
Senior Mortgages" below.
88
Cooperative Loans. Cooperative shares owned by a tenant-stockholder and
pledged to a lender are, in almost all cases, subject to restrictions on
transfer as set forth in the cooperative's articles of incorporation and
by-laws, as well as in the proprietary lease or occupancy agreement, and may be
cancelled by the cooperative if the tenant-stockholder fails to pay rent or
other obligations or charges owed, including mechanics' liens against the
cooperative apartment building incurred by such tenant-stockholder. The
proprietary lease or occupancy agreement generally permits the cooperative to
terminate such lease or agreement in the event an obligor fails to make payments
or defaults in the performance of covenants required thereunder. Typically, the
lender and the cooperative enter into a recognition agreement which establishes
the rights and obligations of both parties in the event of a default by the
tenant-stockholder on its obligations under the proprietary lease or occupancy
agreement. A default by the tenant-stockholder under the proprietary lease or
occupancy agreement will usually constitute a default under the security
agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that
the tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides, that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds from the sale of the cooperative apartment,
subject, however, to the cooperative's right to sums due under the proprietary
lease or occupancy agreement. The total amount owed to the cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the cooperative loan and accrued and unpaid interest.
Recognition agreements also provide that, in the event of a foreclosure
on a cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease. Generally, lenders are
not limited in any rights they may have to dispossess tenant-stockholders.
In some states, foreclosure on the cooperative shares is accomplished
by a sale in accordance with the provisions of Article 9 of the UCC and the
security agreement relating to those shares. Article 9 of the UCC requires that
a sale be conducted in a "commercially reasonable" manner. Whether a foreclosure
sale has been conducted in a "commercially reasonable" manner will depend on the
facts in each case. In determining commercial reasonableness, a court will look
to the notice given the debtor and the method, manner, time, place and terms of
the foreclosure.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the cooperative to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account for the surplus to subordinate lenders or the
tenant-stockholder as provided in the UCC. Conversely, if a portion of the
indebtedness remains unpaid, the tenant-stockholder is generally responsible for
the deficiency. See "--Anti-Deficiency Legislation and Other Limitations on
Lenders" below.
89
In the case of foreclosure on a building which was converted from a
rental building to a building owned by a cooperative under a non-eviction plan,
some states require that a purchaser at a foreclosure sale take the property
subject to rent control and rent stabilization laws which apply to certain
tenants who elected to remain in the building but who did not purchase shares in
the cooperative when the building was so converted.
REPOSSESSION OF MANUFACTURED HOMES
Repossession of manufactured housing is governed by state law. A number
of states have enacted legislation that requires that the debtor be given an
opportunity to cure a monetary default (typically 30 days to bring the account
current) before repossession can commence. So long as a manufactured home has
not become attached to real estate in such way that it may be treated as a part
of the real estate under applicable state law, repossession in the event of a
default by the obligor will generally be governed by the UCC. Article 9 of the
UCC provides the statutory framework for the repossession of manufactured
housing. While the UCC as adopted by the various states may vary in certain
particulars, the general repossession procedure is discussed below.
Because manufactured homes generally depreciate in value, it is
unlikely that repossession and resale of a manufactured home will result in the
full recovery of the outstanding principal and unpaid interest on the related
defaulted Manufactured Housing Contract.
Except in those states where the debtor must receive notice of the
right to cure a default, repossession can commence immediately upon default
without prior notice. Repossession may be effected either through self-help
(peaceable retaking without court order), voluntary repossession or through
judicial process (repossession pursuant to court-issued writ of replevin). The
self-help and/or voluntary repossession methods, which are more commonly
employed, are accomplished simply by retaking possession of the manufactured
home. In cases in which the debtor objects or raises a defense to repossession,
a court order must be obtained from the appropriate state court, and the
manufactured home must then be repossessed in accordance with that order.
Whether the method employed is self-help, voluntary repossession or judicial
repossession, the repossession can be accomplished either by an actual physical
removal of the manufactured home to a secure location for refurbishment and
resale or by removing the occupants and their belongings from the manufactured
home and maintaining possession of the manufactured home on the location where
the occupants were residing. Various factors may affect whether the manufactured
home is physically removed or left on location, such as the nature and term of
the lease of the site on which it is located and the condition of the unit. In
many cases, leaving the manufactured home on location is preferable, in the
event that the home is already set up, because the expenses of retaking and
redelivery will be saved. However, in those cases where the home is left on
location, expenses for site rentals will usually be incurred.
Once repossession has been achieved, preparation for the subsequent
disposition of the manufactured home can commence. The disposition may be by
public or private sale provided the method, manner, time, place and other terms
of the sale are commercially reasonable.
Sale proceeds are to be applied first to reasonable repossession
expenses (expenses incurred in retaking, storage, preparing for sale to include
refurbishing costs and selling) and
90
then to satisfaction of the indebtedness. While some states impose prohibitions
or limitations on deficiency judgments if the net proceeds from resale do not
cover the full amount of the indebtedness, the remainder may be sought from the
debtor in the form of a deficiency judgment in those states that do not prohibit
or limit such judgments. The deficiency judgment is a personal judgment against
the debtor for the shortfall. Occasionally, after resale of a manufactured home
and payment of all expenses and indebtedness, there is a surplus of funds. In
that case, the UCC requires the party suing for the deficiency judgment to remit
the surplus to the subordinate creditors or the debtor, as provided in the UCC.
Because the defaulting owner of a manufactured home generally has very little
capital or income available following repossession, a deficiency judgment may
not be sought in many cases or, if obtained, will be settled at a significant
discount in light of the defaulting owner's strained financial condition.
Any contract secured by a manufactured home located in Louisiana will
be governed by Louisiana Revised Statutes in addition to Article 9 of the UCC.
Louisiana law provides similar mechanisms for perfection and enforcement of a
security interest in manufactured housing used as collateral for an installment
sale contract or installment loan agreement.
Under Louisiana law, a manufactured home that has been permanently
affixed to real estate will nevertheless remain subject to the motor vehicle
registration laws unless the obligor and any holder of a security interest in
the property execute and file in the real estate records for the parish in which
the property is located a document converting the unit into real property. A
manufactured home that is converted into real property but is then removed from
its site can be converted back to personal property governed by the motor
vehicle registration laws if the obligor executes and files various documents in
the appropriate real estate records and all mortgagees under real estate
mortgages on the property and the land to which it was affixed file releases
with the motor vehicle commission.
So long as a manufactured home remains subject to the Louisiana motor
vehicle laws, liens are recorded on the certificate of title by the motor
vehicle commissioner and repossession can be accomplished only after the
obligor's abandonment or with the obligor's consent given after or in
contemplation of default, or pursuant to judicial process and seizure by the
sheriff.
RIGHTS OF REDEMPTION
Single Family Loans, Multifamily Loans and Home Equity Loans. In some
states, after sale pursuant to a deed of trust or foreclosure of a mortgage, the
borrower and foreclosed junior lienors are given a statutory period in which to
redeem the mortgaged property from the foreclosure sale. In some states,
redemption may occur only upon payment of the entire principal balance of the
loan plus 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 would defeat the title
of any purchaser from the lender subsequent to foreclosure or sale under a deed
of trust. Consequently, the practical effect of the redemption right is to force
the lender to retain the property and pay the expenses of ownership until the
redemption period has run.
Manufactured Housing Contracts. While state laws do not usually require
notice to be given debtors prior to repossession, many states do require
delivery of a notice of default and of
91
the debtor's right to cure defaults before repossession. The law in most states
also requires that the debtor be given notice of sale prior to the resale of a
manufactured home so that the owner may redeem at or before resale. In addition,
the sale generally must comply with the requirements of the UCC.
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 defaults
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 maintain the property adequately 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 some 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.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Generally, Article 9 of the UCC governs foreclosure on cooperative
shares and the related proprietary lease or occupancy agreement. Certain states,
including California, have adopted statutory prohibitions restricting the right
of the beneficiary or mortgagee to obtain a deficiency judgment against
borrowers financing the purchase of their residence or following sale under a
deed of trust or certain other foreclosure proceedings. A deficiency judgment is
a personal judgment against the borrower equal in most cases to the difference
between the amount due to the lender and the fair market value of the real
property sold at the foreclosure sale. As a result of these prohibitions, it is
anticipated that in many instances the master servicer will not seek deficiency
judgments against defaulting borrowers. Under the laws applicable in most
states, a creditor is entitled to obtain a deficiency judgment for any
deficiency following possession and resale of a manufactured home. However, some
states impose prohibitions or limitations on deficiency judgments in these
cases.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the Bankruptcy Code, the
federal Servicemembers Civil Relief Act and state laws affording relief to
debtors, may interfere with or affect the ability of the secured mortgage lender
to realize upon its security. For example, in a proceeding under the Bankruptcy
Code, a lender may not foreclose on the mortgaged property without the
permission of the bankruptcy court. If the mortgaged property is not the
debtor's principal residence and the
92
bankruptcy court determines that the value of the mortgaged property is less
than the principal balance of the mortgage loan, the rehabilitation plan
proposed by the debtor may
o reduce the secured indebtedness to the value of the mortgaged
property as of the date of the commencement of the bankruptcy
thereby rendering the lender a general unsecured creditor for the
difference,
o reduce the monthly payments due under the mortgage loan,
o change the rate of interest of the mortgage loan, and
o alter the mortgage loan repayment schedule.
The effect of proceedings under the Bankruptcy Code, including but not
limited to any automatic stay, could result in delays in receiving payments on
the mortgage loans underlying a series of certificates and possible reductions
in the aggregate amount of payments.
The federal tax laws provide priority to certain tax liens over the
lien of a mortgage or secured party. In addition, substantive requirements are
imposed upon mortgage lenders in connection with the origination and the
servicing of mortgage loans by numerous federal and some state consumer
protection laws. These laws include the federal Truth-in-Lending Act, or TILA,
as implemented by Regulation Z, Real Estate Settlement Procedures Act, as
implemented by Regulation Z, Real Estate Settlement Procedures Act, as
implemented by Regulation X, Equal Credit Opportunity Act, as implemented by
Regulation B, Fair Credit Billing Act, Fair Credit Reporting Act and related
statutes. These federal laws impose specific statutory liabilities upon lenders
who originate mortgage loans and who fail to comply with the provisions of the
law. In some cases, this liability may affect assignees of the mortgage loans.
In particular, an originator's failure to comply with certain requirements of
the federal TILA, as implemented by Regulation Z, could subject both originators
and assignees of such obligations to monetary penalties and could result in
borrowers' rescinding the mortgage loans either against the originators or
assignees. Further, the failure of the originator to use the correct form of
notice of right to cancel in connection with non-purchase money transactions
could subject the originator and assignees to extended borrower rescission
rights.
HOMEOWNERSHIP ACT AND SIMILAR STATE LAWS
Some of the mortgage loans, known as High Cost Loans, may be subject to
the Home Ownership and Equity Protection Act of 1994, or Homeownership Act,
which amended TILA to provide new requirements applicable to loans not made to
finance the purchase of a mortgaged property that exceed certain interest rate
and/or points and fees thresholds. The Homeownership Act requires certain
additional disclosures, specifies when those disclosures are to be made and
limits or prohibits inclusion of certain features in High Cost Loans. Purchasers
or assignees of any High Cost Loan, including any trust, could be liable under
federal law for all claims and be subject to all defenses that the borrower
could assert against the originator of the High Cost Loan under TILA or any
other law, unless the purchaser or assignee did not know, and could not with
reasonable diligence have determined, that the loan was subject to the
Homeownership Act. Remedies available to the borrower include monetary penalties
as well as rescission rights, if the
93
appropriate disclosures were not given as required or if the particular loan
includes features prohibited by the Homeownership Act. The maximum damages that
may be recovered from an assignee, including the related trust, is the remaining
amount of indebtedness plus the total amount paid by the borrower in connection
with the mortgage loan.
In addition to the Homeownership Act, a number of legislative proposals
have been introduced at both the federal and state levels that are designed to
discourage predatory lending practices. Some states have enacted, and other
state or local governments may enact, laws that impose requirements and
restrictions greater than those in the Homeownership Act. These laws prohibit
inclusion of certain features in mortgage loans that have interests rates or
origination costs in excess of prescribed levels, and require that borrowers be
given certain disclosures prior to the consummation of the mortgage loans.
Purchasers or assignees of a mortgage loan, including the related trust, could
be exposed to all claims and defenses that the borrower could assert against the
originator of the mortgage loan for a violation of state law. Claims and
defenses available to the borrower could include actual, statutory and punitive
damages, costs and attorneys' fees, rescission rights, defenses to foreclosure
action or an action to collect, and other equitable remedies.
Unless otherwise specified in the accompanying prospectus supplement,
the depositor will represent and warrant that all of the mortgage loans in the
related pool complied in all material respects with all applicable local, state
and federal laws at the time of origination. Although the depositor will be
obligated to repurchase any mortgage loan as to which a breach of its
representation and warranty has occurred (so long as the breach is materially
adverse to the interests of the securityholders), the repurchase price of those
mortgage loans could be less than the monetary damages and/or any equitable
remedies imposed pursuant to various state laws.
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 within the secondary mortgage market, including some securitization
trusts. Under the anti-predatory lending laws of some states, the borrower is
required to meet a net tangible benefits test in connection with the origination
of the related mortgage loan. This test may be highly subjective and open to
interpretation. As a result, a court may determine that a mortgage loan does not
meet the test even if the originator reasonably believed that the test was
satisfied. Any determination by a court that the mortgage loan does not meet the
test will result in a violation of the state anti-predatory lending law, in
which case the related seller will be required to purchase that mortgage loan
from the trust.
The so-called Holder-in-Due-Course Rule of the Federal Trade Commission
has the effect of subjecting a seller and certain related creditors and their
assignees in a consumer credit transaction, and any assignee of the creditor, to
all claims and defenses which the debtor in the transaction could assert against
the seller of the goods. Liability under this FTC Rule is limited to the amounts
paid by a debtor on a Manufactured Housing Contract, and the holder of the
Manufactured Housing Contract may also be unable to collect amounts still due
under the Manufactured Housing Contract.
Most of the Manufactured Housing Contracts in a pool will be subject to
the requirements of this FTC Rule. Accordingly, the trustee, as holder of the
Manufactured Housing Contracts,
94
will be subject to any claims or defenses that the purchaser of the related
manufactured home may assert against the seller of the manufactured home, or
that the purchaser of the home improvements may assert against the contractor,
subject to a maximum liability equal to the amounts paid by the obligor on the
Manufactured Housing Contract. If an obligor is successful in asserting any such
claim or defense, and if the seller had or should have had knowledge of such
claim or defense, the master servicer will have the right to require the seller
to repurchase the Manufactured Housing Contract because of a breach of its
representation and warranty that no claims or defenses exist which would affect
the borrower's obligation to make the required payments under the Manufactured
Housing Contract.
A number of lawsuits are pending in the United States alleging personal
injury from exposure to the chemical formaldehyde, which is present in many
building materials including such manufactured housing components as plywood
flooring and wall paneling. Some of these lawsuits are pending against
manufacturers of manufactured housing, suppliers of component parts and others
in the distribution process. Plaintiffs have won judgments in some of these
lawsuits.
Under the FTC Rule discussed above, the holder of a Manufactured
Housing Contract secured by a manufactured home with respect to which a
formaldehyde claim has been asserted successfully may be liable to the borrower
for the amount paid by the borrower on that Manufactured Housing Contract and
may be unable to collect amounts still due under that Manufactured Housing
Contract. Because the successful assertion of this type of claim would
constitute the breach of a representation or warranty of the seller, the related
securityholders would suffer a loss only to the extent that
o the seller fails to perform its obligation to repurchase that
Manufactured Housing Contract, and
o the seller, the applicable depositor or the trustee is
unsuccessful in asserting a claim of contribution or subrogation
on behalf of the securityholders against the manufacturer or
other who are directly liable to the plaintiff for damages.
Typical product liability insurance policies held by manufacturers and
component suppliers of manufactured homes may not cover liabilities from the
presence of formaldehyde in manufactured housing. As a result, recoveries from
manufacturers and component suppliers may be limited to their corporate assets
without the benefit of insurance.
DUE-ON-SALE CLAUSES
Unless otherwise provided in the related prospectus supplement, each
conventional loan will contain a due-on-sale clause which will generally provide
that, if the mortgagor or obligor sells, transfers or conveys the mortgaged
property, the loan may be accelerated by the mortgagee or secured party. Unless
otherwise provided in the related prospectus supplement, the master servicer
will, to the extent it has knowledge of the sale, transfer or conveyance,
exercise its rights to accelerate the maturity of the related loans through
enforcement of the due-on-sale clauses, subject to applicable state law. Section
341(b) of the Garn-St. Germain Depository Institutions Act of 1982 (Garn-St.
Germain) permits a lender, subject to certain conditions, to "enter into or
95
enforce a contract containing a due-on-sale clause with respect to a real
property loan," notwithstanding any contrary state law. Garn-St. Germain gave
states that previously had enacted "due-on-sale" restrictions a three-year
window to reenact the previous restrictions or enact new restrictions. Only six
states acted within this window period: Arizona, Florida, Michigan, Minnesota,
New Mexico and Utah. Consequently, due-on-sale provisions in documents governed
by the laws of those state are not preempted by federal law. With respect to
loans secured by an owner-occupied residence including a manufactured home, the
Garn-St Germain Act sets forth nine specific instances in which a mortgagee
covered by the act may not exercise its rights under a due-on-sale clause,
notwithstanding the fact that a transfer of the property may have occurred. The
inability to enforce a due-on-sale clause may result in transfer of the
mortgaged property to an uncreditworthy person, which could increase the
likelihood of default, or may result in a mortgage bearing an interest rate
below the current market rate being assumed by a new home buyer, which may
affect the average life of the loans and the number of loans which may extend to
maturity.
In addition, under the federal Bankruptcy Code, due-on-sale clauses may
not be enforceable in bankruptcy proceedings and under certain circumstances may
be eliminated in a resulting loan modification.
PREPAYMENT CHARGES; LATE FEES
Under certain state laws, prepayment charges with respect to
prepayments on loans secured by liens encumbering owner-occupied residential
properties may not be imposed after a certain period of time following the
origination of a loan. Since many of the mortgaged properties will be
owner-occupied, it is anticipated that prepayment charges may not be imposed
with respect to many of the loans. The absence of this type of a restraint on
prepayment, particularly with respect to fixed rate loans having higher loan
rates or APRs, may increase the likelihood of refinancing or other early
retirement of the loans. Legal restrictions, if any, on prepayment of
Multifamily Loans will be described in the related prospectus supplement.
Loans may also contain provisions obligating the borrower to pay a late
fee if payments are not timely made. In some states there may be specific
limitations on the late charges that a lender may collect from the borrower for
delinquent payments. Unless otherwise specified in the related prospectus
supplement, late fees will be retained by the applicable servicer as additional
servicing compensation.
Some state laws restrict the imposition of prepayment charges and late
fees even when the loans expressly provide for the collection of those charges.
Although the Alternative Mortgage Transaction Parity Act 1982, or the Parity
Act, permits the collection of prepayment charges and late fees in connection
with some types of eligible loans preempting any contrary state law
prohibitions, some states may not recognize the preemptive authority of the
Parity Act or have formally opted out of the Parity Act. As a result, it is
possible that prepayment charges may not be collected even on loans that provide
for the payment of those charges unless otherwise specified in the accompanying
prospectus supplement. The master servicer or any entity identified in the
accompanying prospectus supplement will be entitled to all prepayment charges
and late payment charges received on the loans and these amounts will not be
available for payment on the securities. The Office of Thrift Supervision or
OTS, the agency that
96
administers the Parity Act for unregulated housing creditors, has withdrawn its
favorable Parity Act regulations and chief counsel opinions that authorized
lenders to charge prepayment charges and late fees in certain circumstances
notwithstanding contrary state law, effective July 1, 2003. However, the OTS's
ruling does not have retroactive effect on loans originated before July 1, 2003.
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. The Office of Thrift Supervision, as successor to the
Federal Home Loan Bank Board, is authorized to issue rules and regulations and
to publish interpretations governing implementation of Title V. The statute
authorized any state to reimpose limitations on interest rates and finance
charges by adopting before April 1, 1983 a law or constitutional provision which
expressly rejects application of the federal law. Fifteen states adopted such a
law prior to the April 1, 1983 deadline. In addition, even where Title V was not
rejected, any state is authorized to adopt a provision limiting discount points
or other charges on loans covered by Title V. No Manufactured Housing Contract
secured by a manufactured home located in any state in which application of
Title V was expressly rejected or a provision limiting discount points or other
charges has been adopted will be included in any trust fund if the Manufactured
Housing Contract imposes finance charges or provides for discount points or
charges in excess of permitted levels.
Title V also provides that state usury limitations will not apply to
any loan which is secured by a first lien on certain kinds of manufactured
housing provided that certain conditions are satisfied. These conditions relate
to the terms of any prepayment, balloon payment, late charges and deferral fees
and the requirement of a 30-day notice period prior to instituting any action
leading to repossession of or foreclosure with respect to the related unit.
SERVICEMEMBERS CIVIL RELIEF ACT
Generally, under the terms of the Servicemembers Civil Relief Act
(referred to herein as the Relief Act), borrowers who enter military service
after the origination of their mortgage loan may not be charged interest above
an annual rate of 6% during the period of active duty status. In addition to
adjusting the interest, the lender must forgive any such interest in excess of
the annual 6% rate, unless a court or administrative agency of the United States
or of any state orders otherwise upon application of the lender. The Relief Act
applies to borrowers who are members of the Air Force, Army, Marines, Navy or
Coast Guard, and officers of the U.S. Public Health Service or the National
Oceanic and Atmospheric Administration assigned to duty with the military. The
Relief Act also applies to borrowers who are members of the National Guard or
are on reserve status at the time their mortgage is originated and are later
called to active duty. It is possible that the interest rate limitation could
have an effect, for an indeterminate period of time, on the ability of the
master servicer to collect full amounts of interest on affected mortgage loans.
Unless otherwise provided in the related prospectus supplement, any shortfall in
interest collections resulting from the application of the Relief Act could
result in losses to the related securityholders. In addition, the Relief Act
imposes limitations which would impair the ability of the master servicer to
foreclose on an affected mortgage loan during the borrower's period of
97
active duty status. Thus, in the event that a mortgage loan goes into default,
the application of the Relief Act could cause delays and losses occasioned by
the lender's inability to realize upon the mortgaged property in a timely
fashion.
ENVIRONMENTAL RISKS
Real property pledged as security to a lender may be subject to
unforeseen environmental risks. Under the laws of certain states, contamination
of a property may give rise to a lien on the property to assure the payment of
the costs of clean-up. In several states such a lien has priority over the lien
of an existing mortgage against such property. In addition, under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980
(CERCLA), the United States Environmental Protection Agency (EPA) may impose a
lien on property where the EPA has incurred clean-up costs. However, a CERCLA
lien is subordinate to pre-existing, perfected security interests.
Under the laws of some states and under CERCLA, 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 a current or prior owner or operator. CERCLA imposes liability for
such costs on any and all "responsible parties," including owners or operators
of the property who did not cause or contribute to the contamination.
Furthermore, liability under CERCLA is not limited to the original or
outstanding balance of a loan or to the value of the related mortgaged property.
Lenders may be held liable under CERCLA as owners or operators unless they
qualify for the secured creditor exemption to CERCLA. This exemption exempts
from the definition of "owner" or "operator" those who, without participating in
the management of a facility, hold indicia of ownership primarily to protect a
security interest in the facility. Thus, if a lender's activities begin to
encroach on the actual management of a contaminated facility or property, the
lender may incur liability as an "owner" or "operator" under CERCLA. Similarly,
if a lender forecloses and takes title to a contaminated facility or property,
the lender may incur CERCLA liability in various circumstances, including, but
not limited to, when it holds the facility or property as an investment,
including leasing the facility or property to a third party, or fails to market
the property in a timely fashion.
The Asset Conservation, Lender Liability and Deposit Insurance Act of
1996, or Conservation Act, amended, among other things, the provisions of CERCLA
with respect to lender liability and the secured creditor exemption. The
Conservation Act offers substantial protection to lenders by defining the
activities which a lender can engage in without losing the benefit of the
secured creditor exemption. For a lender to be deemed to have participated in
the management of a mortgaged property, the lender must actually participate in
the management or operational affairs of the mortgaged property. The
Conservation Act provides that "merely having the capacity to influence, or the
unexercised right to control" operations does not constitute participation in
management. A lender will lose the protection of the secured creditor exemption
only if it (1) exercises decision-making control over the borrower's
environmental compliance and hazardous substance handling or disposal practices
for the mortgaged property, or (2) assumes responsibility for the overall
management of the mortgaged property, including day-to-day decision-making for
environmental compliance, or (3) assumes management of substantially all
operational functions of the mortgaged property. The Conservation Act also
98
provides that a lender will continue to have the benefit of the secured creditor
exemption even in the event that it forecloses on a mortgaged property,
purchases it at a foreclosure sale or accepts a deed-in-lieu of foreclosure so
long as the lender seeks to sell the mortgaged property at the earliest
practicable commercially reasonable time on commercially reasonable terms.
CERCLA does not apply to petroleum products, and the secured creditor
exclusion does not govern liability for cleanup costs under federal laws other
than CERCLA, in particular Subtitle I of the federal Resource Conservation and
Recovery Act, which regulates underground petroleum storage tanks other than
heating oil tanks. The EPA has adopted a lender liability rule for underground
storage tanks under Subtitle I of the Resource Conservation Act. Under this
rule, a holder of a security interest in an underground storage tank or real
property containing an underground storage tank is not considered an operator of
the underground storage tank as long as petroleum is not added to, stored in or
dispensed from the tank. Moreover, under the Conservation Act, the protections
accorded to lenders under CERCLA are also accorded to holders of security
interests in underground petroleum storage tanks. It should be noted, however,
that liability for cleanup of petroleum contamination may be governed by state
law, which may not provide for any specific protection for secured creditors.
The Conservation Act specifically addresses the potential liability
under CERCLA of lenders that hold mortgages or similar conventional security
interests in real property, as the trust fund generally does in connection with
the loans. However, the Conservation Act does not clearly address the potential
liability of lenders who retain legal title to a property and enter into an
agreement with the purchaser for the payment of the purchase price and interest
over the term of the contract as is the case with the installment contracts.
If a lender (including a lender under an installment contract) 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 contamination at a
property pledged as collateral for one of the loans (or at a property subject to
an installment contract), would be imposed on the trust fund, and thus occasion
a loss to the securityholders, depends on the specific factual and legal
circumstances at issue.
Except as otherwise specified in the applicable prospectus supplement,
at the time the mortgage loans were originated, no environmental assessment or a
very limited environment assessment of the mortgage properties was conducted.
Traditionally, many residential mortgage lenders have not taken steps
to determine whether contaminants are present on a mortgaged property prior to
the origination of a single family mortgage loan or prior to foreclosure or
accepting a deed-in-lieu of foreclosure. Except as otherwise specified in the
applicable prospectus supplement, neither the depositor nor any master servicer
will be required by any agreement to undertake any of these evaluations prior to
foreclosure or accepting a deed-in-lieu of foreclosure. The depositor does not
make any representations or warranties or assume any liability with respect to
the absence or effect of
99
contaminants on any mortgaged property or any casualty resulting from the
presence or effect of contaminants. However, the master servicer will not be
obligated to foreclose on any mortgaged property or accept a deed-in-lieu of
foreclosure if it knows or reasonably believes that there are material
contaminated conditions on the property. A failure so to foreclose may reduce
the amounts otherwise available to securityholders of the related series.
The pooling and servicing agreement will provide that the master
servicer, acting on behalf of the trust fund, may not acquire title to a
multifamily residential property or mixed-use property underlying a loan or take
over its operation unless the master servicer has previously determined, based
upon a report prepared by a person who regularly conducts environmental audits,
that the mortgaged property is in compliance with applicable environmental laws
and regulations or that the acquisition would not be more detrimental than
beneficial to the value of the mortgaged property and the interests of the
related securityholders.
THE HOME IMPROVEMENT CONTRACTS
General. The Home Improvement 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 UCC.
Under 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 these contracts to the
trustee or a designated custodian or may retain possession of them as custodian
for the trustee. In addition, the depositor will file 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. The Home Improvement Contracts
that are secured by the related home improvements grant to the originator a
purchase money security interest in the 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 and the purchase money security interests
are assignable. In general, a purchase money security interest grants to the
holder a security interest that has priority over a conflicting security
interest in the same collateral and the proceeds of 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, 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 such characterization upon incorporation
of such materials into the related property, will not be secured by a purchase
money security interest in the home improvement being financed.
100
Enforcement of Security Interest in Home Improvements. So long as the
home improvement has not become subject to the real estate law, a creditor can
repossess a home improvement securing a contract by voluntary surrender, by
"self-help" repossession that is "peaceful" (i.e., without breach of the peace)
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a contract must give the
debtor a number of days' notice, which varies from 10 to 30 days depending on
the state, prior to commencement of any repossession. The UCC and consumer
protection laws in most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting such a sale. The law in most states also requires that the debtor be
given notice of any sale prior to resale of the unit that the debtor may redeem
at or before the resale.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the property securing the debtor's loan. However, some states
impose prohibitions or limitations on deficiency judgments, and in many cases
the defaulting borrower would have no assets with which to pay a judgment.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit or
delay the ability of a lender to repossess and resell collateral or enforce a
deficiency judgment.
INSTALLMENT CONTRACTS
Under an installment contract the seller 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 borrower of the contract is the lender
obligated to convey title to the property to the purchaser. As with mortgage or
deed of trust financing, during the effective period of the installment
contract, the borrower is generally responsible for maintaining the property in
good condition and for paying real estate taxes, assessments and hazard
insurance premiums associated with the property.
The method of enforcing the rights of the lender under an installment
contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to the terms. The terms of installment contracts
generally provide that upon a default by the borrower, the borrower loses his or
her right to occupy the property, the entire indebtedness is accelerated, and
the buyer's equitable interest in the property is forfeited. The lender in such
a situation does not have to foreclose in order to obtain title to the property,
although in some cases a quiet title action is in order if the borrower has
filed the installment contract in local land records and an ejectment action may
be necessary to recover possession. In a few states, particularly in cases of
borrower default during the early years of an installment contract, the courts
will permit ejectment of the buyer and a forfeiture of his or her interest in
the property. However, most state legislatures have enacted provisions by
analogy to mortgage law protecting borrowers under installment contracts from
the harsh consequences of forfeiture. Under such statutes, a judicial or
nonjudicial foreclosure may be required, the lender may be required to give
notice of default and the borrower may be granted some grace period during which
the installment contract may be reinstated upon full
101
payment of the default amount and the borrower may have a post-foreclosure
statutory redemption right. In other states, courts in equity may permit a
borrower with significant investment in the property under an installment
contract for the sale of real estate to share in the proceeds of sale of the
property after the indebtedness is repaid or may otherwise refuse to enforce the
forfeiture clause. Nevertheless, generally speaking, the lender's procedures for
obtaining possession and clear title under an installment contract in a given
state are simpler and less time-consuming and costly than are the procedures for
foreclosing and obtaining clear title to a property subject to one or more
liens.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGEES
To the extent that the loans comprising the trust fund for a series are
secured by mortgages which are junior to other mortgages held by other lenders
or institutional investors, the rights of the trust fund (and therefore the
securityholders), as mortgagee under any such junior mortgage, are subordinate
to those of any mortgagee under any senior mortgage. The senior mortgagee has
the right to receive hazard insurance and condemnation proceeds and to cause the
property securing the loan to be sold upon default of the mortgagor, thereby
extinguishing the junior mortgagee's lien unless the junior mortgagee asserts
its subordinate interest in the property in foreclosure litigation and,
possibly, satisfies the defaulted senior mortgage. A junior mortgagee may
satisfy a defaulted senior loan in full and, in some states, may cure such
default and bring the senior loan current, in either event adding the amounts
expended to the balance due on the junior loan. In most states, absent a
provision in the mortgage or deed of trust, no notice of default is required to
be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected under
any hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage, in such order as the mortgagee may determine. Thus, in the
event improvements on the property are damaged or destroyed by fire or other
casualty, or in the event the property is taken by condemnation, the mortgagee
or beneficiary under 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 which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste, 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.
102
The form of credit line trust deed or mortgage generally used by most
institutional lenders which make revolving credit line loans typically contains
a "future advance" clause, which provides, in essence, that additional amounts
advanced to or on behalf of the borrower by the beneficiary or lender are to be
secured by the deed of trust or mortgage. Any amounts so advanced after the
cut-off date with respect to any mortgage will not be included in the trust
fund. The priority of the lien securing any advance made under the clause may
depend in most states on whether the deed of trust or mortgage is called and
recorded as a credit line deed of trust or mortgage. If the beneficiary or
lender advances additional amounts, the advance is entitled to receive the same
priority as amounts initially advanced under the trust deed or mortgage,
notwithstanding the fact that there may be junior trust deeds or mortgages and
other liens which intervene between the date of recording of the trust deed or
mortgage and the date of the future advance, and notwithstanding that the
beneficiary or lender had actual knowledge of such intervening junior trust
deeds or mortgages and other liens at the time of the advance. In most states,
the trust deed or mortgage lien securing mortgage loans of the type which
includes home equity credit lines applies retroactively to the date of the
original recording of the trust deed or mortgage, provided that the total amount
of advances under the home equity credit line does not exceed the maximum
specified principal amount of the recorded trust deed or mortgage, except as to
advances made after receipt by the lender of a written notice of lien from a
judgment lien creditor of the trustor.
THE TITLE I PROGRAM
General. Certain of the loans contained in a trust fund may be loans
insured under the FHA Title I Insurance program created pursuant to Sections 1
and 2(a) of the National Housing Act of 1934. Under the Title I Program, the FHA
is authorized and empowered to insure qualified lending institutions against
losses on eligible loans. The Title I Program operates as a coinsurance program
in which the FHA insures up to 90% of certain losses incurred on an individual
insured loan, including the unpaid principal balance of the loan, but only to
the extent of the insurance coverage available in the lender's FHA insurance
coverage reserve account. The owner of the loan bears the uninsured loss on each
loan.
Title I loan means a loan made to finance actions or items that
substantially protect or improve the basic livability or utility of a one- to
four-family residential property.
There are two basic methods of lending or originating such loans which
include a "direct loan" or a "dealer loan". With respect to a direct loan, the
borrower makes application directly to a lender without any assistance from a
dealer, which application may be filled out by the borrower or by a person
acting at the direction of the borrower who does not have a financial interest
in the loan transaction, and the lender may disburse the loan proceeds solely to
the borrower or jointly to the borrower and other parties to the transaction.
With respect to a dealer loan, the dealer, who has a direct or indirect
financial interest in the loan transaction, assists the borrower in preparing
the loan application or otherwise assists the borrower in obtaining the loan
from the lender. The lender may disburse proceeds solely to the dealer or the
borrower or jointly to the borrower and the dealer or other parties to the
transaction. With respect to a dealer Title I loan, a dealer may include a
seller, a contractor or supplier of goods or services.
103
Loans insured under the Title I Program are required to have fixed
interest rates and generally provide for equal installment payments due weekly,
biweekly, semi-monthly or monthly, except that a loan may be payable quarterly
or semi-annually where a borrower has an irregular flow of income. The first or
last payments (or both) may vary in amount but may not exceed 150% of the
regular installment payment, and the first payment may be due no later than two
months from the date of the loan. The note must contain a provision permitting
full or partial prepayment of the loan. The interest rate must be negotiated and
agreed to by the borrower and the lender and must be fixed for the term of the
loan and recited in the note. Interest on an insured loan must accrue from the
date of the loan and be calculated according to the actuarial method. The lender
must assure that the note and all other documents evidencing the loan are in
compliance with applicable federal, state and local laws.
Each insured lender is required to use prudent lending standards in
underwriting individual loans and to satisfy the applicable loan underwriting
requirements under the Title I Program prior to its approval of the loan and
disbursement of loan proceeds. Generally, the lender must exercise prudence and
diligence to determine whether the borrower and any co-maker is solvent and an
acceptable credit risk, with a reasonable ability to make payments on the loan
obligation. The lender's credit application and review must determine whether
the borrower's income will be adequate to meet the periodic payments required by
the loan, as well as the borrower's other housing and recurring expenses, which
determination must be made in accordance with the expense-to-income ratios
published by the Secretary of HUD unless the lender determines and documents in
the loan file the existence of compensating factors concerning the borrower's
creditworthiness which support approval of the loan.
Under the Title I Program, the FHA does not review or approve for
qualification for insurance the individual loans insured thereunder at the time
of approval by the lending institution (as is typically the case with other
federal loan programs). If, after a loan has been made and reported for
insurance under the Title I Program, the lender discovers any material
misstatement of fact or that the loan proceeds have been misused by the
borrower, dealer or any other party, it shall promptly report this to the FHA.
In such case, provided that the validity of any lien on the property has not
been impaired, the insurance of the loan under the Title I Program will not be
affected unless such material misstatements of fact or misuse of loan proceeds
was caused by (or was knowingly sanctioned by) the lender or its employees.
Requirements for Title I Loans. The maximum principal amount for Title
I loans must not exceed the actual cost of the project plus any applicable fees
and charges allowed under the Title I Program; provided that such maximum amount
does not exceed $25,000 (or the current applicable amount) for a single family
property improvement loan. Generally, the term of a Title I loan may not be less
than six months nor greater than 20 years and 32 days. A borrower may obtain
multiple Title I loans with respect to multiple properties, and a borrower may
obtain more than one Title I loan with respect to a single property, in each
case as long as the total outstanding balance of all Title I loans in the same
property does not exceed the maximum loan amount for the type of Title I loan
thereon having the highest permissible loan amount.
Borrower eligibility for a Title I loan requires that the borrower have
at least a one-half interest in either fee simple title to the real property, a
lease thereof for a term expiring at least six months after the final maturity
of the Title I loan or a recorded land installment contract for
104
the purchase of the real property. In the case of a Title I loan with a total
principal balance in excess of $15,000, if the property is not occupied by the
owner, the borrower must have equity in the property being improved at least
equal to the principal amount of the loan, as demonstrated by a current
appraisal. Any Title I loan in excess of $7,500 must be secured by a recorded
lien on the improved property which is evidenced by a mortgage or deed of trust
executed by the borrower and all other owners in fee simple.
The proceeds from a Title I loan may be used only to finance property
improvements which substantially protect or improve the basic livability or
utility of the property as disclosed in the loan application. The Secretary of
HUD has published a list of items and activities which cannot be financed with
proceeds from any Title I loan and from time to time the Secretary of HUD may
amend such list of items and activities. With respect to any dealer Title I
loan, before the lender may disburse funds, the lender must have in its
possession a completion certificate on a HUD approved form, signed by the
borrower and the dealer. With respect to any direct Title I loan, the lender is
required to obtain, promptly upon completion of the improvements but not later
than 6 months after disbursement of the loan proceeds with one 6 month extension
if necessary, a completion certificate, signed by the borrower. The lender is
required to conduct an on-site inspection on any Title I loan where the
principal obligation is $7,500 or more, and on any direct Title I loan where the
borrower fails to submit a completion certificate.
FHA Insurance Coverage. Under the Title I Program, the FHA establishes
an insurance coverage reserve account for each lender which has been granted a
Title I contract of insurance. The amount of insurance coverage in this account
is a maximum of 10% of the amount disbursed, advanced or expended by the lender
in originating or purchasing eligible loans registered with the FHA for Title I
insurance, with certain adjustments. The balance in the insurance coverage
reserve account is the maximum amount of insurance claims the FHA is required to
pay to the Title I lender. Loans to be insured under the Title I Program will be
registered for insurance by the FHA and the insurance coverage attributable to
such loans will be included in the insurance coverage reserve account for the
originating or purchasing lender following the receipt and acknowledgment by the
FHA of a loan report on the prescribed form pursuant to the Title I regulations.
For each eligible loan reported and acknowledged for insurance, the FHA charges
a premium. For loans having a maturity of 25 months or less, the FHA bills the
lender for the entire premium in an amount equal to the product of 0.50% of the
original loan amount and the loan term. For home improvement loans with a
maturity greater than 25 months, each year that a loan is outstanding the FHA
bills the lender for a premium in an amount equal to 0.50% of the original loan
amount. If a loan is prepaid during the year, the FHA will not refund or abate
the premium paid for that year.
Under the Title I Program the FHA will reduce the insurance coverage
available in the lender's FHA insurance coverage reserve account with respect to
loans insured under the lender's contract of insurance by (i) the amount of the
FHA insurance claims approved for payment relating to such insured loans and
(ii) the amount of insurance coverage attributable to insured loans sold by the
lender, and such insurance coverage may be reduced for any FHA insurance claims
rejected by the FHA. The balance of the lender's FHA insurance coverage reserve
account will be further adjusted as required under Title I or by the FHA, and
the insurance coverage therein may be earmarked with respect to each or any
eligible loans insured thereunder, if a determination is made by the Secretary
of HUD that it is in its interest to do so.
105
Originations and acquisitions of new eligible loans will continue to increase a
lender's insurance coverage reserve account balance by 10% of the amount
disbursed, advanced or expended in originating or acquiring such eligible loans
registered with the FHA for insurance under the Title I Program. The Secretary
of HUD may transfer insurance coverage between insurance coverage reserve
accounts with earmarking with respect to a particular insured loan or group of
insured loans when a determination is made that it is in the Secretary's
interest to do so.
The lender may transfer (except as collateral in a bona fide
transaction) insured loans and loans reported for insurance only to another
qualified lender under a valid Title I contract of insurance. Unless an insured
loan is transferred with recourse or with a guaranty or repurchase agreement,
the FHA, upon receipt of written notification of the transfer of such loan in
accordance with the Title I regulations, will transfer from the transferor's
insurance coverage reserve account to the transferee's insurance coverage
reserve account an amount, if available, equal to 10% of the actual purchase
price or the net unpaid principal balance of such loan (whichever is less).
However, under the Title I Program not more than $5,000 in insurance coverage
shall be transferred to or from a lender's insurance coverage reserve account
during any October 1 to September 30 period without the prior approval of the
Secretary of HUD. Amounts which may be recovered by the Secretary of HUD after
payment of an insurance claim are not added to the amount of insurance coverage
in the related lender's insurance coverage reserve account.
Claims Procedures Under Title I. Under the Title I Program the lender
may accelerate an insured loan following a default on such loan only after the
lender or its agent has contacted the borrower in a face-to-face meeting or by
telephone to discuss the reasons for the default and to seek its cure. If the
borrower does not cure the default or agree to a modification agreement or
repayment plan, the lender will notify the borrower in writing that, unless
within 30 days the default is cured or the borrower enters into a modification
agreement or repayment plan, the loan will be accelerated and that, if the
default persists, the lender will report the default to an appropriate credit
agency. The lender may rescind the acceleration of maturity after full payment
is due and reinstate the loan only if the borrower brings the loan current,
executes a modification agreement or agrees to an acceptable repayment plan.
Following acceleration of maturity upon a secured Title I loan, the
lender may either (a) proceed against the property under any security
instrument, or (b) make a claim under the lender's contract of insurance. If the
lender chooses to proceed against the property under a security instrument (or
if it accepts a voluntary conveyance or surrender of the property), the lender
may file an insurance claim only with the prior approval of the Secretary of
HUD.
When a lender files an insurance claim with the FHA under the Title I
Program, the FHA reviews the claim, the complete loan file and documentation of
the lender's efforts to obtain recourse against any dealer who has agreed
thereto, certification of compliance with applicable state and local laws in
carrying out any foreclosure or repossession, and evidence that the lender has
properly filed proofs of claims, where the borrower is bankrupt or deceased.
Generally, a claim for reimbursement for loss on any Title I loan must be filed
with the FHA no later than 9 months after the date of default of the loan.
Concurrently with filing the insurance claim, the lender shall assign to the
United States of America the lender's entire interest in the loan note (or a
judgment in lien of the note), in any security held and in any claim filed in
any legal
106
proceedings. If, at the time the note is assigned to the United States, the
Secretary has reason to believe that the note is not valid or enforceable
against the borrower, the FHA may deny the claim and reassign the note to the
lender. If either such defect is discovered after the FHA has paid a claim, the
FHA may require the lender to repurchase the paid claim and to accept a
reassignment of the loan note. If the lender subsequently obtains a valid and
enforceable judgment against the borrower, the lender may resubmit a new
insurance claim with an assignment of the judgment. Although the FHA may contest
any insurance claim and make a demand for repurchase of the loan at any time up
to two years from the date the claim was certified for payment and may do so
thereafter in the event of fraud or misrepresentation on the part of the lender,
the FHA has expressed an intention to limit the period of time within which it
will take such action to one year from the date the claim was certified for
payment.
Under the Title I Program the amount of an FHA insurance claim payment,
when made, is equal to the claimable amount, up to the amount of insurance
coverage in the lender's insurance coverage reserve account. The "claimable
amount" means an amount equal to 90% of the sum of:
o the unpaid loan obligation (net unpaid principal and the
uncollected interest earned to the date of default) with
adjustments thereto if the lender has proceeded against property
securing the loan;
o the interest on the unpaid amount of the loan obligation from the
date of default to the date of the claim's initial submission for
payment plus 15 calendar days (but not to exceed 9 months from
the date of default), calculated at the rate of 7% per year;
o the uncollected court costs;
o the attorney's fees not to exceed $500; and
o the expenses for recording the assignment of the security to the
United States.
The Secretary of HUD may deny a claim for insurance in whole or in part
for any violations of the regulations governing the Title I Program; however,
the Secretary of HUD may waive such violations if it determines that enforcement
of the regulations would impose an injustice upon a lender which has
substantially complied with the regulations in good faith.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following summary of the material federal income tax consequences
of the purchase, ownership and disposition of certificates is based on the
opinion of tax counsel to the depositor, either Sidley Austin Brown & Wood LLP
or Thacher Proffitt & Wood LLP, as specified in the related prospectus
supplement. This summary is based on the provisions of the Internal Revenue Code
of 1986, as amended, and the regulations, including the REMIC Regulations,
rulings and decisions promulgated thereunder and, where applicable, proposed
regulations, all of which are subject to change either prospectively or
retroactively. This summary does not address the material federal income tax
consequences of an investment in securities applicable to certain financial
institutions, banks, insurance companies, tax exempt organizations, dealers in
options,
107
currency or securities, traders in securities that elect to mark to market, or
persons who hold positions other than securities such that the securities are
treated as part of a hedging transaction, straddle, conversion or other
integrated transaction which are subject to special rules. Because of the
complexity of the tax issues involved, we strongly suggest that prospective
investors consult their tax advisors regarding the federal, state, local and any
other tax consequences to them of the purchase, ownership and disposition of
securities.
GENERAL
The federal income tax consequences to securityholders will vary
depending on whether an election is made to treat the trust fund relating to a
particular series of securities as a REMIC under the Code. The prospectus
supplement for each series of securities will specify whether a REMIC election
will be made. In the discussion that follows, all references to a "section" or
"sections" shall be understood to refer, unless otherwise specifically
indicated, to a section or sections of the Code.
If a REMIC election is not made, in the opinion of tax counsel the
trust fund will not be classified as a publicly traded partnership, a taxable
mortgage pool, or an association taxable as a corporation. A trust fund that
qualifies as a "grantor trust" for federal income tax purposes also will receive
an opinion of tax counsel to the effect that:
o the trust fund will be classified as a grantor trust under
subpart E, part I of subchapter J of the Code; and
o owners of certificates will be treated for federal income tax
purposes as owners of a portion of the trust fund's assets as
described below.
A trust fund that issues notes may also receive an opinion of tax
counsel regarding the characterization of the notes as debt instruments for
federal income tax purposes.
With respect to each trust fund that elects REMIC status, in the
opinion of tax counsel, assuming compliance with all provisions of the related
agreement, the trust fund will qualify as a REMIC and the related certificates
will be considered to be regular interests or residual interests in the REMIC.
The related prospectus supplement for each series of securities will indicate
whether the trust fund will make a REMIC election and whether a class of
securities will be treated as a regular or residual interest in the REMIC.
Each opinion is an expression of an opinion only, is not a guarantee of
results and is not binding on the Internal Revenue Service or any third party.
If, contrary to the opinion of tax counsel, the IRS successfully were
to assert that a class of notes did not represent debt instruments for federal
income tax purposes, that class of notes would be treated as equity interests in
the related trust fund. The trust fund would then be treated as a partnership
and could be a publicly traded partnership. If the trust fund were classified as
a publicly traded partnership, it would not be subject to taxation as a
corporation because its income would constitute "qualifying income" not derived
in the conduct of a financial business. Nevertheless, if the trust fund were
classified as a partnership, treatment of a class of notes as
108
equity interests in such a partnership could have adverse tax consequences to
certain holders. For example, income to foreign holders of such a class
generally would be subject to U.S. tax and withholding requirements, and
individual holders of such a class would be allocated their proportionate share
of the trust's income but might be subject to certain limitations on their
ability to deduct their share of the trust's expenses.
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 their holders 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.
109
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."
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
110
pro rata as principal payments are received, and such income will be capital
gain if the debt security is held as a capital asset. However, accrual method
holders may elect to accrue all de minimis OID as well as market discount under
a constant interest method.
Debt securities may provide for interest based on a qualified variable
rate. Under the OID Regulations, interest is generally treated as payable at a
qualified variable rate and not as contingent interest if
o the interest is unconditionally payable at least annually,
o the issue price of the debt instrument does not exceed the total
noncontingent principal payments, and
o interest is based on a "qualified floating rate," an "objective
rate," or a combination of "qualified floating rates" that do not
operate in a manner that significantly accelerates or defers
interest payments on the debt security.
In the case of compound interest securities, certain interest weighted
securities, and certain of the other debt securities, none of the payments under
the instrument will be considered qualified stated interest, and thus the
aggregate amount of all payments will be included in the stated redemption price
at maturity.
The Internal Revenue Service issued contingent payment regulations
governing the calculation of OID on instruments having contingent interest
payments. These contingent payment regulations represent the only guidance
regarding the views of the IRS with respect to contingent interest instruments
and specifically do not apply for purposes of calculating OID on debt
instruments subject to section 1272(a)(6) of the Code, such as the debt
securities.
Additionally, the OID Regulations do not contain provisions
specifically interpreting section 1272(a)(6) of the Code. Until the Treasury
issues guidance to the contrary, the trustee intends to base its computation on
section 1272(a)(6) and the OID Regulations as described in this prospectus.
However, because no regulatory guidance currently exists under 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 a
taxable year a pro rata portion of the original issue discount that accrued
during the relevant accrual period. In the case of a debt security that is not a
Regular Interest Security and the principal payments on which are not subject to
acceleration resulting from prepayments on the loans, the amount of OID
includible in income of a holder for an accrual period (generally the period
over which interest accrues on the debt instrument) will equal the product of
the yield to maturity of the debt security and the adjusted issue price of the
debt security, reduced by any payments of qualified stated interest. The
adjusted issue price is the sum of its issue price plus prior accruals of OID,
reduced by the total payments made with respect to the debt security in all
prior periods, other than qualified stated interest payments.
111
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 pay-through security is computed by taking into
account the prepayment rate assumed in pricing the debt instrument. The amount
of OID that will accrue during an accrual period on a pay-through security is
the excess, if any, of the
o sum of
o the present value of all payments remaining to be made on
the pay-through security as of the close of the accrual
period and
o 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 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 regular REMIC interests (or other regular interests in a REMIC) in a
manner that it believes to be appropriate, to take account of realized losses on
the loans, although the OID Regulations do not provide for such adjustments. If
the IRS were to require that OID be accrued without such adjustments, the rate
of accrual of OID for a class of securities that are regular REMIC interests
could increase.
112
Certain classes of securities that are regular REMIC interests may
represent more than one class of REMIC regular interests. Unless otherwise
provided in the related prospectus supplement, the applicable trustee intends,
based on the OID Regulations, to calculate OID on such securities as if, solely
for the purposes of computing OID, the separate regular interests were a single
debt instrument.
A subsequent holder of a debt security will also be required to include
OID in gross income, but the holder who purchases the debt security for an
amount that exceeds its adjusted issue price will be entitled (as will an
initial holder who pays more than a debt security's issue price) to offset such
OID by comparable economic accruals of portions of the excess.
Effects of Defaults and Delinquencies. In the opinion of tax counsel,
holders will be required to report income with respect to the related securities
under an accrual method without giving effect to delays and reductions in
distributions attributable to a default or delinquency on the loans, except
possibly to the extent that it can be established that such amounts are
uncollectible. As a result, the amount of income (including OID) reported by a
holder of a security in any period could significantly exceed the amount of cash
distributed to the holder in that period. The holder will eventually be allowed
a loss (or will be allowed to report a lesser amount of income) to the extent
that the aggregate amount of distributions on the securities is reduced as a
result of a loan default. However, the timing and character of losses or
reductions in income are uncertain and, accordingly, holders of securities
should consult their own tax advisors on this point.
Interest Weighted Securities. An "interest weighted security" is a
security that is a REMIC regular interest or a "stripped" security (as discussed
under "--Tax Status as a Grantor Trust; General" below) the payments on which
consist solely or primarily of a specified portion of the interest payments on
qualified mortgages held by the REMIC or on loans underlying pass-through
securities. It is not clear how income should be accrued with respect to
interest weighted securities. The trustee intends to take the position that all
of the income derived from an interest weighted security should be treated as
OID and that the amount and rate of accrual of such OID should be calculated by
treating the interest weighted security as a compound interest security.
However, in the case of interest weighted securities that are entitled to some
payments of principal and 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 "--Non-REMIC Certificates--B.
Multiple Classes of Senior Certificates--Stripped Bonds and Stripped Coupons"
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
113
be calculated as if the interest index remained at its value as of the
issue date of the securities. Because the proper method of adjusting accruals of
OID on a variable rate debt security is uncertain, holders of variable rate debt
securities should consult their own tax advisers regarding the appropriate
treatment of such securities for federal income tax purposes.
Market Discount. In the opinion of tax counsel, a purchaser of a
security may be subject to the market discount rules of sections 1276 through
1278 of the Code. A holder that acquires a debt security with more than a
prescribed de minimis amount of "market discount" (generally, the excess of the
principal amount of the debt security over the purchaser's purchase price) will
be required to include accrued market discount in income as ordinary income in
each month, but limited to an amount not exceeding the principal payments on the
debt security received in that month and, if the securities are sold, the gain
realized. This market discount would accrue in a manner to be provided in
Treasury regulations but, until such regulations are issued, market discount
would in general accrue either
o on the basis of a constant yield (in the case of a pay-through
security, taking into account a prepayment assumption) or
o in the ratio of (a) in the case of securities (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 1986 Act indicates that premium is to be
accrued in the same manner as market discount. Accordingly, it appears that the
accrual of premium on a class of pay-through
114
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.
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
income as interest, based on a constant yield method for Debt securities
acquired on or after April 4, 1994. If such an election were to be made with
respect to a debt security with market discount, the holder of the debt security
would be deemed to have made an election to include in income currently market
discount with respect to all other debt instruments having market discount that
such holder of the debt security acquires during the year of the election or
thereafter. Similarly, 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.
Sale or Exchange of a Debt Security. Sale or exchange of a debt
security prior to its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the seller's adjusted basis
in the debt security. Such adjusted basis generally will equal the seller's
purchase price for the debt security, increased by the OID and market discount
included in the seller's gross income with respect to the debt security, and
reduced by principal payments on the debt security previously received by the
seller and any premium amortized by the seller. Such gain or loss will be
capital gain or loss to a seller for which a debt security is a "capital asset"
within the meaning of section 1221 of the Code except to the extent of any
accrued but unrecognized market discount, and will be long-term or short-term
depending on whether the debt security has been owned for the long-term capital
gain holding period (currently more than one year).
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.
115
It is possible that capital gain realized by holders of debt securities
could be considered gain realized upon the disposition of property that was part
of a "conversion transaction." A sale of a debt security will be part of a
conversion transaction if substantially all of the holder's expected return is
attributable to the time value of the holder's net investment, and at least one
of the following conditions is met:
o the holder entered the contract to sell the debt security
substantially contemporaneously with acquiring the debt security;
o the debt security is part of a straddle;
o the debt security is marketed or sold as producing capital gain;
or
o other transactions to be specified in Treasury regulations that
have not yet been issued occur.
If the sale or other disposition of a debt security is part of a
conversion transaction, all or any portion of the gain realized upon the sale or
other disposition would be treated as ordinary income instead of capital gain.
Non-U.S. Persons. Generally, to the extent that a debt security
evidences ownership in mortgage loans that are issued on or before July 18,
1984, interest or OID paid by the person required to withhold tax under section
1441 or 1442 of the Code to (i) an owner that is not a U.S. Person or (ii) a
debt securityholder holding on behalf of an owner that is not a U.S. Person,
will be subject to federal income tax, collected by withholding, at a rate of
30% (or such lower rate as may be provided for interest by an applicable tax
treaty). Accrued OID recognized by the owner on the sale or exchange of such a
debt security also will be subject to federal income tax at the same rate.
Generally, such payments would not be subject to withholding to the extent that
a debt security evidences ownership in mortgage loans issued after July 18,
1984, if
o the debt securityholder does not actually or constructively own
10% or more of the combined voting power of all classes of equity
in the issuer (which for purposes of this discussion may be
defined as the trust fund);
o the debt securityholder is not a controlled foreign corporation
within the meaning of section 957 of the Code related to the
issuer; and
o the debt securityholder complies with certain identification
requirements, including delivery of a statement, signed by the
debt securityholder under penalties of perjury, certifying that
it is not a U.S. Person and providing its name and address.
Information Reporting and Backup Withholding. The master servicer will
furnish or make available, within a reasonable time after the end of each
calendar year, to each holder of a debt security at any time during the year,
such information as may be deemed necessary or desirable to assist
securityholders in preparing their federal income tax returns, or to enable
holders to make the information available to owners or other financial
intermediaries of holders that hold the debt securities as nominees. If a
holder, owner or other recipient of a payment on
116
behalf of an owner fails to supply a certified taxpayer identification number or
if the Secretary of the Treasury determines that such person has not reported
all interest and dividend income required to be shown on its federal income tax
return, backup withholding may be required with respect to any payments. Any
amounts deducted and withheld from a distribution to a recipient would be
allowed as a credit against the recipient's federal income tax liability.
NON-REMIC CERTIFICATES
SINGLE CLASS OF SENIOR CERTIFICATES
Characterization. The trust fund may be created with one class of
senior certificates and one class of subordinated certificates. In this case,
each senior certificateholder will be treated as the owner of a pro rata
undivided interest in the interest and principal portions of the trust fund
represented by that senior certificate and will be considered the equitable
owner of a pro rata undivided interest in each of the mortgage loans in the
related mortgage pool. Any amounts received by a senior certificateholder in
lieu of amounts due with respect to any mortgage loan because of a default or
delinquency in payment will be treated for federal income tax purposes as having
the same character as the payments they replace.
Each holder of a senior certificate will be required to report on its
federal income tax return its pro rata share of the entire income from the
mortgage loans in the trust fund represented by that senior certificate,
including interest, original issue discount, if any, prepayment fees, assumption
fees, any gain recognized upon an assumption and late payment charges received
by the master servicer in accordance with the senior certificateholder's method
of accounting. Under section 162 or 212 of the Code, each senior
certificateholder will be entitled to deduct its pro rata share of servicing
fees, prepayment fees, assumption fees, any loss recognized upon an assumption
and late payment charges retained by the master servicer, provided that these
amounts are reasonable compensation for services rendered to the trust fund. A
senior certificateholder that is an individual, estate or trust will be entitled
to deduct its share of expenses only to the extent such expenses, plus all other
section 212 expenses, exceed 2% of that senior certificateholder's adjusted
gross income. A senior certificateholder using the cash method of accounting
must take into account its pro rata share of income and deductions as and when
collected by or paid to the master servicer. A senior certificateholder using an
accrual method of accounting must take into account its pro rata share of income
and deductions as they become due or are paid to the master servicer, whichever
is earlier. If the servicing fees paid to the master servicer were deemed to
exceed reasonable servicing compensation, the amount of such excess could be
considered as a retained ownership interest by the master servicer, or any
person to whom the master servicer assigned for value all or a portion of the
servicing fees, in a portion of the interest payments on the mortgage loans. The
mortgage loans might then be subject to the "coupon stripping" rules of the Code
discussed below.
Unless otherwise specified in the related prospectus supplement, tax
counsel will deliver its opinion to the depositor with respect to each series of
certificates that:
o a senior certificate owned by a "domestic building and loan
association" within the meaning of section 7701(a)(19) of the
Code representing principal and interest payments on mortgage
loans will be considered to represent "loans . . . secured by an
117
interest in real property which is . . . residential property"
within the meaning of section 7701(a)(19)(C)(v) of the Code to
the extent that the mortgage loans represented by that senior
certificate are of a type described in the section;
o a senior certificate owned by a real estate investment trust
representing an interest in mortgage loans will be considered to
represent "real estate assets" within the meaning of section
856(c)(4)(A) of the Code and interest income on the mortgage
loans will be considered "interest on obligations secured by
mortgages on real property" within the meaning of section
856(c)(3)(B) of the Code to the extent that the mortgage loans
represented by that senior certificate are of a type described in
the section; and
o a senior certificate owned by a REMIC will be an "obligation . .
. which is principally secured by an interest in real property"
within the meaning of section 860G(a)(3)(A) of the Code.
The Small Business Job Protection Act of 1996, as part of the repeal of
the bad debt reserve method for thrift institutions, repealed the application of
section 593(d) of the Code to any taxable year beginning after December 31,
1995.
The assets constituting certain trust funds may include "buydown"
mortgage loans. The characterization of any investment in "buydown" mortgage
loans will depend upon the precise terms of the related buydown agreement, but
to the extent that such "buydown" mortgage loans are secured in part by a bank
account or other personal property, they may not be treated in their entirety as
assets described in the foregoing sections of the Code. There are no directly
applicable precedents with respect to the federal income tax treatment or the
characterization of investments in "buydown" mortgage loans. Accordingly,
holders of senior certificates should consult their own tax advisors with
respect to characterization of investments in senior certificates representing
an interest in a trust fund that includes "buydown" mortgage loans.
Premium. The price paid for a senior certificate by a holder will be
allocated to the holder's undivided interest in each mortgage loan based on each
mortgage loan's relative fair market value, so that the holder's undivided
interest in each mortgage loan will have its own tax basis. A senior
certificateholder that acquires an interest in mortgage loans at a premium may
elect to amortize the premium under a constant interest method, provided that
the mortgage loan was originated after September 27, 1985. Premium allocable to
a mortgage loan originated on or before September 27, 1985 should be allocated
among the principal payments on the mortgage loan and allowed as an ordinary
deduction as principal payments are made. Amortizable bond premium will be
treated as an offset to interest income on a senior certificate. The basis for a
senior certificate will be reduced to the extent that amortizable premium is
applied to offset interest payments.
It is not clear whether a reasonable prepayment assumption should be
used in computing amortization of premium allowable under section 171 of the
Code. A certificateholder that makes this election for a certificate 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 certificateholder acquires during the year of the election or
thereafter.
118
If a premium is not subject to amortization using a reasonable
prepayment assumption, the holder of a senior certificate acquired at a premium
should recognize a loss, if a mortgage loan prepays in full, equal to the
difference between the portion of the prepaid principal amount of the mortgage
loan that is allocable to the senior certificate and the portion of the adjusted
basis of the senior certificate that is allocable to the mortgage loan. If a
reasonable prepayment assumption is used to amortize the premium, it appears
that a loss would be available, if at all, only if prepayments have occurred at
a rate faster than the reasonable assumed prepayment rate. It is not clear
whether any other adjustments would be required to reflect differences between
an assumed prepayment rate and the actual rate of prepayments.
On December 30, 1997, the Internal Revenue Service issued final
amortizable bond premium regulations. These regulations, which generally are
effective for bonds issued or acquired on or after March 2, 1998 (or, for
holders making an election for the taxable year that included March 2, 1998 or
any subsequent taxable year, shall apply to bonds held on or after the first day
of the taxable year of the election). The amortizable bond premium regulations
specifically do not apply to prepayable debt instruments or any pool of debt
instruments, such as the trust fund, the yield on which may be affected by
prepayments which are subject to section 1272(a)(6) of the Code. Absent further
guidance from the IRS and unless otherwise specified in the related prospectus
supplement, the trustee will account for amortizable bond premium in the manner
described above. Prospective purchasers should consult their tax advisors
regarding amortizable bond premium and the amortizable bond premium regulations.
Original Issue Discount. The IRS has stated in published rulings that,
in circumstances similar to those described herein, the special rules of the
Code (currently sections 1271 through 1273 and section 1275) relating to
original issue discount (OID) will be applicable to a senior certificateholder's
interest in those mortgage loans meeting the conditions necessary for these
sections to apply. Accordingly, the following discussion is based in part on the
Treasury's OID Regulations issued on February 2, 1994 under sections 1271
through 1273 and section 1275 of the Code. Certificateholders should be aware,
however, that the OID Regulations do not adequately address certain issues
relevant to prepayable securities, such as the certificates. Rules regarding
periodic inclusion of OID income are applicable to mortgages of corporations
originated after May 27, 1969, mortgages of noncorporate mortgagors (other than
individuals) originated after July 1, 1982, and mortgages of individuals
originated after March 2, 1984. OID could arise by the financing of points or
other charges by the originator of the mortgages in an amount greater than a
statutory de minimis exception to the extent that the points are not currently
deductible under applicable provisions of the Code or are not for services
provided by the lender. OID generally must be reported as ordinary gross income
as it accrues under a constant interest method. See "--B. Multiple Classes of
Senior Certificates--Senior Certificates Representing Interests in Loans Other
than ARM Loans--Accrual of Original Issue Discount" below.
Market Discount. A senior certificateholder that acquires an undivided
interest in mortgage loans may be subject to the market discount rules of
sections 1276 through 1278 to the extent an undivided interest in a mortgage
loan is considered to have been purchased at a "market discount". Generally, the
excess of the portion of the principal amount of a mortgage loan allocable to
the holder's undivided interest over the holder's tax basis in such interest.
Market discount with respect to a senior certificate will be considered to be
zero if the amount
119
allocable to the senior certificate is less than 0.25% of the senior
certificate's stated redemption price at maturity multiplied by the weighted
average maturity remaining after the date of purchase. Treasury regulations
implementing the market discount rules have not yet been issued; therefore,
investors should consult their own tax advisors regarding the application of
these rules and the advisability of making any of the elections allowed under
sections 1276 through 1278 of the Code.
The Code provides that any principal payment, whether a scheduled
payment or a prepayment, or any gain on disposition of a market discount bond
acquired by the taxpayer after October 22, 1986 shall be treated as ordinary
income to the extent that it does not exceed the accrued market discount at the
time of such payment. The amount of accrued market discount for purposes of
determining the tax treatment of subsequent principal payments or dispositions
of the market discount bond is to be reduced by the amount so treated as
ordinary income.
The Code also grants to the Department of the Treasury authority to
issue regulations providing for the computation of accrued market discount on
debt instruments, the principal of which is payable in more than one
installment. Although the Treasury has not yet issued regulations, rules
described in the relevant legislative history will apply. Under those rules, the
holder of a market discount bond may elect to accrue market discount either on
the basis of a constant interest rate or according to one of the following
methods. If a senior certificate is issued with OID, the amount of market
discount that accrues during any accrual period is equal to the product of
o the total remaining market discount
times
o a fraction, the numerator of which is the original issue discount
accruing during the period and the denominator of which is the
total remaining original issue discount at the beginning of the
accrual period.
For senior certificates issued without OID, the amount of market
discount that accrues during a period is equal to the product of
o the total remaining market discount
times
o a fraction, the numerator of which is the amount of stated
interest paid during the accrual period and the denominator of
which is the total amount of stated interest remaining to be paid
at the beginning of the accrual period.
For purposes of calculating market discount under any of the above
methods in the case of instruments (such as the senior certificates) which
provide for payments which may be accelerated by reason of prepayments of other
obligations securing such instruments, the same prepayment assumption applicable
to calculating the accrual of original issue discount will apply. Because the
regulations described above have not been issued, it is impossible to predict
120
what effect those regulations might have on the tax treatment of a senior
certificate purchased at a discount or premium in the secondary market.
A holder who acquires a senior certificate at a market discount also
may be required to defer, until the maturity date of the senior certificate or
its earlier disposition in a taxable transaction, the deduction of a portion of
the amount of interest that the holder paid or accrued during the taxable year
on indebtedness incurred or maintained to purchase or carry the senior
certificate in excess of the aggregate amount of interest (including OID)
includible in such holder's gross income for the taxable year with respect to
the senior certificate. The amount of such net interest expense deferred in a
taxable year may not exceed the amount of market discount accrued on the senior
certificate for the days during the taxable year on which the holder held the
senior certificate and, in general, would be deductible when such market
discount is includible in income. The amount of any remaining deferred deduction
is to be taken into account in the taxable year in which the senior certificate
matures or is disposed of in a taxable transaction. In the case of a disposition
in which gain or loss is not recognized in whole or in part, any remaining
deferred deduction will be allowed to the extent of gain recognized on the
disposition. This deferral rule does not apply if the senior certificateholder
elects to include such market discount in income currently as it accrues on all
market discount obligations acquired by the senior certificateholder in that
taxable year or thereafter.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a certificateholder to elect to accrue all interest, discount
(including de minimis market or original issue discount) and premium in income
as interest, based on a constant yield method for certificates acquired on or
after April 4, 1994. If such an election is made with respect to a mortgage loan
with market discount, the certificateholder will 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 certificateholder
acquires during the year of the election or thereafter. Similarly, a
certificateholder that makes this election for a certificate that is acquired at
a premium will be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that such
certificateholder owns or acquires. See "--Regular Certificates--Original Issue
Discount and Premium" below. The election to accrue interest, discount and
premium on a constant yield method with respect to a certificate is irrevocable.
Anti-abuse Rule. The IRS is permitted to apply or depart from the rules
contained in the OID Regulations as necessary or appropriate to achieve a
reasonable result where a principal purpose in structuring a mortgage asset,
mortgage loan or senior certificate, or the effect of applying the otherwise
applicable rules, is to achieve a result that is unreasonable in light of the
purposes of the applicable statutes (which generally are intended to achieve the
clear reflection of income for both issuers and holders of debt instruments).
MULTIPLE CLASSES OF SENIOR CERTIFICATES
Stripped Bonds and Stripped Coupons
General. 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
121
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. For purposes of sections 1271 through 1288 of the
Code, section 1286 treats a stripped bond or a stripped coupon as an obligation
issued on the date that such stripped interest is created. If a trust fund is
created with two classes of senior certificates, one class of senior
certificates will represent the right to principal and interest, or principal
only, on all or a portion of the mortgage loans ("stripped bond certificates"),
while the second class of senior certificates will represent the right to some
or all of the interest on such portion ("stripped coupon certificates").
Servicing fees in excess of reasonable servicing fees will be treated
under the stripped bond rules. If such excess servicing fee is less than 100
basis points (i.e., 1% interest on the mortgage loan principal balance) or the
certificates 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 certificates should be treated as market discount.
The IRS appears to require that reasonable servicing fees be calculated on a
mortgage loan by mortgage loan basis, which could result in some mortgage loans
being treated as having more than 100 basis points of interest stripped off.
Although not entirely clear, a stripped bond certificate generally
should be treated as a single debt instrument issued on the day it is purchased
for purposes of calculating any original issue discount. Generally, if the
discount on a stripped bond certificate is larger than a de minimis amount (as
calculated for purposes of the original issue discount rules), a purchaser of
such a certificate will be required to accrue the discount under the original
issue discount rules of the Code. See "--Single Class of Senior
Certificates--Original Issue Discount" above. However, a purchaser of a stripped
bond certificate will be required to account for any discount on the certificate
as market discount rather than original issue discount if either
o the amount of OID with respect to the certificate was treated as
zero under the OID de minimis rule when the certificate was
stripped, or
o no more than 100 basis points (including any amount of servicing
in excess of reasonable servicing) are stripped off the trust
fund's mortgage loans.
Pursuant to Revenue Procedure 91-49 issued on August 8, 1991,
purchasers of stripped bond certificates using an inconsistent method of
accounting must change their method of accounting and request the consent of the
IRS to the change in their accounting method on a statement attached to their
first timely tax return filed after August 8, 1991.
The precise tax treatment of stripped coupon certificates is
substantially uncertain. The Code could be read literally to require that
original issue discount computations be made on a mortgage loan by mortgagee
loan basis. However, based on recent IRS guidance, it appears that a stripped
coupon certificate should be treated as a single installment obligation subject
to the original issue discount rules of the Code. As a result, all payments on a
stripped coupon certificate would be included in the certificate's stated
redemption price at maturity for purposes of calculating income on such
certificate under the original issue discount rules of the Code.
122
It is unclear under what circumstances, if any, the prepayment of
mortgage loans will give rise to a loss to the holder of a stripped bond
certificate purchased at a premium or a stripped coupon certificate. If a senior
certificate is treated as a single instrument (rather than an interest in
discrete mortgage loans) and the effect of prepayments is taken into account in
computing yield with respect to the senior certificate, it appears that no loss
may be available as a result of any particular prepayment unless prepayments
occur at a rate faster than the assumed prepayment rate. However, if the senior
certificate is treated as an interest in discrete mortgage loans or if no
prepayment assumption is used, then, when a mortgage loan is prepaid, the holder
of the certificate should be able to recognize a loss equal to the portion of
the adjusted issue price of the certificate that is allocable to the mortgage
loan.
Because of the complexity of these issues, we strongly suggest that
holders of stripped bond certificates and stripped coupon certificates consult
with their own tax advisors regarding the proper treatment of these certificates
for federal income tax purposes.
Treatment of Certain Owners. Several sections of the Code provide
beneficial treatment to certain taxpayers that invest in mortgage loans of the
type that make up the trust fund. With respect to these sections, no specific
legal authority exists regarding whether the character of the senior
certificates, for federal income tax purposes, will be the same as that of the
underlying mortgage loans. While section 1286 treats a stripped obligation as a
separate obligation for purposes of the provisions of the Code addressing
original issue discount, it is not clear whether such characterization would
apply with regard to these other sections. Although the issue is not free from
doubt, in the opinion of tax counsel, based on policy considerations, each class
of senior certificates should be considered to represent "real estate assets"
within the meaning of section 856(c)(4)(A) of the Code and "loans . . . secured
by, an interest in real property which is . . . residential real property"
within the meaning of section 7701(a)(19)(C)(v) of the Code, and interest income
attributable to senior certificates should be considered to represent "interest
on obligations secured by mortgages on real property" within the meaning of
section 856(c)(3)(B) of the Code, provided that in each case the underlying
mortgage loans and interest on such mortgage loans qualify for such treatment.
Prospective purchasers to which such characterization of an investment in senior
certificates is material should consult their own tax advisors regarding the
characterization of the senior certificates and related income. Senior
certificates will be "obligations (including any participation or certificate of
beneficial ownership therein) which are principally secured by an interest in
real property" within the meaning of section 860G(a)(3)(A) of the Code.
Senior Certificates Representing Interests in Loans Other
Than ARM Loans
General. The OID rules of sections 1271 through 1275 of the Code will
be applicable to a senior certificateholder's interest in those mortgage loans
as to which the conditions for the application of those sections are met. Rules
regarding periodic inclusion of original issue discount in income are applicable
to mortgages of corporations originated after May 27, 1969, mortgages of
noncorporate mortgagors (other than individuals) originated after July 1, 1982,
and mortgages of individuals originated after March 2, 1984. Under the OID
Regulations, OID could arise by the charging of points by the originator of the
mortgage in an amount greater than the statutory de minimis exception, including
a payment of points that is currently deductible by the borrower under
applicable provisions of the Code, or, under certain circumstances, by the
123
presence of "teaser" rates on the mortgage loans. OID on each senior certificate
must be included in the owner's ordinary income for federal income tax purposes
as it accrues, in accordance with a constant interest method that takes into
account the compounding of interest, in advance of receipt of the cash
attributable to such income. The amount of OID required to be included in an
owner's income in any taxable year with respect to a senior certificate
representing an interest in mortgage loans other than mortgage loans with
interest rates that adjust periodically (ARM loans) likely will be computed as
described under "--Accrual of Original Issue Discount" below. The following
discussion is based in part on the OID Regulations and in part on the provisions
of the Tax Reform Act of 1986, as amended. The OID Regulations generally are
effective for debt instruments issued on or after April 4, 1994, but may be
relied upon as authority with respect to debt instruments such as the senior
certificates issued after December 21, 1992. Alternatively, proposed Treasury
regulations issued December 21, 1992 may be treated as authority for debt
instruments issued after December 21, 1992 and prior to April 4, 1994, and
proposed Treasury regulations issued in 1986 and 1991 may be treated as
authority for instruments issued before December 21, 1992. In applying these
dates, the issue date of the mortgage loans should be used or, in the case of
stripped bond certificates or stripped coupon certificates, the date when these
certificates are acquired. The holder of a senior certificate should be aware,
however, that neither the proposed OID Regulations nor the OID Regulations
adequately address certain issues relevant to prepayable securities.
Under the Code, the mortgage loans underlying each senior certificate
will be treated as having been issued on the date they were originated with an
amount of OID equal to the excess of such mortgage loan's stated redemption
price at maturity over its issue price. The issue price of a mortgage loan is
generally the amount lent to the mortgagee, which may be adjusted to take into
account certain loan origination fees. The stated redemption price at maturity
of a mortgage loan is the sum of all payments to be made on such mortgage loan
other than payments that are treated as qualified stated interest payments. The
accrual of this OID, as described under "-- Accrual of Original Issue Discount"
below, will, unless otherwise specified in the related prospectus supplement,
utilize the original yield to maturity of the senior certificate calculated
based on a reasonable assumed prepayment rate for the mortgage loans underlying
the senior certificates and will take into account events that occur during the
calculation period. This prepayment assumption will be determined in the manner
prescribed by regulations that have not yet been issued. The legislative history
of the Tax Reform Act provides, however, that the regulations will require that
this prepayment assumption be the prepayment assumption that is used in
determining the offering price of the certificate. No representation is made
that any certificate will prepay at the prepayment assumption or at any other
rate. The prepayment assumption contained in the Code literally only applies to
debt instruments collateralized by other debt instruments that are subject to
prepayment rather than direct ownership interests in such debt instruments, such
as the certificates represent. However, no other legal authority provides
guidance with regard to the proper method for accruing OID on obligations that
are subject to prepayment, and, until further guidance is issued, the master
servicer intends to calculate and report OID under the method described below.
Accrual of Original Issue Discount. Generally, the owner of a senior
certificate must include in gross income the sum of the "daily portions", as
defined below, of the OID on that senior certificate for each day on which it
owns the senior certificate, including the date of purchase but excluding the
date of disposition. In the case of an original owner, the daily
124
portions of original issue discount with respect to each component generally
will be determined as follows under the Amendments. A calculation will be made
by the master servicer or such other entity specified in the related prospectus
supplement of the portion of original issue discount that accrues during each
successive monthly accrual period (or shorter period from the date of original
issue) that ends on the day in the calendar year corresponding to each of the
distribution dates on the senior certificate (or the day prior to each such
date). This will be done, in the case of each full month accrual period, by
adding
o the present value at the end of the accrual period (determined by
using as a discount factor the original yield to maturity of the
respective component, under the Prepayment Assumption) of all
remaining payments to be received under the Prepayment Assumption
on the respective component, and
o any payments received during such accrual period (other than a
payment of qualified stated interest), and subtracting from that
total the "adjusted issue price" of the respective component at
the beginning of such accrual period.
The "adjusted issue price" of a senior certificate at the beginning of
the first accrual period is its issue price; the "adjusted issue price" of a
senior certificate at the beginning of a subsequent accrual period is the
"adjusted issue price" at the beginning of the immediately preceding accrual
period plus the amount of OID allocable to that accrual period reduced by the
amount of any payment (other than a payment of qualified stated interest) made
at the end of or during that accrual period. The OID during the accrual period
will then be divided by the number of days in the period to determine the daily
portion of OID for each day in the period. With respect to an initial accrual
period shorter than a full monthly accrual period, the daily portions of
original issue discount must be determined according to an appropriate
allocation under any reasonable method.
OID generally must be reported as ordinary gross income as it accrues
under a constant interest method that takes into account the compounding of
interest as it accrues rather than when received. However, the amount of OID
includible in the income of a holder of an obligation is reduced when the
obligation is acquired after its initial issuance at a price greater than the
sum of the original issue price and the previously accrued OID, less prior
payments of principal. Accordingly, if mortgage loans acquired by a
certificateholder are purchased at a price equal to the then unpaid principal
amount of such mortgage loan, no original issue discount attributable to the
difference between the issue price and the original principal amount of such
mortgage loan (i.e., points) will be includible by such holder. Other OID on the
mortgage loans (e.g., that arising from a "teaser" rate) would still need to be
accrued.
Senior Certificates Representing Interests in ARM Loans
The OID Regulations do not address the treatment of instruments, such
as the senior certificates (if the related trust fund includes ARM loans), which
represent interests in ARM loans. Additionally, the IRS has not issued guidance
under the coupon stripping rules of the Code with respect to these instruments.
In the absence of any authority, the master servicer will report OID on senior
certificates attributable to ARM loans ("stripped ARM obligations") to holders
in a manner it believes to be consistent with the rules described under the
heading "--
125
Senior Certificates Representing Interests in Loans Other Than ARM Loans" above
and with the OID Regulations. In general, application of these rules may require
inclusion of income on a stripped ARM obligation in advance of the receipt of
cash attributable to such income. Further, the addition of deferred interest
resulting from negative amortization to the principal balance of an ARM loan may
require the inclusion of such amount in the income of the senior
certificateholder when the amount accrues. Furthermore, the addition of deferred
interest to the senior certificate's principal balance will result in additional
income (including possibly OID income) to the senior certificateholder over the
remaining life of the senior certificates.
Because the treatment of stripped ARM obligations is uncertain,
investors are urged to consult their tax advisors regarding how income will be
includible with respect to these certificates.
POSSIBLE APPLICATION OF CONTINGENT PAYMENT REGULATIONS TO CERTAIN NON-REMIC
CERTIFICATES
Final regulations issued on June 11, 1996 with respect to OID under
section 1275 include "contingent payment regulations" covering obligations that
provide for one or more contingent payments. Rights to interest payments on a
mortgage loan might be considered to be contingent within the meaning of the
contingent payment regulations if the interest would not be paid if the borrower
exercised its right to prepay the mortgage loan. However, in the case of an
investor having a right to shares of the interest and principal payments on a
mortgage loan when the share of interest is not substantially greater than the
share of principal, the possibility of prepayment should not be considered to
characterize otherwise noncontingent interest payments as contingent payments.
The absence of interest payments following a prepayment would be the normal
consequence of the return of the investor's capital in the form of a principal
payment. On the other hand, a right to interest on such a mortgage loan is more
likely to be regarded as contingent if held by an investor that does not also
hold a right to the related principal. Such an investor would not recover its
capital through receipt of a principal payment at the time of the prepayment of
the mortgage loan.
Applying these principles to the senior certificates, because the
mortgage loans are subject to prepayment at any time, payments on a class of
senior certificates representing a right to interest on the mortgage loans could
be considered to be contingent within the meaning of the contingent payment
regulations, at least if the senior certificate was issued at a premium. The
likelihood that such payments will be considered contingent increases the
greater the amount of such premium.
In the event that payments on a senior certificate in respect of
interest on the mortgage loans are considered contingent, then the holder would
generally report income or loss as described under the heading "--Stripped Bonds
and Stripped Coupons" above; provided, however, that the yield that would be
used in calculating interest income would not be the actual yield but would
instead equal the "applicable Federal rate" (AFR), in effect at the time of
purchase of the senior certificate by the holder. The AFR generally is an
average of current yields on Treasury securities computed and published monthly
by the IRS. In addition, once the holder's adjusted basis in the senior
certificate has been reduced (by prior distributions or losses) to an amount
equal to the aggregate amount of the remaining noncontingent payments of the
126
mortgage loans that are allocable to the senior certificate (or to zero if the
senior certificate does not share in principal payments), then the holder would
recognize income in each subsequent month equal to the full amount of interest
on the mortgage loans that accrues in that month and is allocable to the senior
certificate. It is uncertain whether, under the contingent payment regulations,
any other adjustments would be made to take account of prepayments of the
mortgage loans.
SALE OR EXCHANGE OF A SENIOR CERTIFICATE
Sale or exchange of a senior certificate prior to its maturity will
result in gain or loss equal to the difference, if any, between the amount
received and the seller's adjusted basis in the senior certificate. Such
adjusted basis generally will equal the seller's purchase price for the senior
certificate, increased by the OID and market discount included in the seller's
gross income with respect to the senior certificate, and reduced by principal
payments on the senior certificate previously received by the seller and any
premium amortized by the seller. Such gain or loss will be capital gain or loss
to a seller for which a senior certificate is a "capital asset" within the
meaning of section 1221 of the Code except to the extent of any accrued but
unrecognized market discount, and will be long-term or short-term depending on
whether the senior certificate has been owned for the long-term capital gain
holding period (currently more than one year).
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.
It is possible that capital gain realized by holders of the senior
certificates could be considered gain realized upon the disposition of property
that was part of a "conversion transaction". A sale of a senior certificate will
be part of a conversion transaction if substantially all of the holder's
expected return is attributable to the time value of the holder's net
investment, and at least one of the following conditions is met:
o the holder entered the contract to sell the senior certificate
substantially contemporaneously with acquiring the senior
certificate;
o the senior certificate is part of a straddle;
o the senior certificate is marketed or sold as producing capital
gain; or
o other transactions to be specified in Treasury regulations that
have not yet been issued occur.
If the sale or other disposition of a senior certificate is part of a
conversion transaction, all or any portion of the gain realized upon the sale or
other disposition would be treated as ordinary income instead of capital gain.
127
Senior certificates will be "evidences of indebtedness" within the
meaning of section 582(c)(1) of the Code, so that gain or loss recognized from
the sale of a senior certificate by a bank or a thrift institution to which such
section applies will be ordinary income or loss.
NON-U.S. PERSONS
Generally, to the extent that a senior certificate evidences ownership
in mortgage loans that are issued on or before July 18, 1984, interest or OID
paid by the person required to withhold tax under section 1441 or 1442 to (i) an
owner that is not a U.S. Person or (ii) a senior certificateholder holding on
behalf of an owner that is not a U.S. Person, will be subject to federal income
tax, collected by withholding, at a rate of 30% or such lower rate as may be
provided for interest by an applicable tax treaty. Accrued OID recognized by the
owner on the sale or exchange of such a senior certificate also will be subject
to federal income tax at the same rate. Generally, such payments would not be
subject to withholding to the extent that a senior certificate evidences
ownership in mortgage loans issued after July 18, 1984, if
o the senior certificateholder does not actually or constructively
own 10% or more of the combined voting power of all classes of
equity in the issuer (which for purposes of this discussion may
be defined as the trust fund);
o the senior certificateholder is not a controlled foreign
corporation within the meaning of section 957 of the Code related
to the issuer; and
o the senior certificateholder complies with certain identification
requirements, including delivery of a statement, signed by the
senior certificateholder under penalties of perjury, certifying
that it is not a U.S. Person and providing its name and address.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The master servicer will furnish or make available, within a reasonable
time after the end of each calendar year, to each certificateholder at any time
during the year, such information as may be deemed necessary or desirable to
assist securityholders in preparing their federal income tax returns, or to
enable holders to make the information available to owners or other financial
intermediaries of holders that hold the certificates as nominees. If a holder,
owner or other recipient of a payment on behalf of an owner fails to supply a
certified taxpayer identification number or if the Secretary of the Treasury
determines that such person has not reported all interest and dividend income
required to be shown on its federal income tax return, backup withholding may be
required with respect to any payments. Any amounts deducted and withheld from a
distribution to a recipient would be allowed as a credit against the recipient's
federal income tax liability.
128
REMIC CERTIFICATES
GENERAL
The trust fund relating to a series of certificates may elect to be
treated as a REMIC. Qualification as a REMIC requires ongoing compliance with
certain conditions. Although a REMIC is not generally subject to federal income
tax (see, however, "--Prohibited Transactions and Other Taxes") below, if a
trust fund with respect to which a REMIC election is made fails 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 interest in a REMIC as described under "--Residual
Certificates" below), the Code provides that a trust fund will not be treated as
a REMIC for such year and thereafter. In that event, such entity may be taxable
as a separate corporation, and the related REMIC certificates may not be
accorded the status or given the tax treatment described below. While the Code
authorizes the Treasury to issue regulations providing relief in the event of an
inadvertent termination of status as a REMIC, no such regulations have been
issued. Moreover, any relief may be accompanied by sanctions such as the
imposition of a corporate tax on all or a portion of the REMIC's income for the
period in which the requirements for such status are not satisfied. With respect
to each trust fund that elects REMIC status, in the opinion of tax counsel,
assuming compliance with all provisions of the related Agreement, the trust fund
will qualify as a REMIC and the related certificates will be considered to be
regular interests ("regular certificates") or residual interests ("residual
certificates") in the REMIC. The related prospectus supplement for each series
of certificates will indicate whether the trust fund will make a REMIC election
and whether a class of certificates will be treated as a regular or residual
interest in the REMIC.
In general, with respect to each series of certificates for which a
REMIC election is made,
o certificates held by a thrift institution taxed as a "domestic
building and loan association" will constitute assets described
in section 7701(a)(19)(C) of the Code;
o certificates 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
o interest on certificates held by a real estate investment trust
will be considered "interest on obligations secured by mortgages
on real property" within the meaning of section 856(c)(3)(B) of
the Code.
If less than 95% of the REMIC's assets are assets qualifying under any
of the foregoing sections, the certificates will be qualifying assets only to
the extent that the REMIC's assets are qualifying assets. In addition, payments
on mortgage loans held pending distribution on the REMIC certificates will be
considered to be qualifying assets under the foregoing sections.
In some instances, the mortgage loans may not be treated entirely as
assets described in the foregoing sections. See, in this regard, the discussion
of "buydown" mortgage loans contained in "--Non-REMIC Certificates--Single Class
of Senior Certificates" above. REMIC certificates held by a real estate
investment trust will not constitute "Government Securities" within the meaning
of section 856(c)(4)(A) of the Code and REMIC certificates held by a
129
regulated investment company will not constitute "Government Securities" within
the meaning of section 851(b)(4)(A)(ii) of the Code. REMIC certificates held by
certain financial institutions will constitute "evidences of indebtedness"
within the meaning of section 582(c)(1) of the Code.
A "qualified mortgage" for REMIC purposes is any obligation (including
certificates of participation in such an obligation) that is principally secured
by an interest in real property and that is transferred to the REMIC within a
prescribed time period in exchange for regular or residual interests in the
REMIC. The REMIC Regulations provide that manufactured housing or mobile homes
(not including recreational vehicles, campers or similar vehicles) which are
"single family residences" under section 25(e)(10) of the Code will qualify as
real property without regard to state law classifications. Under section
25(e)(10), a single family residence includes any manufactured home which has a
minimum of 400 square feet of living space and a minimum width in excess of 102
inches and which is of a kind customarily used at a fixed location.
TIERED REMIC STRUCTURES
For certain series of certificates, two separate elections may be made
to treat designated portions of the related trust fund as REMICs (respectively,
the "subsidiary REMIC" and the "master REMIC") for federal income tax purposes.
Upon the issuance of any such series of certificates, tax counsel will deliver
its opinion generally to the effect that, assuming compliance with all
provisions of the related pooling and servicing agreement, the master REMIC as
well as any subsidiary REMIC will each qualify as a REMIC and the REMIC
certificates issued by the master REMIC and the subsidiary REMIC, respectively,
will be considered to evidence ownership of regular certificates or residual
certificates in the related REMIC within the meaning of the REMIC provisions.
Only REMIC certificates issued by the master REMIC will be offered
under this prospectus. The subsidiary REMIC and the master REMIC will be treated
as one REMIC solely for purposes of determining
o whether the REMIC certificates will be (i) "real estate assets"
within the meaning of section 856(c)(4)(A) of the Code or (ii)
"loans secured by an interest in real property" under section
7701(a)(19)(C) of the Code; and
o whether the income on the certificates is interest described in
section 856(c)(3)(B) of the Code.
REGULAR CERTIFICATES
General. Except as otherwise stated in this discussion, regular
certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC and not as ownership interests in the REMIC or its assets.
Moreover, holders of regular certificates that otherwise report income under a
cash method of accounting will be required to report income with respect to
regular certificates under an accrual method.
130
Original Issue Discount and Premium. The regular certificates may be
issued with OID within the meaning of section 1273(a) of the Code. Generally,
the amount of OID, if any, will equal the difference between the "stated
redemption price at maturity" of a regular certificate and its "issue price".
Holders of any class of certificates issued with OID will be required to include
such OID in gross income for federal income tax purposes as it accrues, in
accordance with a constant interest method based on the compounding of interest,
in advance of receipt of the cash attributable to such income. The following
discussion is based in part on the OID Regulations and in part on the provisions
of the Tax Reform Act. Holders of regular certificates should be aware, however,
that the OID Regulations do not adequately address certain issues relevant to
prepayable securities such as the regular certificates.
Rules governing OID are set forth in sections 1271 through 1273 and
section 1275 of the Code. These rules require that the amount and rate of
accrual of OID be calculated based on a Prepayment Assumption and prescribe a
method for adjusting the amount and rate of accrual of such discount where the
actual prepayment rate differs from the Prepayment Assumption. Under the Code,
the Prepayment Assumption must be determined in the manner prescribed by
regulations which have not yet been issued. The Legislative History provides,
however, that Congress intended the regulations to require that the Prepayment
Assumption be the prepayment assumption that is used in determining the initial
offering price of the regular certificates. The prospectus supplement for each
series of regular certificates will specify the prepayment assumption to be used
for the purpose of determining the amount and rate of accrual of OID. No
representation is made that the regular certificates will prepay at the
prepayment assumption or at any other rate.
In general, each regular certificate will be treated as a single
installment obligation issued with an amount of OID equal to the excess of its
"stated redemption price at maturity" over its "issue price". The issue price of
a regular certificate is the first price at which a substantial amount of
regular certificates 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 regular certificates is sold for cash on or prior to
the date of their initial issuance, the issue price for that class will be
treated as the fair market value of that class on the initial issue date. The
issue price of a regular certificate also includes the amount paid by an initial
regular certificateholder for accrued interest that relates to a period prior to
the initial issue date of the regular certificate. The stated redemption price
at maturity of a regular certificate includes the original principal amount of
the regular certificate, but generally will not include distributions of
interest if such distributions constitute "qualified stated interest". 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 regular certificate. 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 regular certificates 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 the
regular certificates includes all distributions of interest as well as principal
thereon.
Where the interval between the initial issue date and the first
distribution date on a regular certificate is longer than the interval between
subsequent distribution dates, the greater of
131
any OID (disregarding the rate in the first period) and any interest foregone
during the first period is treated as the amount by which the stated redemption
price at maturity of the certificate exceeds its issue price for purposes of the
de minimis rule described below. The OID Regulations suggest that all interest
on a long-first-period regular certificate that is issued with non-de minimis
OID, as determined under the foregoing rule, will be treated as OID. Where the
interval between the issue date and the first distribution date on a regular
certificate is shorter than the interval between subsequent distribution dates,
interest due on the first Distribution Date in excess of the amount that accrued
during the first period would be added to the certificates stated redemption
price at maturity. Regular securityholders should consult their own tax advisors
to determine the issue price and stated redemption price at maturity of a
regular certificate.
Under the de minimis rule, OID on a regular certificate will be
considered to be zero if the amount of OID is less than 0.25% of the stated
redemption price at maturity of the regular certificate multiplied by the
weighted average maturity of the regular certificate. For this purpose, the
weighted average maturity of the regular certificate is computed as the sum of
the amounts determined by multiplying
o 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
times
o a fraction, the numerator of which is the amount of each
distribution included in the stated redemption price at maturity
of the regular certificate and the denominator of which is the
stated redemption price at maturity of the regular certificate.
Although currently unclear, it appears that the schedule of such
distributions should be determined in accordance with the assumed rate of
prepayment of the mortgage loans and the anticipated reinvestment rate, if any,
relating to the regular certificates. This prepayment assumption with respect to
a series of regular certificates will be set forth in the related prospectus
supplement. Holders generally must report de minimis OID pro rata as principal
payments are received and such income will be capital gain if the regular
certificate is held as a capital asset. However, accrual method holders may
elect to accrue all de minimis OID as well as market discount under a constant
interest method.
The prospectus supplement with respect to a trust fund may provide for
certain regular certificates to be issued as "super-premium" certificates at
prices significantly exceeding their principal amounts or based on notional
principal balances. The income tax treatment of these super-premium certificates
is not entirely certain. For information reporting purposes, the trust fund
intends to take the position that the stated redemption price at maturity of the
super-premium certificates is the sum of all payments to be made on these
certificates determined under the prepayment assumption set forth in the related
prospectus supplement, with the result that the super-premium certificates would
be treated as being issued with OID. The calculation of income in this manner
could result in negative OID (which delays future accruals of OID rather than
being immediately deductible) when prepayments on the mortgage loans exceed
132
those estimated under the prepayment assumption. The IRS might contend, however,
that the contingent payment regulations should apply to the super-premium
certificates.
Although the contingent payment regulations are not applicable to
instruments governed by section 1272(a)(6) of the Code, they represent the only
guidance regarding the current view of the IRS with respect to contingent
payment instruments. In the alternative, the IRS could assert that the stated
redemption price at maturity of such regular certificates should be limited to
their principal amount (subject to the discussion under "--Accrued Interest
Certificates" below), so that such regular certificates would be considered for
U.S. federal income tax purposes to be issued at a premium. If such position
were to prevail, the rules described under "--Premium" below would apply. It is
unclear when a loss may be claimed for any unrecovered basis for a super-premium
certificate. It is possible that a holder of a super-premium certificate may
only claim a loss when its remaining basis exceeds the maximum amount of future
payments, assuming no further prepayments, or when the final payment is received
with respect to the super-premium certificate.
Under the REMIC Regulations, if the issue price of a regular
certificate (other than regular certificate based on a notional amount) does not
exceed 125% of its actual principal amount, the interest rate is not considered
disproportionately high. Accordingly, a regular certificate generally should not
be treated as a super-premium certificate and the rules described below under
"--Premium" below should apply. However, it is possible that holders of regular
certificates issued at a premium, even if the premium is less than 25% of the
certificate's actual principal balance, will be required to amortize the premium
under an OID method or contingent interest method even though no election under
section 171 of the Code is made to amortize such premium.
Generally, a regular certificateholder must include in gross income the
"daily portions," as determined below, of the OID that accrues on a regular
certificate for each day the regular certificateholder holds the regular
certificate, including the purchase date but excluding the disposition date. In
the case of an original holder of a regular certificate, a calculation will be
made of the portion of the OID that accrues during each successive accrual
period that ends on the day in the calendar year corresponding to a distribution
date (or if distribution dates are on the first day or first business day of the
immediately preceding month, interest may be treated as payable on the last day
of the immediately preceding month) and begins on the day after the end of the
immediately preceding accrual period (or on the issue date in the case of the
first accrual period). This will be done, in the case of each full accrual
period, by adding
o the present value at the end of the accrual period (determined by
using as a discount factor the original yield to maturity of the
regular certificates as calculated under the Prepayment
Assumption) of all remaining payments to be received on the
regular certificate under the Prepayment Assumption, and
o any payments included in the stated redemption price at maturity
received during the accrual period,
and subtracting from that total the "adjusted issue price" of the
regular certificates at the beginning of the accrual period.
133
The "adjusted issue price" of a regular certificate at the beginning of
the first accrual period is its issue price; the "adjusted issue price" of a
regular certificate at the beginning of a subsequent accrual period is the
"adjusted issue price" at the beginning of the immediately preceding accrual
period plus the amount of OID allocable to that accrual period and reduced by
the accrual period. The OID accrued during an accrual period will then be
divided by the number of days in the period to determine the daily portion of
OID for each day in the accrual period. The calculation of OID under the method
described above will cause the accrual of OID to either increase or decrease
(but never below zero) in a given accrual period to reflect the fact that
prepayments are occurring faster or slower than under the Prepayment Assumption.
With respect to an initial accrual period shorter than a full accrual period,
the daily portions of OID may be determined according to an appropriate
allocation under any reasonable method.
A subsequent purchaser of a regular certificate issued with OID who
purchases the regular certificate at a cost less than the remaining stated
redemption price at maturity will also be required to include in gross income
the sum of the daily portions of OID on that regular certificate. In computing
the daily portions of OID for such a purchaser (as well as an initial purchaser
that purchases at a price higher than the adjusted issue price but less than the
stated redemption price at maturity), however, the daily portion is reduced by
the amount that would be the daily portion for such day (computed in accordance
with the rules set forth above) multiplied by a fraction, the numerator of which
is the amount, if any, by which the price paid by such holder for that regular
certificate exceeds the following amount:
o the sum of the issue price plus the aggregate amount of OID that
would have been includible in the gross income of an original
regular certificateholder (who purchased the regular certificate
at its issue price),
less
o any prior payments included in the stated redemption price at
maturity,
and the denominator of which is the sum of the daily portions for that
regular certificate for all days beginning on the date after the purchase date
and ending on the maturity date computed under the Prepayment Assumption. A
holder who pays an acquisition premium instead may elect to accrue OID by
treating the purchase as original issue.
Variable Rate Regular Certificates. Regular certificates may provide
for interest based on a variable rate. Interest based on a variable rate will
constitute qualified stated interest and not contingent interest if, generally,
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", a combination of a single fixed rate and one or more
"qualified floating rates", one "qualified inverse floating
rate", or a combination of "qualified floating rates" that do not
operate in a
134
manner that significantly accelerates or defers interest
payments on the regular certificate.
The amount of OID with respect to a regular certificate bearing a
variable rate of interest will accrue in the manner described under "--Original
Issue Discount and Premium" above by assuming generally that the index used for
the variable rate will remain fixed throughout the term of the certificate.
Appropriate adjustments are made for the actual variable rate.
Although unclear at present, the depositor intends to treat interest on
a regular certificate that is a weighted average of the net interest rates on
mortgage loans as qualified stated interest. In such case, the weighted average
rate used to compute the initial pass-through rate on the regular certificates
will be deemed to be the index in effect through the life of the regular
certificates. It is possible, however, that the IRS may treat some or all of the
interest on regular certificates with a weighted average rate as taxable under
the rules relating to obligations providing for contingent payments. Such
treatment may effect the timing of income accruals on regular certificates.
Market Discount. A purchaser of a regular certificate may be subject to
the market discount provisions of sections 1276 through 1278 of the Code. Under
these provisions and the OID Regulations, "market discount" equals the excess,
if any, of
o the regular certificate's stated principal amount or, in the case
of a regular certificate with OID, the adjusted issue price
(determined for this purpose as if the purchaser had purchased
the regular certificate from an original holder)
over
o the price for the regular certificate paid by the purchaser.
A holder who purchases a regular certificate at a market discount will
recognize income upon receipt of each distribution representing stated
redemption price. In particular, under section 1276 of the Code such a holder
generally will be required to allocate each principal distribution first to
accrued market discount not previously included in income and to recognize
ordinary income to that extent. A certificateholder may elect to include market
discount in income currently as it accrues rather than including it on a
deferred basis in accordance with the foregoing. If made, such election will
apply to all market discount bonds acquired by the certificateholder on or after
the first day of the first taxable year to which the election applies. In
addition, the OID Regulations permit a certificateholder using the accrual
method of accounting to elect to accrue all interest, discount (including de
minimis market or original issue discount) and premium in income as interest,
based on a constant yield method. If such an election is made with respect to a
regular certificate with market discount, the certificateholder will 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 the
certificateholder acquires during the year of the election or thereafter.
Similarly, a certificateholder that makes this election for a certificate 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 certificateholder owns or acquires. See "--Original Issues
Discount and Premium" above. The
135
election to accrue interest, discount and premium on a constant yield method
with respect to a certificate is irrevocable.
Market discount with respect to a regular certificate will be
considered to be zero if the amount allocable to the regular certificate is less
than 0.25% of the regular certificate's stated redemption price at maturity
multiplied by the regular certificate's weighted average maturity remaining
after the date of purchase. If market discount on a regular certificate is
considered to be zero under this rule, the actual amount of market discount must
be allocated to the remaining principal payments on the regular certificate and
gain equal to such allocated amount will be recognized when the corresponding
principal payment is made. Treasury regulations implementing the market discount
rules have not yet been issued; therefore, investors should consult their own
tax advisors regarding the application of these rules and the advisability of
making any of the elections allowed under sections 1276 through 1278 of the
Code.
The Code provides that any principal payment (whether a scheduled
payment or a prepayment) or any gain on disposition of a market discount bond
acquired by the taxpayer after October 22, 1986, shall be treated as ordinary
income to the extent that it does not exceed the accrued market discount at the
time of such payment. The amount of accrued market discount for purposes of
determining the tax treatment of subsequent principal payments or dispositions
of the market discount bond is to be reduced by the amount so treated as
ordinary income.
The Code also grants authority to the Treasury to issue regulations
providing for the computation of accrued market discount on debt instruments,
the principal of which is payable in more than one installment. Until such time
as regulations are issued by the Treasury, rules described in the legislative
history of the Tax Reform Act will apply. Under those rules, the holder of a
market discount bond may elect to accrue market discount either on the basis of
a constant interest rate or according to one of the following methods. For
regular certificates issued with OID, the amount of market discount that accrues
during a period is equal to the product of
o the total remaining market discount
multiplied by
o a fraction, the numerator of which is the OID accruing during the
period and the denominator of which is the total remaining OID at
the beginning of the period.
For regular certificates issued without OID, the amount of market
discount that accrues during a period is equal to the product of
o the total remaining market discount
multiplied by
o a fraction, the numerator of which is the amount of stated
interest paid during the accrual period and the denominator of
which is the total amount of stated interest remaining to be paid
at the beginning of the period.
136
For purposes of calculating market discount under any of the above
methods in the case of instruments (such as the regular certificates) which
provide for payments which may be accelerated by reason of prepayments of other
obligations securing such instruments, the same prepayment assumption applicable
to calculating the accrual of OID will apply.
A holder of a regular certificate that acquires it at a market discount
also may be required to defer, until the maturity date of the regular
certificate or its earlier disposition in a taxable transaction, the deduction
of a portion of the amount of interest that the holder paid or accrued during
the taxable year on indebtedness incurred or maintained to purchase or carry the
regular certificate in excess of the aggregate amount of interest (including
OID) includible in the holder's gross income for the taxable year with respect
to the regular certificate. The amount of such net interest expense deferred in
a taxable year may not exceed the amount of market discount accrued on the
regular certificate for the days during the taxable year on which the holder
held the regular certificate and, in general, would be deductible when such
market discount is includible in income. The amount of any remaining deferred
deduction is to be taken into account in the taxable year in which the regular
certificate matures or is disposed of in a taxable transaction. In the case of a
disposition in which gain or loss is not recognized in whole or in part, any
remaining deferred deduction will be allowed to the extent of gain recognized on
the disposition. This deferral rule does not apply if the regular
certificateholder elects to include such market discount in income currently as
it accrues on all market discount obligations acquired by the regular
certificateholder in that taxable year or thereafter.
Premium. A purchaser of a regular certificate who purchases the regular
certificate at a cost (not including accrued qualified stated interest) greater
than its remaining stated redemption price at maturity will be considered to
have purchased the regular certificate at a premium and may elect to amortize
such premium under a constant yield method. A certificateholder that makes this
election for a certificate that is acquired at a premium will be deemed to have
made an election to amortize bond premium with respect to all debt instruments
having amortizable bond premium that such certificateholder acquires during the
year of the election or thereafter. It is not clear whether the prepayment
assumption would be taken into account in determining the life of the regular
certificate for this purpose. However, the legislative history of the Tax Reform
Act states that the same rules that apply to accrual of market discount (which
rules require use of a prepayment assumption in accruing market discount with
respect to regular certificates without regard to whether the certificates have
OID) will also apply in amortizing bond premium under section 171 of the Code.
The Code provides that amortizable bond premium will be allocated among the
interest payments on the regular certificates and will be applied as an offset
against the interest payment.
On June 27, 1996, the IRS published in the Federal Register proposed
regulations on the amortization of bond premium. The foregoing discussion is
based in part on such proposed regulations. On December 30, 1997, the IRS issued
the amortizable bond premium regulations which generally are effective for bonds
acquired on or after March 2, 1998 or, for holders making an election to
amortize bond premium as described above, the taxable year that includes March
2, 1998 or any subsequent taxable year, will apply to bonds held on or after the
first day of taxable year in which such election is made. Neither the proposed
regulations nor the final regulations, by their express terms, apply to
prepayable securities described in section 1272(a)(6)
137
of the Code such as the regular certificates. Holders of regular certificates
should consult their tax advisors regarding the possibility of making an
election to amortize any such bond premium.
Deferred Interest. Certain classes of regular certificates will provide
for the accrual of interest when one or more ARM Loans are adding deferred
interest to their principal balance by reason of negative amortization. Any
deferred interest that accrues with respect to a class of regular certificates
will constitute income to the holders of such certificates prior to the time
distributions of cash with respect to deferred interest are made. It is unclear,
under the OID Regulations, whether any of the interest on such certificates will
constitute qualified stated interest or whether all or a portion of the interest
payable on the certificates must be included in the stated redemption price at
maturity of the certificates and accounted for as OID (which could accelerate
such inclusion). Interest on regular certificates must in any event be accounted
for under an accrual method by the holders of these certificates. Applying the
latter analysis therefore may result only in a slight difference in the timing
of the inclusion in income of interest on the regular certificates.
Effects of Defaults and Delinquencies. Certain series of certificates
may contain one or more classes of subordinated certificates and, in the event
there are defaults or delinquencies on the mortgage loans, amounts that would
otherwise be distributed on the subordinated certificates may instead be
distributed on the senior certificates. Holders of subordinated certificates
nevertheless will be required to report income with respect to these
certificates under an accrual method without giving effect to delays and
reductions in distributions on such subordinated certificates attributable to
defaults and delinquencies on the mortgage loans, except to the extent that it
can be established that such amounts are uncollectible. As a result, the amount
of income reported by a holder of a subordinated certificate in any period could
significantly exceed the amount of cash distributed to such holder in that
period. The holder will eventually be allowed a loss (or will be allowed to
report a lesser amount of income) to the extent that the aggregate amount of
distributions on the subordinated certificate is reduced as a result of defaults
and delinquencies on the mortgage loans. However, the timing and character of
such losses or reductions in income are uncertain. Accordingly, holders of
subordinated certificates should consult their own tax advisors on this point.
Sale, Exchange or Redemption. If a regular certificate is sold,
exchanged, redeemed or retired, the seller will recognize gain or loss equal to
the difference between the amount realized on the sale, exchange, redemption, or
retirement and the seller's adjusted basis in the regular certificate. The
adjusted basis generally will equal the cost of the regular certificate to the
seller, increased by any OID and market discount included in the seller's gross
income with respect to the regular certificate, and reduced (but not below zero)
by payments included in the stated redemption price at maturity previously
received by the seller and by any amortized premium. Similarly, a holder who
receives a payment which is part of the stated redemption price at maturity of a
regular certificate will recognize gain equal to the excess, if any, of the
amount of the payment over the holder's adjusted basis in the regular
certificate. The holder of a regular certificate that receives a final payment
which is less than the holder's adjusted basis in the regular certificate will
generally recognize a loss. Except as provided in the following paragraph and as
provided under "--Market Discount" above, any such gain or loss will be capital
gain or loss, provided that the regular certificate is held as a "capital asset"
(generally, property held for investment) within the meaning of section 1221 of
the Code.
138
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.
Gain from the sale or other disposition of a regular certificate that
might otherwise be capital gain will be treated as ordinary income to the extent
that such gain does not exceed the excess, if any, of:
o the amount that would have been includible in such holder's
income with respect to the regular certificate had income accrued
thereon at a rate equal to 110% of the AFR as defined in section
1274(d) of the Code determined as of the date of purchase of such
regular certificate,
over
o the amount actually includible in the holder's income.
Gain from the sale or other disposition of a regular certificate that
might otherwise be capital gain will be treated as ordinary income, (i) if the
regular certificate is held as part of a "conversion transaction" as defined in
section 1258(c) of the Code, up to the amount of interest that would have
accrued at the applicable federal rate under section 1274(d) of the Code in
effect at the time the taxpayer entered into the transaction minus any amount
previously treated as ordinary income with respect to any prior disposition of
property that was held as part of such transaction, or (ii) if the regular
certificate is held as part of a straddle. Potential investors should consult
their tax advisors with respect to the tax consequences of ownership and
disposition of an investment in regular certificates in their particular
circumstances.
Regular certificates will be "evidences of indebtedness" within the
meaning of section 582(c)(1) of the Code so that gain or loss recognized from
the sale of a regular certificate by a bank or a thrift institution to which
such section applies will be ordinary income or loss.
The regular certificate information reports will include a statement of
the adjusted issue price of the regular certificate at the beginning of each
accrual period. In addition, the reports will include information necessary to
compute the accrual of any market discount that may arise upon secondary trading
of regular certificates. Because exact computation of the accrual of market
discount on a constant yield method would require information relating to the
holder's purchase price which the REMIC may not have, it appears that the
information reports will only require information pertaining to the appropriate
proportionate method of accruing market discount.
Accrued Interest Certificates. Regular certificates that are "payment
lag" certificates may provide for payments of interest based on a period that
corresponds to the interval between distribution dates but that ends prior to
each distribution date. The period between the initial issue date of the payment
lag certificates and their first distribution date may or may not exceed such
interval. Purchasers of payment lag certificates for which the period between
the initial issue date and the first distribution date does not exceed such
interval could pay upon purchase
139
of the regular certificates accrued interest in excess of the accrued interest
that would be paid if the interest paid on the distribution date were interest
accrued from distribution date to distribution date. If a portion of the initial
purchase price of a regular certificate is allocable to interest that has
accrued prior to the issue date ("pre-issuance accrued interest"), and the
regular certificate provides for a payment of stated interest on the first
payment date (and the first payment date, is within one year of the issue date)
that equals or exceeds the amount of the pre-issuance accrued interest, then the
regular certificate's issue price may be computed by subtracting from the issue
price the amount of pre-issuance accrued interest, rather than as an amount
payable on the regular certificate. However, it is unclear under this method how
the proposed OID Regulations treat interest on payment lag certificates as
described above. Therefore, in the case of a payment lag certificate, the REMIC
intends to include accrued interest in the issue price and report interest
payments made on the first distribution date as interest only to the extent such
payments represent interest for the number of days that the certificateholder
has held the payment lag certificate during the first accrual period.
Investors should consult their own tax advisors concerning the
treatment for federal income tax purposes of payment lag certificates.
Non-Interest Expenses of the REMIC. Under temporary Treasury
regulations, if the REMIC is considered to be a "single-class REMIC", a portion
of the REMIC's servicing, administrative and other noninterest expenses will be
allocated as a separate item to those regular securityholders that are
"pass-through interest holders". Generally, a single-class REMIC is defined as
(i) a REMIC that would be treated as a fixed investment trust under Treasury
regulations but for its qualification as a REMIC or (ii) a REMIC that is
substantially similar to an investment trust but is structured with the
principal purpose of avoiding this allocation requirement imposed by the
temporary regulations. Such a pass-through interest holder would be required to
add its allocable share, if any, of such expenses to its gross income and to
treat the same amount as an item of investment expense. An individual generally
would be allowed a deduction for such expenses only as a miscellaneous itemized
deduction subject to the limitations under section 67 of the Code. That section
allows such deductions only to the extent that in the aggregate such expenses
exceed 2% of the holder's adjusted gross income. In addition, section 68 of the
Code provides that the amount of itemized deductions otherwise allowable for an
individual whose adjusted gross income exceeds a certain amount (the "applicable
amount") will be reduced by the lesser of (i) 3% of the excess of the
individual's adjusted gross income over the applicable amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for the taxable year. As a
result of the Economic Growth and Tax Relief Reconciliation Act of 2001 (the
"2001 Act"), limitations imposed by section 68 of the Code on claiming itemized
deductions will be phased-out commencing in 2006. Unless amended, this provision
of the 2001 Act will no longer apply for taxable years beginning on or after
December 31, 2010. The amount of additional taxable income recognized by
residual securityholders who are subject to the limitations of either section 67
or section 68 may be substantial. The REMIC is required to report to each
pass-through interest holder and to the IRS such holder's allocable share, if
any, of the REMIC's non-interest expenses. The term "pass-through interest
holder" generally refers to individuals, entities taxed as individuals and
certain pass-through entities including regulated investment companies, but does
not include real estate investment trusts. Certificateholders that are
"pass-through interest holders" should consult their own tax advisors about the
impact of these rules on an investment in the regular certificates.
140
Treatment of Realized Losses. Although not entirely clear, it appears
that holders of regular certificates that are corporations should in general be
allowed to deduct as an ordinary loss any loss sustained during the taxable year
on account of any regular certificates becoming wholly or partially worthless
and that, in general, holders of certificates that are not corporations should
be allowed to deduct as a short-term capital loss any loss sustained during the
taxable year on account of any regular certificates becoming wholly worthless.
Although the matter is not entirely clear, non-corporate holders of certificates
may be allowed a bad debt deduction at such time that the principal balance of
any regular certificate is reduced to reflect realized losses resulting from any
liquidated mortgage loans. The IRS, however, could take the position that
non-corporate holders will be allowed a bad debt deduction to reflect realized
losses only after all mortgage loans remaining in the related trust fund have
been liquidated or the certificates of the related series have been otherwise
retired. Prospective investors in and holders of the certificates are urged to
consult their own tax advisors regarding the appropriate timing, amount and
character of any loss sustained with respect to such certificates, including any
loss resulting from the failure to recover previously accrued interest or
discount income. Special loss rules are applicable to banks and thrift
institutions, including rules regarding reserves for bad debts. Such taxpayers
are advised to consult their tax advisors regarding the treatment of losses on
certificates.
Non-U.S. Persons. Generally, payments of interest (including any
payment with respect to accrued OID) on the regular certificates to a regular
certificateholder who is a non-U.S. Person not engaged in a trade or business
within the United States will not be subject to federal withholding tax if
o the regular certificateholder does not actually or constructively
own 10% or more of the combined voting power of all classes of
equity in the issuer (which for purposes of this discussion may
be defined as the trust fund or the beneficial owners of the
related residual certificates);
o the regular certificateholder is not a controlled foreign
corporation (within the meaning of section 957 of the Code)
related to the issuer; and
o the regular certificateholder complies with certain
identification requirements, including delivery of a statement,
signed by the regular certificateholder under penalties of
perjury, certifying that it is a foreign person and providing its
name and address.
If a regular certificateholder is not exempt from withholding,
distributions of interest, including distributions in respect of accrued OID,
the holder may be subject to a 30% withholding tax, subject to reduction under
any applicable tax treaty.
Further, it appears that a regular certificate would not be included in
the estate of a nonresident alien individual and would not be subject to United
States estate taxes. However, securityholders who are non-resident alien
individuals should consult their tax advisors concerning this question.
141
Regular securityholders who are non-U.S. Persons and persons related to
such holders should not acquire any residual certificates, and residual
securityholders and persons related to residual securityholders should not
acquire any regular certificates without consulting their tax advisors as to the
possible adverse tax consequences of doing so.
Information Reporting and Backup Withholding. The master servicer will
furnish or make available, within a reasonable time after the end of each
calendar year, to each regular certificateholder at any time during such year,
such information as may be deemed necessary or desirable to assist regular
securityholders in preparing their federal income tax returns or to enable
holders to make such information available to owners or other financial
intermediaries of holders that hold regular certificates. If a holder, owner or
other recipient of a payment on behalf of an owner fails to supply a certified
taxpayer identification number or if the Secretary of the Treasury determines
that such person has not reported all interest and dividend income required to
be shown on its federal income tax return, backup withholding may be required
with respect to any payments. Any amounts deducted and withheld from a
distribution to a recipient would be allowed as a credit against such
recipient's federal income tax liability.
RESIDUAL CERTIFICATES
Allocation of the Income of the REMIC to the Residual Certificates. The
REMIC will not be subject to federal income tax except with respect to income
from prohibited transactions and certain other transactions. See "--Prohibited
Transactions and Other Taxes" below. Instead, each original holder of a residual
certificate will report on its federal income tax return, as ordinary income,
its share of the taxable income of the REMIC for each day during the taxable
year on which such holder owns any residual certificates. The taxable income of
the REMIC for each day will be determined by allocating the taxable income of
the REMIC for each calendar quarter ratably to each day in the quarter. The
holder's share of the taxable income of the REMIC for each day will be based on
the portion of the outstanding residual certificates that the holder owns on
that day. The taxable income of the REMIC will be determined under an accrual
method and will be taxable to the residual securityholders without regard to the
timing or amounts of cash distributions by the REMIC. Ordinary income derived
from residual certificates will be "portfolio income" for purposes of the
taxation of taxpayers subject to the limitations on the deductibility of
"passive losses". As residual interests, the residual certificates will be
subject to tax rules, described below, that differ from those that would apply
if the residual certificates were treated for federal income tax purposes as
direct ownership interests in the certificates or as debt instruments issued by
the REMIC.
A residual certificateholder may be required to include taxable income
from the residual certificate in excess of the cash distributed. For example, a
structure where principal distributions are made serially on regular interests
(i.e., a fast-pay, slow-pay structure) may generate such a mismatching of income
and cash distributions (i.e., "phantom income"). This mismatching may be caused
by the use of certain required tax accounting methods by the REMIC, variations
in the prepayment rate of the underlying mortgage loans and certain other
factors. Depending upon the structure of a particular transaction, the
aforementioned factors may significantly reduce the after-tax yield of a
residual certificate to a residual certificateholder. Investors should consult
their own tax advisors concerning the federal income tax treatment of a residual
certificate and the impact of such tax treatment on the after-tax yield of a
residual certificate.
142
A subsequent residual certificateholder also will report on its federal
income tax return amounts representing a daily share of the taxable income of
the REMIC for each day that the residual certificateholder owns the residual
certificate. Those daily amounts generally would equal the amounts that would
have been reported for the same days by an original residual certificateholder,
as described above. The legislative history of the Tax Reform Act indicates that
certain adjustments may be appropriate to reduce (or increase) the income of a
subsequent holder of a residual certificate that purchased the residual
certificate at a price greater than (or less than) the adjusted basis the
residual certificate would have in the hands of an original residual
certificateholder. See "--Sale or Exchange of Residual Certificates" below. It
is not clear, however, whether such adjustments will in fact be permitted or
required and, if so, how they would be made. The REMIC Regulations do not
provide for any such adjustments.
Taxable Income of the REMIC Attributable to Residual Certificates. The
taxable income of the REMIC will reflect a netting of the income from the
mortgage loans and the REMIC's other assets and the deductions allowed to the
REMIC for interest and OID on the regular certificates and, except as described
under "--Non-Interest Expenses of the REMIC" below, other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate tax basis in its assets equal to the sum of the issue prices
of the regular and residual certificates (or, if a class of certificates is not
sold initially, their fair market values). Such aggregate basis will be
allocated among the mortgage loans and other assets of the REMIC in proportion
to their respective fair market values. A mortgage loan will be deemed to have
been acquired with discount or premium to the extent that the REMIC's basis
therein is less or greater, respectively than its principal balance. Any such
discount (whether market discount or OID) will be includible in the income of
the REMIC as it accrues, in advance of receipt of the cash attributable to such
income, under a method similar to the method described above for accruing OID on
the regular certificates. The REMIC expects to elect under section 171 of the
Code to amortize any premium on the mortgage loans. Premium on any mortgage loan
to which the election applies would be amortized under a constant yield method.
It is likely that the yield of a mortgage loan would be calculated for this
purpose taking account of the prepayment assumption. However, the election would
not apply to any mortgage loan originated on or before September 27, 1985.
Instead, premium on such a mortgage loan would be allocated among the principal
payments thereon and would be deductible by the REMIC as those payments become
due.
The REMIC will be allowed a deduction for interest and OID on the
regular certificates. The amount and method of accrual of OID will be calculated
for this purpose in the same manner as described above with respect to regular
certificates except that the 0.25% per annum de minimis rule and adjustments for
subsequent holders described therein will not apply.
A residual certificateholder will not be permitted to amortize the cost
of the residual certificate as an offset to its share of the REMIC's taxable
income. However, such taxable income will not include cash received by the REMIC
that represents a recovery of the REMIC's basis in its assets, and, as described
above, the issue price of the residual certificates will be added to the issue
price of the regular certificates in determining the REMIC's initial basis in
its assets. See "--Sale or Exchange of Residual Certificates" below. For a
discussion of possible
143
adjustments to income of a subsequent holder of a residual certificate to
reflect any difference between the actual cost of the residual certificate to
such holder and the adjusted basis the residual certificate would have in the
hands of an original residual certificateholder, see "-- Allocation of the
Income of the REMIC to the Residual Certificates" above.
Additional Taxable Income of Residual Interests. Any payment received
by a holder of a residual certificate in connection with the acquisition of the
residual certificate will be taken into account in determining the income of
such holder for federal income tax purposes. Although it appears likely that any
such payment would be includible in income immediately upon its receipt or
accrual as ordinary income, the IRS might assert that such payment should be
included in income over time according to an amortization schedule or according
to some other method. Because of the uncertainty concerning the treatment of
such payments, holders of residual certificates should consult their tax
advisors concerning the treatment of such payments for income tax purposes.
Net Losses of the REMIC. The REMIC will have a net loss for any
calendar quarter in which its deductions exceed its gross income. The net loss
would be allocated among the residual securityholders in the same manner as the
REMIC's taxable income. The net loss allocable to any residual certificate will
not be deductible by the holder to the extent that such net loss exceeds such
holder's adjusted basis in the residual certificate. Any net loss that is not
currently deductible by reason of this limitation may only be used by the
residual certificateholder to offset its share of the REMIC's taxable income in
future periods (but not otherwise). The ability of residual securityholders that
are individuals or closely held corporations to deduct net losses may be subject
to additional limitations under the Code.
Mark-to-Market Regulations. Prospective purchasers of a residual
certificate should be aware that the IRS finalized mark-to-market regulations
which provide that a residual certificate acquired after January 3, 1995 cannot
be marked to market. The mark-to-market regulations replaced the temporary
regulations which allowed a residual certificate to be marked to market provided
that it was not a "negative value" residual interest.
Inducement Fees. The Treasury Department has issued final regulations,
effective May 11, 2004, that address the federal income tax treatment of
"inducement fees" received by transferees of noneconomic REMIC residual
interests. The final regulations require inducement fees to be included in
income over a period reasonably related to the period in which the related REMIC
residual interest is expected to generate taxable income or net loss allocable
to the holder. The final regulations provide two safe harbor methods that permit
transferees to include inducement fees in income either (i) in the same amounts
and over the same period that the taxpayer uses for financial reporting
purposes, provided that such period is not shorter than the period the REMIC is
expected to generate taxable income or (ii) ratably over the remaining
anticipated weighted average life of all the regular and residual interests
issued by the REMIC, determined based on actual distributions projected as
remaining to be made on such interests under the prepayment assumption. If the
holder of a REMIC residual interest sells or otherwise disposes of the residual
certificate, any unrecognized portion of the inducement fee must be taken into
account at the time of the sale or disposition. The final regulations also
provide that an inducement fee shall be treated as income from sources within
the United States. In addition, the IRS has issued administrative guidance
addressing the procedures by which transferees of
144
noneconomic REMIC residual interests may obtain automatic consent from the IRS
to change the method of accounting for REMIC inducement fee income to one of the
safe harbor methods provided in these final regulations (including a change from
one safe harbor method to the other safe harbor method). Prospective purchasers
of the residual certificates should consult with their tax advisors regarding
the effect of these final regulations and the related guidance regarding the
procedures for obtaining automatic consent to change the method of accounting.
Non-Interest Expenses of the REMIC. The REMIC's taxable income will be
determined in the same manner as if the REMIC were an individual. However, all
or a portion of the REMIC's servicing, administrative and other non-interest
expenses will be allocated as a separate item to residual securityholders that
are "pass-through interest holders". Such a holder would be required to add an
amount equal to its allocable share, if any, of such expenses to its gross
income and to treat the same amount as an item of investment expense.
Individuals are generally allowed a deduction for such an investment expense
only as a miscellaneous itemized deduction subject to the limitations under
section 67 of the Code which allows such deduction only to the extent that, in
the aggregate, all such expenses exceed 2% of an individual's adjusted gross
income. In addition, the personal exemptions and itemized deductions of
individuals with adjusted gross incomes above particular levels are subject to
certain limitations which reduce or eliminate the benefit of such items. The
REMIC is required to report to each pass-through interest holder and to the IRS
the holder's allocable share, if any, of the REMIC's non-interest expenses. The
term "pass-through interest holder" generally refers to individuals, entities
taxed as individuals and certain pass-through entities, but does not include
real estate investment trusts. Residual securityholders that are "pass-through
interest holders" should consult their own tax advisors about the impact of
these rules on an investment in the residual certificates. See "-- Regular
Certificates--Non-Interest Expenses of the REMIC" above.
Excess Inclusions. A portion of the income on a residual certificate
(referred to in the Code as an "excess inclusion") for any calendar quarter
will, with an exception discussed below for certain thrift institutions, be
subject to federal income tax in all events. Thus, for example, an excess
inclusion
o may not, except as described below, be offset by any unrelated
losses, deductions or loss carryovers of a residual
certificateholder;
o will be treated as "unrelated business taxable income" within the
meaning of section 512 of the Code if the residual
certificateholder is a pension fund or any other organization
that is subject to tax only on its unrelated business taxable
income (see "Tax-Exempt Investors" below); and
o is not eligible for any reduction in the rate of withholding tax
in the case of a residual certificateholder that is a foreign
investor.
See "--Non-U.S. Persons" below. The exception for thrift institutions
is available only to the institution holding the residual certificate and not to
any affiliate of the institution, unless the affiliate is a subsidiary all the
stock of which, and substantially all the indebtedness of which, is held by the
institution, and which is organized and operated exclusively in connection with
the organization and operation of one or more REMICs.
145
Except as discussed in the following paragraph, with respect to any
residual certificateholder, the excess inclusions for any calendar quarter is
the excess, if any, of
o the income of the residual certificateholder for that calendar
quarter from its residual certificate
over
o the sum of the "daily accruals" for all days during the calendar
quarter on which the residual certificateholder holds the
residual certificate.
For this purpose, the daily accruals with respect to a residual
certificate are determined by allocating to each day in the calendar quarter its
ratable portion of the product of the "adjusted issue price" of the residual
certificate at the beginning of the calendar quarter and 120% of the "Federal
long-term rate" in effect at the time the residual certificate is issued. For
this purpose, the "adjusted issue price" of a residual certificate at the
beginning of any calendar quarter equals the issue price of the residual
certificate, increased by the amount of daily accruals for all prior quarters,
and decreased (but not below zero) by the aggregate amount of payments made on
the residual certificate before the beginning of such quarter. The "Federal
long-term rate" is an average of current yields on Treasury securities with a
remaining term of greater than nine years, computed and published monthly by the
IRS.
In the case of any residual certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such residual
certificates, reduced (but not below zero) by the real estate investment trust
taxable income (within the meaning of section 857(b)(2) of the Code, excluding
any net capital gain), will be allocated among the shareholders of such trust in
proportion to the dividends received by the shareholders from such trust, and
any amount so allocated will be treated as an excess inclusion with respect to a
residual certificate as if held directly by such shareholder. Regulated
investment companies, common trust funds and certain cooperatives are subject to
similar rules.
In addition, the Code provides three rules for determining the effect
of excess inclusions on the alternative minimum taxable income of a residual
certificateholder. First, the alternative minimum taxable income for the
residual certificateholder is determined without regard to the special rule that
taxable income cannot be less than excess inclusion. Second, the amount of any
alternative minimum tax net operating loss deductions must be computed without
regard to any excess inclusions. Third, the residual certificateholder's
alternative minimum taxable income for a tax year cannot be less than excess
inclusions for the year. The effect of this last statutory amendment is to
prevent the use of nonrefundable tax credits to reduce a taxpayer's income tax
below its tentative minimum tax computed only on excess inclusions.
Payments. Any distribution made on a residual certificate to a residual
certificateholder will be treated as a non-taxable return of capital to the
extent it does not exceed the residual certificateholder's adjusted basis in the
residual certificate. To the extent a distribution exceeds such adjusted basis,
it will be treated as gain from the sale of the residual certificate.
146
Pass-Through of Miscellaneous Itemized Deductions. As a general rule,
all of the fees and expenses of a REMIC will be taken into account by holders of
the residual certificates. In the case of a "single class REMIC", however, the
expenses and a matching amount of additional income will be allocated, under
temporary Treasury regulations, among the holders of the regular certificates
and the holders of the residual certificates on a daily basis in proportion to
the relative amounts of income accruing to each certificateholder on that day.
In the case of individuals (or trusts, estates or other persons who compute
their income in the same manner as individuals) who own an interest in a regular
certificate directly or through a pass-through entity which is required to pass
miscellaneous itemized deductions through to its owners or beneficiaries (e.g.,
a partnership, an S corporation or a grantor trust), such expenses will be
deductible only to the extent that such expenses, plus other "miscellaneous
itemized deductions" of the individual, exceed 2% of such individual's adjusted
gross income. The reduction or disallowance of this deduction coupled with the
allocation of additional income may have a significant impact on the yield of
the regular certificate to such a holder. Further, holders (other than
corporations) subject to the alternative minimum tax may not deduct
miscellaneous itemized deductions in determining such holders' alternative
minimum taxable income. In general terms, a single class REMIC is one that
either (i) 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
(ii) is similar to such a trust and is structured with the principal purpose of
avoiding the single class REMIC rules. Unless otherwise stated in the applicable
prospectus supplement, the expenses of the REMIC will be allocated to holders of
the related residual certificates in their entirety and not to holders of the
related regular certificates.
Sale or Exchange of Residual Certificates. If a residual certificate is
sold or exchanged, the seller will generally recognize gain or loss equal to the
difference between the amount realized on the sale or exchange and its adjusted
basis in the residual certificate (except that the recognition of loss may be
limited under the "wash sale" rules described below). A holder's adjusted basis
in a residual certificate generally equals the cost of the residual certificate
to the residual certificateholder, increased by the taxable income of the REMIC
that was included in the income of the residual certificateholder with respect
to the residual certificate, and decreased (but not below zero) by the net
losses that have been allowed as deductions to the residual certificateholder
with respect to the residual certificate and by the distributions received
thereon by the residual certificateholder. In general, any such gain or loss
will be capital gain or loss provided the residual certificate is held as a
capital asset. However, residual certificates will be "evidences of
indebtedness" within the meaning of section 582(c)(1) of the Code, so that gain
or loss recognized from sale of a residual certificate by a bank or thrift
institution to which such section applies would be ordinary income or loss.
Except as provided in Treasury regulations yet to be issued, if the
seller of a residual certificate reacquires the residual certificate or acquires
any other residual certificate, any residual interest in another REMIC or
similar interest in a "taxable mortgage pool" (as defined in section 7701(i)) of
the Code during the period beginning six months before, and ending six months
after, the date of such sale, such sale will be subject to the "wash sale" rules
of section 1091 of the Code. In that event, any loss realized by the residual
certificateholder on the sale will not be deductible, but instead will increase
the residual certificateholder's adjusted basis in the newly acquired asset.
147
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.
PROHIBITED TRANSACTIONS AND OTHER TAXES
The REMIC is subject to a tax at a rate equal to 100% of the net income
derived from "prohibited transactions". In general, a prohibited transaction
means the disposition of a mortgage loan other than pursuant to certain
specified exceptions, the receipt of investment income from a source other than
a mortgage loan or certain other permitted investments or the disposition of an
asset representing a temporary investment of payments on the mortgage loans
pending payment on the residual certificates or regular certificates. In
addition, the assumption of a mortgage loan by a subsequent purchaser could
cause the REMIC to recognize gain which would also be subject to the 100% tax on
prohibited transactions.
In addition, certain contributions to a REMIC made after the initial
issue date of the certificates could result in the imposition of a tax on the
REMIC equal to 100% of the value of the contributed property.
It is not anticipated that the REMIC will engage in any prohibited
transactions or receive any contributions subject to the contributions tax.
However, in the event that the REMIC is subject to any such tax, unless
otherwise disclosed in the related prospectus supplement, such tax would be
borne first by the residual securityholders, to the extent of amounts
distributable to them, and then by the master servicer.
LIQUIDATION AND TERMINATION
If the REMIC adopts a plan of complete liquidation, within the meaning
of section 860F(a)(4)(A)(i) of the Code, which may be accomplished by
designating in the REMIC's final tax return a date on which such adoption is
deemed to occur, and sells all of its assets (other than cash) within a 90-day
period beginning on such date, the REMIC will not be subject to any prohibited
transaction tax, provided that the REMIC credits or distributes in liquidation
all of the sale proceeds plus its cash (other than the amounts retained to meet
claims) to holders of regular and residual certificates within the 90-day
period.
The REMIC will terminate shortly following the retirement of the
regular certificates. If a residual certificateholder's adjusted basis in the
residual certificate exceeds the amount of cash distributed to the residual
certificateholder in final liquidation of its interest, it would appear that the
residual certificateholder would be entitled to a loss equal to the amount of
such excess. It is unclear whether such a loss, if allowed, will be a capital
loss or an ordinary loss.
ADMINISTRATIVE MATTERS
Solely for the purpose of the administrative provisions of the Code,
the REMIC will be treated as a partnership and the residual securityholders will
be treated as the partners. Under temporary regulations, however, if there is at
no time during the taxable year more than one
148
residual certificateholder, a REMIC shall not be subject to the rules of
subchapter C of chapter 63 of the Code relating to the treatment of partnership
items for a taxable year. Accordingly, the REMIC will file an annual tax return
on Form 1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return. In
addition, certain other information will be furnished quarterly to each residual
certificateholder who held the residual certificate on any day in the previous
calendar quarter.
Each residual certificateholder is required to treat items on its
return consistently with their treatment on the REMIC's return, unless the
residual certificateholder either files a statement identifying the
inconsistency or establishes that the inconsistency resulted from incorrect
information received from the REMIC. The IRS may assert a deficiency resulting
from a failure to comply with the consistency requirement without instituting an
administrative proceeding at the REMIC level. Any person that holds a residual
certificate as a nominee for another person may be required to furnish the
REMIC, in a manner to be provided in Treasury regulations, with the name and
address of such person and other information.
TAX-EXEMPT INVESTORS
Any residual certificateholder that is a pension fund or other entity
that is subject to federal income taxation only on its "unrelated business
taxable income" within the meaning of section 512 of the Code will be subject to
such tax on that portion of the distributions received on a residual certificate
that is considered an "excess inclusion." See"--Residual Certificates-- Excess
Inclusions" above.
NON-U.S. PERSONS
Amounts paid to residual securityholders who are not U.S. Persons (see
"--Regular Certificates--Non-U.S. Persons" above) are treated as interest for
purposes of the 30% (or lower treaty rate) United States withholding tax.
Amounts distributed to residual securityholders should qualify as "portfolio
interest", subject to the conditions described in "--Regular Certificates"
above, but only to the extent that the mortgage loans were originated after July
18, 1984. Furthermore, the rate of withholding on any income on a residual
certificate that is excess inclusion income will not be subject to reduction
under any applicable tax treaties. See "-- Residual Certificates--Excess
Inclusions" above. If the portfolio interest exemption is unavailable, such
amount will be subject to United States withholding tax when paid or otherwise
distributed (or when the residual certificate is disposed of) under rules
similar to those for withholding upon disposition of debt instruments that have
OID. The Code, however, grants the Treasury authority to issue regulations
requiring that those amounts be taken into account earlier than otherwise
provided where necessary to prevent avoidance of tax (e.g., where the residual
certificates do not have significant value). See "--Residual
Certificates--Excess Inclusions" above. If the amounts paid to residual
securityholders that are not U.S. Persons are effectively connected with their
conduct of a trade or business within the United States, the 30% (or lower
treaty rate) withholding tax will not apply. Instead, the amounts paid to such
non-U.S. Person will be subject to U. S. federal income taxation at regular
graduated rates. For special restrictions on the transfer of residual
certificates, see "--Tax-Related Restrictions on Transfers of Residual
Certificates" below.
149
Regular securityholders and persons related to such holders should not
acquire any residual certificates, and residual securityholders and persons
related to residual securityholders should not acquire any regular certificates
without consulting their tax advisors as to the possible adverse tax
consequences of such acquisition.
TAX-RELATED RESTRICTIONS ON TRANSFERS OF RESIDUAL CERTIFICATES
Disqualified Organizations. An entity may not qualify as a REMIC unless
there are reasonable arrangements designed to ensure that residual interests in
such entity are not held by "disqualified organizations". Further, a tax is
imposed on the transfer of a residual interest in a REMIC to a disqualified
organization. The amount of the tax equals the product of
o an amount (as determined under the REMIC Regulations) equal to
the present value of the total anticipated "excess inclusions"
with respect to such interest for periods after the transfer
multiplied by
o the highest marginal federal income tax rate applicable to
corporations.
The tax is imposed on the transferor unless the transfer is through an
agent (including a broker or other middlemen) for a disqualified organization,
in which event the tax is imposed on the agent. The person otherwise liable for
the tax shall be relieved of liability for the tax if the transferee furnished
to such person an affidavit that the transferee is not a disqualified
organization and, at the time of the transfer, such person does not have actual
knowledge that the affidavit is false. A "disqualified organization" means
o the United States, any state, possession, or political
subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of any of the
foregoing (provided that such term does not include an
instrumentality if all its activities are subject to tax and,
except for Freddie Mac, a majority of its board of directors is
not selected by any such governmental agency),
o any organization (other than certain farmers' cooperatives)
generally exempt from federal income taxes unless such
organization is subject to the tax on "unrelated business taxable
income",
o a rural electric or telephone cooperative, and
o electing large partnerships.
A tax is imposed on a "pass-through entity" holding a residual interest
in a REMIC if at any time during the taxable year of the pass-through entity a
disqualified organization is the record holder of an interest in such entity.
The amount of the tax is equal to the product of
o the amount of excess inclusions for the taxable year allocable to
the interest held by the disqualified organization, and
150
o the highest marginal federal income tax rate applicable to
corporations.
The pass-through entity otherwise liable for the tax, for any period
during which the disqualified organization is the record holder of an interest
in such entity, will be relieved of liability for the tax if such record holder
furnishes to such entity an affidavit that such record holder is not a
disqualified organization and, for such period, the pass-through entity does not
have actual knowledge that the affidavit is false. For this purpose, a
"pass-through entity" means
o a regulated investment company, real estate investment trust or
common trust fund,
o a partnership, trust or estate, and
o certain cooperatives.
Except as may be provided in Treasury regulations not yet issued, any
person holding an interest in a pass-through entity as a nominee for another
will, with respect to such interest, be treated as a pass-through entity. The
tax on pass-through entities is generally effective for periods after March 31,
1988, except that in the case of regulated investment companies, real estate
investment trusts, common trust funds and publicly-traded partnerships the tax
shall apply only to taxable years of such entities beginning after December 31,
1988.
In order to comply with these rules, the pooling and servicing
agreement will provide that no record or beneficial ownership interest in a
residual certificate may be, directly or indirectly, purchased, transferred or
sold without the express written consent of the master servicer. The master
servicer will grant such consent to a proposed transfer only if it receives the
following: (i) an affidavit from the proposed transferee to the effect that it
is not a disqualified organization and is not acquiring the residual certificate
as a nominee or agent for a disqualified organization and (ii) a covenant by the
proposed transferee to the effect that the proposed transferee agrees to be
bound by and to abide by the transfer restrictions applicable to the residual
certificate.
Non-economic Residual Certificates. The REMIC Regulations disregard,
for federal income tax purposes, any transfer of a non-economic residual
certificate to a U.S. Person, unless no significant purpose of the transfer is
to enable the transferor to impede the assessment or collection of tax. A
"non-economic residual certificate" is any residual certificate (including a
residual certificate with a positive value at issuance) unless at the time of
transfer, taking into account the prepayment assumption and any required or
permitted clean up calls or required liquidation provided for in the REMIC's
organizational documents,
o the present value of the expected future distributions on the
residual certificate 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
o 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.
151
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 transferor is presumed not to
have such knowledge if
o the transferor conducted a reasonable investigation of the
transferee's financial condition and found that the transferee
had historically paid its debts as they come due and found no
evidence to indicate that the transferee would not continue to
pay its debts in the future; and
o the transferee acknowledges to the transferor that the residual
interest may generate tax liabilities in excess of the cash flow
and the transferee represents that it intends to pay such taxes
associated with the residual interest as they become due.
Final Treasury regulations issued on July 18, 2002 (the "New REMIC
Regulations"), provide that transfers of non-economic residual interests must
meet two additional requirements to qualify for the safe harbor:
o the transferee must represent that it will not cause income from
the non-economic residual interest to be attributable to a
foreign permanent establishment or fixed base (within the meaning
of an applicable income tax treaty, hereafter a "foreign branch")
of the transferee or another U.S. taxpayer; and
o the transfer must satisfy either an "asset test" or a "formula
test" provided under the REMIC Regulations.
A transfer to an "eligible corporation," generally a domestic
corporation, will satisfy the asset test if:
o at the time of the transfer, and at the close of each of the
transferee's two fiscal years preceding the transferee's fiscal
year of transfer, the transferee's gross and net assets for
financial reporting purposes exceed $100 million and $10 million,
respectively, in each case, exclusive of any obligations of
certain related persons;
o the transferee agrees in writing that any subsequent transfer of
the interest will be to another eligible corporation in a
transaction that satisfies the asset test, and the transferor
does not know or have reason to know that the transferee will not
honor these restrictions on subsequent transfers, and
o a reasonable person would not conclude, based on the facts and
circumstances known to the transferor on or before the date of
the transfer (specifically including the amount of consideration
paid in connection with the transfer of the non-economic residual
interest), that the taxes associated with the residual interest
will not be paid.
In addition, the direct or indirect transfer of the residual interest
to a foreign branch of a domestic corporation is not treated as a transfer to an
eligible corporation under the asset test.
152
The formula test provides that the transfer of a non-economic residual
interest will not qualify under the formula test unless the present value of the
anticipated tax liabilities associated with holding the residual interest does
not exceed the present value of the sum of
o any consideration given to the transferee to acquire the interest
(the inducement payment),
o future distributions on the interest, and
o any anticipated tax savings associated with holding the interest
as the REMIC generates losses.
For purposes of this calculation, the present value is calculated using
a discount rate equal to the lesser of the applicable federal rate and the
transferee's cost of borrowing.
If the transferee has been subject to the alternative minimum tax in
the preceding two years and will compute its taxable income in the current
taxable year using the alternative minimum tax rate, then it may use the
alternative minimum tax rate in lieu of the corporate tax rate. In addition, the
direct or indirect transfer of the residual interest to a foreign branch of a
domestic corporation is not treated as a transfer to an eligible corporation
under the formula test.
The New REMIC Regulations generally apply to transfers of non-economic
residual interests occurring on or after February 4, 2000. The requirement of a
representation that a transfer of a non-economic residual interest is not made
to a foreign branch of a domestic corporation and the requirement of using the
short term applicable federal rate for purposes of the formula test apply to
transfers occurring on or after August 19, 2002.
If a transfer of a non-economic residual certificate is disregarded,
the transferor would continue to be treated as the owner of the residual
certificate and would continue to be subject to tax on its allocable portion of
the net income of the REMIC.
Foreign Investors. The REMIC Regulations provide that the transfer of a
residual certificate that has a "tax avoidance potential" to a "foreign person"
will be disregarded for federal income tax purposes. This rule appears to apply
to a transferee who is not a U.S. Person, unless such transferee's income in
respect of the residual certificate is effectively connected with the conduct of
a United States trade or business. A residual certificate is deemed to have a
tax avoidance potential unless, at the time of transfer, the transferor
reasonably expects that the REMIC will distribute to the transferee amounts that
will equal at least 30% of each excess inclusion and that such amounts will be
distributed at or after the time the excess inclusion accrues and not later than
the end of the calendar year following the year of accrual. If the non- U.S.
Person transfers the residual certificate to a U.S. Person, the transfer will be
disregarded and the foreign transferor will continue to be treated as the owner,
if the transfer has the effect of allowing the transferor to avoid tax on
accrued excess inclusions. The pooling and servicing agreement will provide that
no record or beneficial ownership interest in a residual certificate may be,
directly or indirectly, transferred to a non-U.S. Person unless such person
provides the trustee with a duly completed IRS Form W-8ECI and the trustee
consents to such transfer in writing.
153
Any attempted transfer or pledge in violation of the transfer
restrictions shall be absolutely null and void and shall vest no rights in any
purported transferee. Investors in residual certificates are advised to consult
their own tax advisors with respect to transfers of the residual certificates
and, in addition, pass-through entities are advised to consult their own tax
advisors with respect to any tax which may be imposed on a pass-through entity.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in this
prospectus under "Material Federal Income Tax Considerations" above, potential
investors should consider the state and local income tax consequences of the
acquisition, ownership, and disposition of the certificates. 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 tax consequences of investments in
the certificates.
ERISA CONSIDERATIONS
The following describes certain considerations under the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and the Code. The
related prospectus supplement will contain information concerning considerations
relating to ERISA and the Code that are applicable to the particular securities
offered by the prospectus supplement.
ERISA imposes requirements on certain employee benefit plans (and the
Code imposes requirements on certain other retirement plans and arrangements,
including individual retirement accounts and annuities and Keogh plans) as well
as on collective investment funds and separate accounts in which these plans,
accounts or arrangements are invested, and on persons who bear specified
relationships to these types of plans or arrangements ("Parties in Interest") or
are fiduciaries with respect to these types of plans or 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 a Plan 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 the Plan. ERISA also imposes certain duties on
persons who are fiduciaries of Plans, such as the duty to invest prudently, to
diversify investments unless it is prudent not to do so, and to invest in
accordance with the documents governing the Plan. Under ERISA, any person who
exercises any authority or control respecting the management or disposition of
the assets of a Plan is considered to be a fiduciary of that Plan (subject to
certain exceptions not here relevant). 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 Parties in Interest, and impose additional prohibitions where Parties
in Interest are fiduciaries with respect to a Plan. 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.
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
154
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, state and local law. Any such plan which is qualified and
exempt from taxation under Sections 401(a) and 501(a) of the Code is subject to
the prohibited transaction rules set forth in Section 503 of the Code.
The United States Department of Labor (DOL) issued regulations
concerning the definition of what constitutes the assets of a Plan (DOL Reg.
Section 2510.3-101). Under this "Plan Assets Regulation," 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.
The Plan Assets Regulation provides 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 Assets Regulation, is a security that is widely held, freely
transferable and registered under the Securities Exchange Act of 1934. Equity
participation in an entity by "benefit plan investors" is not significant if,
after the most recent acquisition of an equity interest in the entity, less than
25% of the value of each class of equity interest in the entity is held by
benefit plan investors, which include benefit plans described in ERISA or under
Section 4975 of the Code, whether or not they are subject to ERISA, as well as
entities the underlying assets of which include assets of the benefit plan by
reason of investment in the entity by the benefit plan.
If no exception under the Plan Assets Regulation applies and if a Plan
(or a person investing assets of a Plan, such as an insurance company general
account) acquires an equity interest in the trust, then the assets of the trust
could be considered to be assets of the Plan. In that event, the master servicer
and other persons exercising management or discretionary control over the assets
of the trust could become subject to the fiduciary responsibility provisions of
Title I of ERISA to the extent that they exercised discretionary control of Plan
assets. In addition, parties with certain relationships to investing plans or
providing services with respect to the issuer's assets could be deemed to be
Parties in Interest with respect to investing plans and could become subject to
the prohibited transaction provisions of Section 406 of ERISA and Section 4975
of the Code with respect to transactions involving the assets of the trust.
Because the loans held by the trust may be deemed assets of each Plan that
purchases an equity interest, an investment in an equity interest issued by the
trust by a Plan may not only be a prohibited transaction under ERISA and subject
to an excise tax under Section 4975 of the Code, but may cause transactions
undertaken in the course of operating the trust to constitute prohibited
transactions, unless a statutory, regulatory or administrative exemption
applies.
Without regard to whether securities are considered to be equity
interest in the trust, the trust, certain affiliates of the trust (including the
holder of the trust certificate), or a seller of a security (including an
underwriter) might be considered or might become Parties in Interest with
respect to a Plan. In this case, the acquisition or holdings of the securities
by or on behalf of the Plan could constitute or give rise to a prohibited
transaction, within the meaning of ERISA and the Code, unless they were subject
to one or more exemptions. Depending on the relevant facts and circumstances,
certain prohibited transaction exemptions may apply to the purchase or
155
holding of securities-for example, Prohibited Transaction Class Exemption
("PTCE") 96-23, which exempts certain transactions effected on behalf of a Plan
by an "in-house asset manager"; PTCE 95-60, which exempts certain transactions
by insurance company general accounts; PTCE 91-38, which exempts certain
transactions by bank collective investment funds; PTCE 90-1, which exempts
transactions by insurance company pooled separate accounts; or PTCE 84-14; which
exempts certain transactions effected on behalf of a Plan by a "qualified
professional asset manager". There can be no assurance that any of these
exemptions will apply with respect to any Plan's investment in securities, or
that such an exemption, if it did apply, would apply to all prohibited
transactions that may occur in connection with the investment. Furthermore,
these exemptions would not apply to transactions involved in operation of the
trust if, as described above, the assets of the trust were considered to include
Plan assets.
INSURANCE COMPANY GENERAL ACCOUNTS
The DOL has published final regulations under Section 401(c) of ERISA
describing a safe harbor for insurers that, on or before December 31, 1998,
issued certain non-guaranteed policies supported by their general accounts to
Plans (Labor Reg. Section 2550.401c-1). Under this regulation, an insurer will
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.
PROHIBITED TRANSACTION CLASS EXEMPTION 83-1
Any fiduciary or other Plan asset investor that proposes to purchase
securities on behalf of, or with assets of, a Plan should consult with its
counsel on the potential applicability of ERISA and Section 4975 of the Code to
that investment and the availability of any prohibited transaction class
exemption in connection therewith. In particular, in connection with a
contemplated purchase of certificates, but not notes, representing a beneficial
ownership interest in a pool of single-family residential mortgages, the
fiduciary should consider the availability of PTCE 83-1 for various transactions
involving mortgage pool investment trusts. PTCE 83-1 permits, subject to certain
conditions, transactions that might otherwise be prohibited between Plans and
Parties in Interest with respect to those plans related to the origination,
maintenance and termination of mortgage pools consisting of mortgage loans
secured by first or second mortgages or deeds of trust on single-family
residential property, and the acquisition and holding of certain mortgage pool
pass-through certificates representing an interest in those mortgage pools by
Plans. However, PTCE 83-1 does not provide exemptive relief with respect to
certificates evidencing interests in trusts which include mortgage loans secured
by third or more
156
junior liens, revolving credit loans, loans on unimproved land, contracts,
cooperative loans, multifamily or mixed-use mortgage loans or some types of
private securities, or which contain an interest rate swap (a "swap"), a yield
maintenance agreement (a "cap") or a pre-funding arrangement. In addition, PTCE
83-1 does not provide exemptive relief for transactions involving subordinated
securities. The prospectus supplement may indicate whether it is expected that
PTCE 83-1 will apply to securities offered by that prospectus supplement.
UNDERWRITER EXEMPTION
On September 6, 1990 the DOL issued to Greenwich Capital Markets, Inc.
an underwriter exemption (PTE 90-59, Application No. D-8374, 55 Fed. Reg. 36724
(1990)) (the "Exemption") from certain of the prohibited transaction rules of
ERISA and the related excise tax provisions of Section 4975 of the Code with
respect to the initial purchase, holding and subsequent resale by Plans of
"securities" that are obligations of an issuer containing certain receivables,
loans and other obligations, and with respect to which Greenwich Capital
Markets, Inc. is the underwriter, manager or co-manager of an underwriting
syndicate. The Exemption, which was amended and expanded by PTE 97-34, 62 Fed.
Reg. 39021 (1997); PTE 2000-58, 65 Fed. Reg. 67765 (2000); and PTE 2002-41, 67
Fed. Reg. 54487 (2002), provides relief which is generally similar to that
provided by PTCE 83-1, but is broader in several respects.
The Exemption contains a number of requirements. It does not apply to
any investment pool unless, among other things, the investment pool satisfies
the following conditions:
o the investment pool consists only of assets of a type which have
been included in other investment pools;
o securities evidencing interests in such other investment pools
have been purchased by investors other than Plans for at least
one year prior to the Plan's acquisition of securities pursuant
to the exemption; and
o securities in such other investment pools have been rated in one
of the three (or four, if the investment pool contains certain
types of assets) highest generic rating categories by one of the
credit rating agencies noted below.
The Exemption sets forth general conditions which must be satisfied for
a transaction to be eligible for exemptive relief thereunder. Generally, the
Exemption holds that the acquisition of the securities by a Plan must be on
terms (including the price for the securities) that are at least as favorable to
the Plan as they would be in an arm's length transaction with an unrelated
party. The Exemption requires that the rights and interests evidenced by the
securities not be "subordinated" to the rights and interests evidenced by other
securities of the same trust, except when the trust holds certain types of
assets. The Exemption requires that securities acquired by a Plan have received
a rating at the time of their acquisition that is in one of the three (or four,
if the trust holds certain types of assets) highest generic rating categories of
Standard & Poor's, Moody's Investors Service, Inc. or Fitch Ratings. The
Exemption specifies that the pool trustee must not be an affiliate of any other
member of the "Restricted Group" (defined below), other than an underwriter. The
Exemption stipulates that any Plan investing in the securities must be an
"accredited investor" as defined in Rule 501(a)(1) of Regulation D of the SEC
under the
157
Securities Act of 1933, as amended. The Exemption requires that certain payments
made in connection with the creation and operation of the trust and the sale of
its securities be reasonable. Finally, the Exemption requires that, depending on
the type of issuer, the documents establishing the issuer and governing the
transaction contain certain provisions to protect the assets of the issuer, and
that the issuer receive certain legal opinions.
If an issuer holds obligations that have loan-to-value ratios in excess
of 100%, the Exemption may apply to only the issuer's non-subordinated
securities rated in one of the two highest generic rating categories by at least
one of the rating agencies named in the Exemption if both of the following
conditions are met:
o the obligations are residential or home equity loans, and
o the fair market value of the real property collateral securing
the loan on the closing date is at least 80% of the sum of the
outstanding principal balance of the loan held in the investment
pool and the outstanding principal balance of any other loan of
higher lien priority secured by the same real property
collateral.
Moreover, the Exemption generally provides relief from certain
self-dealing and conflict of interest prohibited transactions that may occur
when the Plan fiduciary causes a Plan to acquire securities of an issuer holding
receivables as to which the fiduciary (or its affiliate) is an obligor, provided
that, among other requirements:
o in the case of an acquisition in connection with the initial
issuance of securities, at least 50% of each class of securities
in which Plans have invested and at least 50% of the aggregate
interest in the issuer is acquired by persons independent of the
Restricted Group;
o the fiduciary (or its affiliate) is an obligor with respect to
not more than 5% of the fair market value of the obligations
contained in the issuer;
o the Plans' 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
o immediately after the acquisition, no more than 25% of the assets
of any Plan with respect to which the person is a fiduciary is
invested in securities representing an interest in one or more
issuers containing assets sold or serviced by the same entity.
This relief is not available to Plans sponsored by the "Restricted
Group", which consists of the seller, the underwriter, the trustee, the master
servicer, any servicer, any counterparty of a permitted swap or notional
principal contract or any insurer with respect to the mortgage loans, any
obligor with respect to mortgage loans included in the investment pool
constituting more than 5% of the aggregate principal balance of the assets in
the investment pool, or any affiliate of those parties, and in general the
Exemption provides only limited relief to such Plans.
If pre-funding is anticipated, the Exemption extends exemptive relief
to securities issued in transactions using pre-funding accounts, whereby a
portion of the loans backing the securities
158
are transferred to the trust fund within a specified period following the
closing date (the "DOL Pre-Funding Period"), when the conditions of the
Exemption are satisfied and the pre-funding accounts meet certain requirements.
The Exemption, as amended, extends exemptive relief to certain
mortgage-backed and asset-backed securities transactions involving trusts that
contain a swap or a cap, provided the swap or cap satisfies certain criteria and
the other requirements of the Exemption are met. Among other requirements, the
counterparty to the swap or cap must maintain ratings at certain levels from
Exemption rating agencies, and the documentation for the swap or cap must
provide for certain remedies if the rating declines. The swap or cap must be an
interest rate notional contract denominated in U.S. dollars, may not be
leveraged, and must satisfy several other criteria, including limitations on its
notional amount. Securities of any class affected by the swap or cap may be sold
to Plan investors only if they are "qualified plan investors" that satisfy
several requirements relating to their ability to understand the terms of the
swap or cap and the effects of the swap or cap on the risks associated with an
investment in the security.
The rating of a security may change. If a class of securities no longer
satisfies the applicable rating requirement of the Exemption, securities of that
class will no longer be eligible for relief under the Exemption (although a Plan
that had purchased the security when it had an appropriate rating would not be
required by the Exemption to dispose of it). However, PTCE 95- 60, which is
applicable to Plan investors that are insurance company general accounts, may be
available in such circumstances.
The prospectus supplement for each series of securities will indicate
the classes of securities, if any, offered thereby as to which it is expected
that the Exemption will apply.
In the case of certain types of securities, transfer of the securities
will not be registered unless the transferee represents that it is not, and is
not purchasing on behalf of, or with assets of, a Plan, or provides an opinion
of counsel or a certification, which opinion of counsel or certification will
not be at the expense of the trustee or depositor, satisfactory to the trustee
and the depositor that the purchase of the securities by or on behalf of, or
with assets of, a Plan, is permissible under applicable law, will not give rise
to a non-exempt prohibited transaction under ERISA or Section 4975 of the Code
and will not subject the trustee, the master servicer or the depositor to any
obligation or liability in addition to those undertaken in the operative
agreements.
Any Plan fiduciary which proposes to cause a Plan to purchase
securities should consult with their counsel concerning the impact of ERISA and
the Code, the applicability of the Exemption or any other available exemption,
and the potential consequences in their specific circumstances, prior to making
such investment. Moreover, each Plan fiduciary should determine whether under
the general fiduciary standards of investment prudence and diversification an
investment in the securities is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
159
LEGAL INVESTMENT CONSIDERATIONS
The prospectus supplement for each series of certificates will specify
which, if any, of those classes of certificates constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984, as amended (SMMEA). Classes of certificates that qualify as "mortgage
related securities" will be legal investments for persons, trusts, corporations,
partnerships, associations, business trusts and business entities (including
depository institutions, life insurance companies and pension funds) created
pursuant to or existing under the laws of the United States or of any state
(including the District of Columbia and Puerto Rico) whose authorized
investments are subject to state regulation to the same extent as, under
applicable law, obligations issued by or guaranteed as to principal and interest
by the United States or any such entities. Under SMMEA, if a state enacts
legislation prior to October 4, 1991 specifically limiting the legal investment
authority of any of these entities with respect to "mortgage related
securities," certificates will constitute legal investments for entities subject
to the legislation only to the extent provided therein. Approximately twenty-one
states adopted the legislation prior to the October 4, 1991 deadline. SMMEA
provides, however, that in no event will the enactment of any such legislation
affect the validity of any contractual commitment to purchase, hold or invest in
certificates, or require the sale or other disposition of certificates, so long
as such contractual commitment was made or such certificates were acquired prior
to the enactment of the legislation.
SMMEA also amended the legal investment authority of
federally-chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal in
certificates without limitations as to the percentage of their assets
represented thereby, federal credit unions may invest in mortgage related
securities, and national banks may purchase certificates for their own account
without regard to the limitations generally applicable to investment securities
set forth in 12 U.S.C. 24 (Seventh), subject in each case to such regulations as
the applicable federal authority may prescribe. In this connection, federal
credit unions should review the National Credit Union Administration (NCUA)
Letter to Credit Unions No. 96, as modified by Letter to Credit Unions No. 108,
which includes guidelines to assist federal credit unions in making investment
decisions for mortgage related securities, and the NCUA's regulation "Investment
and Deposit Activities" (12 C.F.R. Part 703), which sets forth certain
restrictions on investment by federal credit unions in mortgage related
securities.
All depository institutions considering an investment in the
certificates (whether or not the class of certificates under consideration for
purchase constitutes a "mortgage related security") should review the Federal
Financial Institutions Examination Council's Supervisory Policy Statement on the
Securities Activities (to the extent adopted by their respective regulators),
setting forth, in relevant part, certain securities trading and sales practices
deemed unsuitable for an institution's investment portfolio, and guidelines for
(and restrictions on) investing in mortgage derivative products, including
"mortgage related securities", which are "high-risk mortgage securities" as
defined in the Policy Statement. According to the Policy Statement, "high-risk
mortgage securities" include securities such as certificates not entitled to
distributions allocated to principal or interest, or subordinated certificates.
Under the Policy Statement, it is the responsibility of each depository
institution to determine, prior to purchase (and at stated intervals
thereafter), whether a particular mortgage derivative product is a
160
"high-risk mortgage security", and whether the purchase (or retention) of such a
product would be consistent with the Policy Statement.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits and provisions
which may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying."
The Office of Thrift Supervision, or OTS, has issued Thrift Bulletin
73a, entitled "Investing in Complex Securities" ("TB 73a"), which applies to
savings associations regulated by the OTS, and Thrift Bulletin 13a, entitled
"Management of Interest Rate Risk, Investment Securities, and Derivatives
Activities" ("TB 13a"), which applies to thrift institutions regulated by the
OTS.
One of the primary purposes of TB 73a is to require savings
associations, prior to taking any investment position, to determine that the
investment position meets applicable regulatory and policy requirements
(including those set forth TB 13a (see below)) and internal guidelines, is
suitable for the institution, and is safe and sound. OTS recommends, with
respect to purchases of specific securities, additional analyses, including,
among others, analysis of repayment terms, legal structure, expected performance
of the issuer and any underlying assets as well as analysis of the effects of
payment priority, with respect to security which is divided into separate
tranches with unequal payments, and collateral investment parameters, with
respect to a security that is prefunded or involves a revolving period. TB 73a
reiterates the due diligence requirements of the OTS for investing in all
securities and warns that if a savings association makes an investment that does
not meet the applicable regulatory requirements, the savings association's
investment practices will be subject to criticism, and OTS any require
divestiture of such securities. OTS also recommends, with respect to an
investment in any "complex securities," that savings associations should take
into account quality and suitability, interest rate risk and classification
factors. For the purpose of each of TB 73a and TB 13a, the term "complex
security" includes among other things any collateralized mortgage obligation or
real estate mortgage investment conduit security, other than any "plain vanilla"
mortgage pass-through security (i.e., securities that are part of a single class
of securities in the related pool that are non-callable and do not have any
special features). Accordingly, all Classes of the Offered Certificates would
likely be viewed as "complex securities." With respect to quality and
suitability factors, TB 73a warns (i) that a savings association's sole reliance
on outside ratings for material purchases of complex securities is an unsafe and
unsound practice, (ii) that a savings association should only use ratings and
analyses from nationally recognized rating agencies in conjunction with, and in
validation of, its own underwriting processes, and (iii) that it should not use
ratings as a substitute for its own thorough underwriting analyses. With respect
the interest rate risk factor, TB 73a recommends that savings associations
should follow the guidance set forth in TB 13a. With respect to collateralized
loan or bond obligations, TB 73a also requires that the savings associations
meet similar requirements with respect to the underlying collateral, and warns
that investments that are not fully rated as to both principal and interest do
not meet OTS regulatory requirements.
161
One of the primary purposes of TB 13a is to require thrift
institutions, prior to taking any investment position, to (i) conduct a
pre-purchase portfolio sensitivity analysis for any "significant transaction"
involving securities or financial derivatives, and (ii) conduct a pre-purchase
price sensitivity analysis of any "complex security" or financial derivative.
The OTS recommends that a thrift institution should conduct its own in-house pre
acquisition analysis, although it may rely on an analysis conducted by an
independent third-party as long as management understands the analysis and its
key assumptions. Further, TB 13a recommends that the use of "complex securities
with high price sensitivity" be limited to transactions and strategies that
lower a thrift institution's portfolio interest rate risk. TB 13a warns that
investment in complex securities by thrift institutions that do not have
adequate risk measurement, monitoring and control systems may be viewed by OTS
examiners as an unsafe and unsound practice.
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase certificates or to
purchase certificates representing more than a specified percentage of the
investor's assets. Investors should consult their own legal advisors in
determining whether and to what extent the certificates constitute legal
investments for them.
METHOD OF DISTRIBUTION
The certificates offered by this prospectus and by the related
prospectus supplement will be offered in series. The distribution of the
certificates may be effected from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
varying prices to be determined at the time of sale or at the time of commitment
therefor. If so specified in the related prospectus supplement and subject to
the receipt of any required approvals from the Board of Governors of the Federal
Reserve System, the certificates will be distributed in a firm commitment
underwriting, subject to the terms and conditions of the underwriting agreement,
by Greenwich Capital Markets, Inc. (GCM) acting as underwriter with other
underwriters, if any, named in the prospectus supplement. In such event, the
related prospectus supplement may also specify that the underwriters will not be
obligated to pay for any certificates agreed to be purchased by purchasers
pursuant to purchase agreements acceptable to the depositor. In connection with
the sale of the certificates, underwriters may receive compensation from the
depositor or from purchasers of the certificates in the form of discounts,
concessions or commissions. The related prospectus supplement will describe any
compensation paid by the depositor.
Alternatively, the related prospectus supplement may specify that the
certificates will be distributed by GCM acting as agent or in some cases as
principal with respect to certificates that it has previously purchased or
agreed to purchase. If GCM acts as agent in the sale of certificates, GCM will
receive a selling commission with respect to each series of certificates,
depending on market conditions, expressed as a percentage of the aggregate
principal balance of the related mortgage assets as of the cut-off date. The
exact percentage for each series of certificates will be disclosed in the
related prospectus supplement. To the extent that GCM elects to purchase
certificates as principal, GCM may realize losses or profits based upon the
difference between its purchase price and the sales price. The prospectus
supplement with respect to any series offered other than through underwriters
will contain information regarding
162
the nature of such offering and any agreements to be entered into between the
depositor and purchasers of certificates of that series.
The depositor will indemnify GCM and any underwriters against certain
civil liabilities, including liabilities under the Securities Act of 1933, or
will contribute to payments GCM and any underwriters may be required to make in
respect of those liabilities.
In the ordinary course of business, GCM and the depositor may engage in
various securities and financing transactions, including repurchase agreements
to provide interim financing of the depositor's mortgage loans pending the sale
of the mortgage loans or interests in the loans, including the certificates.
The depositor anticipates that the certificates will be sold primarily
to institutional investors. Purchasers of certificates, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933, in connection
with reoffers and sales of certificates by them. Holders of certificates should
consult with their legal advisors in this regard prior to any such reoffer or
sale.
LEGAL MATTERS
The legality of the certificates of each series, including certain
material federal income tax consequences with respect to the certificates, will
be passed upon for the depositor by Sidley Austin Brown & Wood LLP, 787 Seventh
Avenue, New York, New York 10019, or by Thacher Proffitt & Wood LLP, Two World
Financial Center, New York, New York 10281, as specified in the related
prospectus supplement.
FINANCIAL INFORMATION
A new trust fund will be formed with respect to each series of
certificates and no trust fund will engage in any business activities or have
any assets or obligations prior to the issuance of the related series of
certificates. 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 certificates. This
prospectus, which forms a part of the Registration Statement, and the prospectus
supplement relating to each series of certificates contain summaries of the
material terms of the documents referred to 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 the exhibits thereto. 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. In addition, the SEC
maintains a website 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.
163
RATINGS
It is a condition to the issuance of the certificates 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
related prospectus supplement.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by securityholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such certificates, the nature of the underlying mortgage loans
and the credit quality of the credit enhancer or guarantor, if any. Ratings on
mortgage pass-through certificates do not represent any assessment of the
likelihood of principal prepayments by mortgagors or of the degree by which such
prepayments might differ from those originally anticipated. As a result,
securityholders might suffer a lower than anticipated yield, and, in addition,
holders of stripped pass-through certificates in certain cases might fail to
recoup their underlying investments.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating.
164
GLOSSARY OF TERMS
Agency Securities: Mortgage pass-through securities issued or
guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac.
Home Equity Loans: Closed end and/or revolving home equity loans
generally secured by junior liens on one- to four-family residential properties.
Home Improvement Contracts: 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.
Insurance Proceeds: All proceeds of the related hazard insurance
policies and any primary mortgage insurance policies to the extent the proceeds
are not applied to property restoration or released to mortgagors in accordance
with the master servicer's normal servicing procedures, net of insured expenses
including unreimbursed payments of property taxes, insurance premiums and other
items incurred by any related sub-servicer and net of reimbursed advances made
by the sub-servicer.
Liquidation Proceeds: All cash amounts (other than Insurance Proceeds)
received and retained in connection with the liquidation of defaulted mortgage
loans, by foreclosure or otherwise, net of unreimbursed liquidation and
foreclosure expenses incurred by any related sub-servicer and net of
unreimbursed advances made by the sub-servicer.
Manufactured Housing Contracts: Conditional sales contracts and
installment sales or loan agreements secured by manufactured housing.
Multifamily Loans: First lien mortgage loans, or participation
interests in the loans, secured by residential properties consisting of five or
more residential units, including cooperative apartment buildings.
Private Label Securities: Mortgage-backed or asset-backed securities
that are not Agency Securities.
REMIC Regulations: Regulations promulgated by the Department of the
Treasury on December 23, 1992 and generally effective for REMICs with start-up
dates on or after November 12, 1991.
Single Family Loans: First lien mortgage loans, or participation
interests in the loans, secured by 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
165
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 is includible in gross income for federal
income tax purposes 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 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.
166
$170,000,000 (APPROXIMATE)
HOME LOAN MORTGAGE
LOAN TRUST 2005-1
HOME EQUITY LOAN
ASSET-BACKED CERTIFICATES,
SERIES 2005-1
OCEAN BANK, F.S.B.,
AS SELLER AND SERVICER
FINANCIAL ASSET SECURITIES CORP.,
AS DEPOSITOR
------------------
PROSPECTUS SUPPLEMENT
November 22, 2005
------------------
[RBS Greenwich Capital Logo]